Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-10
Financial Stability and Basel II
September 2006
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-10
Financial Stability and Basel II
September 2006
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Financial Stability and Basel II
by
Paul H. Kupiec∗
September 2006
ABSTRACT
The Basel II Advanced Internal Ratings (AIRB) approach is compared to capital
requirements set using an equilibrium structural credit risk model. Analysis shows the AIRB
approach undercapitalizes credit risk relative to regulatory targets and allows wide variation
in capital requirements for a given exposure owing to ambiguity in the definitions of loss
given default and exposure at default. In contrast, the Foundation Internal Ratings Based
(FIRB) approach may over-capitalize credit risk relative to supervisory objectives. It is
unclear how Basel II will buttress financial sector stability as it specifies the weakest risk
regulatory capital standard for large complex AIRB banks.
Key Words: credit risk measurement, credit risk capital allocation, Basel II
JEL Classification: G12, G20, G21, G28
by
Paul H. Kupiec∗
September 2006
ABSTRACT
The Basel II Advanced Internal Ratings (AIRB) approach is compared to capital
requirements set using an equilibrium structural credit risk model. Analysis shows the AIRB
approach undercapitalizes credit risk relative to regulatory targets and allows wide variation
in capital requirements for a given exposure owing to ambiguity in the definitions of loss
given default and exposure at default. In contrast, the Foundation Internal Ratings Based
(FIRB) approach may over-capitalize credit risk relative to supervisory objectives. It is
unclear how Basel II will buttress financial sector stability as it specifies the weakest risk
regulatory capital standard for large complex AIRB banks.
Key Words: credit risk measurement, credit risk capital allocation, Basel II
JEL Classification: G12, G20, G21, G28