Credit Risk Versus Capital Requirements under Basel II: Are SME Loans and Retail Credit Really Different? |
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Authors: | Tor Jacobson Jesper Lindé Kasper Roszbach |
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Institution: | (1) Research Division, Sveriges Riksbank, SE 103 37 Stockholm, Sweden |
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Abstract: | Under Basel II, retail and SME credit (R&SME) receive special treatment because of a supposedly smaller exposure to systemic
risk. Most research on this issue has been based on parameterized credit risk models. We present new evidence by applying
Carey's (Carey, Mark. “Credit Risk in Private Debt Portfolios.” Journal of Finance 53, no. 4 (1998), 1363–1387.) nonparametric Monte-Carlo resampling method to two banks' complete loan portfolios. By exploiting
that a sub-sample of all borrowers has been assigned an internal rating by both banks, we can compare the credit loss distributions
for the three credit types, and compute both economic and regulatory capital under Basel II. We also test if our conclusions
are sensitive to the definitions of R&SME credit. Our findings show that R&SME portfolios are usually riskier than corporate
credit. Special treatment under Basel II is thus not justified.
JEL classification: C14, C15, G21, G28, G33. |
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Keywords: | Internal ratings credit risk Value-at-Risk banks Basel II retail credit SME credit corporate credit regulatory capital economic capital |
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