CÍMLAP
Zsámboki Balázs
Basel II and financial stability
CONTENTS, ABSTRACT
Contents
Abstract
1. Introduction
2. Some basic characteristics of the Basel II risk weight functions
2.1. The economic rationale behind the risk weight functions
2.2. The incentive structure of the risk weight functions
3. The analytical framework
3.1. Estimating PD
3.2. Estimating LGD
3.3. Estimating maturity
4. Sensitivity of capital requirements to changes in PD and LGD
5. Sensitivity of different portfolios of G1 and G2 banks
6. Cyclicality of corporate capital requirements
6.1. Assumptions about PD
6.2. Assumptions about LGD
6.3. Cyclicality of unexpected losses
6.4. Cyclicality of expected losses
6.5. Impact of rating drift
7. Conclusions
Abstract
This study aims to analyse the sensitivity of capital requirements to changes in risk parameters (PD, LGD and M) by creating a 'model bank' with a portfolio mirroring the average asset composition of internationally active large banks, as well as locally oriented smaller institutions participating in the QIS 5 exercise. Using historical data on corporate default rates, the dynamics of risk weights and capital requirements over a whole business cycle are also examined, with special emphasis on financial stability implications. The purpose of this paper is to contribute to a better understanding of the mechanism of Basel II and to explore the possible impacts of prudential regulation on cyclical swings in capital requirements.