Basel inflicts collateral damage

The current Basel proposals could lead to the global spread of the type of systemic loan loss problems Japan is now experiencing, argues John Frye of the Federal Reserve Bank of Chicago.

The New Basel Accord makes regulatory capital more sensitive to credit risk. In the Advanced Approach, the risk weight formula is sensitive to the probability of default and to the expected loss given default (LGD). This is a step in the right direction, but it is a step too far. That is because the formula is too sensitive to LGD.

When the Basel Committee derived the risk weight formula, they made a critical assumption: that when the default rate rises, the loss given default will not rise

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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