Long Run Probability of Default and BASEL II Capital Allocation

Basel II regulatory capital formula could imply substantial gaps between the long run PD and the short run historical average. Hence, banks might need to raise their short run historical average of internal PD substantially. Under through-the-cycle rating system, they might have to increase it even more when the economy is in booming period. With more realistic assumption of credit migration, however, we find that gaps are much smaller in many cases. We show, through simulation and a credit card portfolio, that adjustment in the short run PD can generate substantial variation in BASEL II regulatory capital.
Publisher
The Social Science Research Network(SSRN)
Issue Date
2008-09
Keywords

BASEL II; probability of default; regulatory capital; pooling; business cycle; rating system

Citation

KAIST Business School Working Paper Series KBS-WP-2008-013

URI
http://hdl.handle.net/10203/7921
Link
http://www.ssrn.com/link/KAIST-Business-School.html
Link
http://ssrn.com/abstract=1272271
Appears in Collection
KGSF-Journal Papers(저널논문)
Files in This Item
ssrn.pdf(56.97 kB)Download
  • Hit : 381
  • Download : 119
  • Cited 0 times in thomson ci

qr_code

  • mendeley

    citeulike


rss_1.0 rss_2.0 atom_1.0