publication . Article . Preprint . 2008

An Assessment of the Internal Rating Based Approach in Basel II

Simone Varotto;
Open Access
  • Published: 01 Aug 2008
Abstract
The new bank capital regulation commonly known as Basel II includes a internal rating based approach (IRB) to measuring credit risk in bank portfolios. The IRB relies on the assumptions that the portfolio is fully diversified and that systematic risk is driven by one common factor. In this work we empirically investigate the impact of these assumptions by comparing the risk measures produced by the IRB with those of a more general credit risk model that allows for multiple systematic risk factors and portfolio concentration. Our tests conducted on a large sample of eurobonds over a ten year period reveal that deviations between the IRB and the general model can ...
Subjects
free text keywords: Basel II, Internal Rating Based Approach, Credit Rating, Credit Risk, jel:G28, jel:G32
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