The aim of this paper is to present the different proposals of the Basel Committee on Banking Supervision (BCBS) on the internal ratings-based (IRB) approach for credit risk and to find out about the effects that such measures may have on the financial sector as well as assessing if the measures are sufficient to reach the aspirations of the BCBS.
The remainder of this paper is organized as follows. The next section briefly describes the IRB approach under the Basel II accord and its current design. Section 3 discusses the reasons for the excessive variability in the regulatory capital requirements for credit risk. The focus of this paper is placed on section 4. It presents the different proposals concerning the IRB approach of the BCBS consolation document. Section 5 investigates the effects of the proposed measures of the BCBS. The final section summarizes the main conclusions.
Contents
Abbreviations
1 Introduction
2 IRB approaches for credit risk
3 Reasons for variation in credit RWA
4 Proposals of the BCBS to the IRB approaches for credit risk
4.1 Applicability of internal modelling
4.2 Parameter floors
4.3 Parameter estimation practices and fixed parameters
4.4 Output floors
5 Assessment of the consultation items
6 Conclusion
References
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