Zusammenfassung
A central goal of risk based capital rules, such as Basel II, is the assimilation of regulatory and economic risk capital. In Basel II banks will be allowed to estimate their capital charges from default time series generated by internal credit rating systems. We demonstrate that these capital charges are subject to serious forecasting errors. Moreover, we show that these errors are highly ...
Zusammenfassung
A central goal of risk based capital rules, such as Basel II, is the assimilation of regulatory and economic risk capital. In Basel II banks will be allowed to estimate their capital charges from default time series generated by internal credit rating systems. We demonstrate that these capital charges are subject to serious forecasting errors. Moreover, we show that these errors are highly correlated across banks. As a consequence there is a serious danger that a group of banks within an economy may simultaneously underestimate their required capital charges, thereby inducing systemic risk. It turns out that the forecasting errors are most severe when the employed rating system is of the “Through the Cycle” kind. We also provide some correctives for estimation risk which could easily be implemented by banks. The suggested methods are consistent with standard statistical proceedings and integrate the concept of risk aversion, thereby ful-filling the Basel II requirement of using conservative estimates.
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