Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - a Corporate Analysis

Banco Central do Brasil Working Paper No. 91

47 Pages Posted: 15 Sep 2006

See all articles by Ricardo Schechtman

Ricardo Schechtman

Central Bank of Brazil - Research Department

Valéria Salomão Garcia

Government of the Federative Republic of Brazil - Central Bank of Brazil

Sérgio Mikio Koyama

Government of the Federative Republic of Brazil - Central Bank of Brazil

Guilherme Cronemberg Parente

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: November 2004

Abstract

The new Basel II Capital Accord has demanded a lot of attention from regulatory and regulated entities due to its innovations in determining capital requirements, particularly in the area of credit risk. This paper simulates the application of Basel II IRB foundation approach for the computation of capital and provision requirements relative to the credit risk of major Brazilian banks' corporate credit portfolios. The IRB necessary parameters of probabilities of default are estimated using variables derived from the raw data present in the Public Credit Register of the Central Bank of Brazil. IRB requirements are compared with the current Brazilian regulatory requirements. By making use of the CreditRisk+ portfolio model this paper shows how it is possible to extend the previous comparison. The main result is that, for the situation analyzed, the IRB approach can be considered more conservative than the current Brazilian prescription.

Keywords: Basel II Accord, Capital requirements, Credit risk modeling, Public Credit Register, Bank regulation, Brazil

JEL Classification: G18, G21, C25

Suggested Citation

Schechtman, Ricardo and Garcia, Valéria Salomão and Koyama, Sérgio Mikio and Parente, Guilherme Cronemberg, Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - a Corporate Analysis (November 2004). Banco Central do Brasil Working Paper No. 91, Available at SSRN: https://ssrn.com/abstract=930127 or http://dx.doi.org/10.2139/ssrn.930127

Ricardo Schechtman (Contact Author)

Central Bank of Brazil - Research Department ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Valéria Salomão Garcia

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Sérgio Mikio Koyama

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Guilherme Cronemberg Parente

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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