Credit Risk, Systemic Uncertainties and Economic Capital Requirements for an Artificial Bank Loan Portfolio

Alexis Derviz, Narcisa Kadlčáková, Lucie Kobzová

This paper analyses the impact of different credit risk-based capital requirement implementations on banks' need for capital. The capital requirements for an artificially constructed risky loan portfolio are calculated by applying the BIS approach, the two widespread commercial risk-measurement models, CreditMetrics and CreditRisk+, and, finally, an original synthetic model similar to KMV. In the first three cases we closely follow the methodologies proposed by the regulatory or credit risk models. Economic capital requirements for the latter are obtained by means of Monte Carlo simulations. In the context of CreditMetrics, we additionally perform a Monte Carlo-based stress testing of the monetary policy changes reflected in the term structure of interest rates. Our model of KMV type combines the elements of the structural and the reduced-form methods of risky debt pricing, and the possibilities of its numerical solution are outlined.

Keywords: credit risk, economic capital, market risk, New Basel Capital Accord, systemic uncertainty.

Issued: December 2003

Published as: Derviz A. and N. Kadlčáková: " Business cycle, credit risk and economic capital determination by commercial banks ,' BIS Paper, No. 22, 2005


Download  CNB WP No. 9/2003 (pdf, 828 kB)