Extending Basel Regulatory Capital Requirement under Economic Downturns

Azamtarrahian, Amir; Asadi, Saeed

doi:10.22054/ijer.2018.9516

Authors

Amir Azamtarrahian ¹
Saeed Asadi ²

¹ Investment Analyst, Postgraduate of Corporate Finance, Risk Management Area of Study, Saint Petersburg State University, Russia

² Postgraduate of Financial Engineering, Tarbiat Modarres University, Tehran, Iran

https://doi.org/10.22054/ijer.2018.9516

Abstract

This paper studies credit risk management in banking industry and proposes a generic model for corporate loan portfolio loss distribution in economic downturns. Basel assumes a one-factor Gaussian copula for default correlations and introduces the regulatory capital on the ground of Vasicek process that works acceptably well in normal economic situations but not in recessions. In this paper, one-factor t-student copula is used for dependence structure of probability of Defaults (PDs), and Basel has been extended by introducing correlated PDs and Recovery Rates (RRs) through Clayton copula and the required economic capital is calculated accordingly. Finally, our findings suggest that Expected Shortfall (ES) safeguards banks against losses beyond the VaR level and it is a better risk metric in economic downturns comparing to VaR.

Keywords

References

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Iranian Journal of Economic Research

Extending Basel Regulatory Capital Requirement under Economic Downturns

References

References

Volume 23, Issue 76 - Serial Number 76
October 2018
Pages 159-184

Extending Basel Regulatory Capital Requirement under Economic Downturns

References

References

Volume 23, Issue 76 - Serial Number 76October 2018Pages 159-184

Volume 23, Issue 76 - Serial Number 76
October 2018
Pages 159-184