Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 142: Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy

Kenneth Carling, Tor Jacobson (), Jesper Lindé () and Kasper Roszbach ()
Additional contact information
Kenneth Carling: Högskolan Dalarna, Borlänge
Tor Jacobson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Jesper Lindé: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Kasper Roszbach: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: The Internal Ratings Based (IRB) approach for capital determination is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. We evaluate the IRB approach using historical business loan portfolio data from a major Swedish bank for the period 1994 to 2000. First, we estimate a duration model that takes into account both company, loan related and macroeconomic variables. Next, we obtain a Value-at-Risktype (VaR) credit risk measure, by model-based simulations. Moreover, we study how both the bank’s credit risk and bu.er capital changes over time (had the bank been subject to the proposed rules). This approach allows us to (i) make individual forecasts of default risk conditional on company, loan and macro variables, (ii) study portfolio credit risk over time, (iii) assess to what extent the new Accord will achieve its main objective of increasing credit risk sensitivity in minimal capital charges, and (iv) compare current capital requirements to those under the proposed system. Our results show that macro conditions have great explanatory power in predicting default risk and calculating credit risk. The IRB approach, although sensitive to the choice of some horizon parameters, is an achievement in the intended direction.

Keywords: Internal Ratings Based approach; relative risk weights; Value-at-Risk; credit risk models

JEL-codes: C41; G21; G33; G38

49 pages, September 1, 2002

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Fortchoming as
Kenneth Carling, Tor Jacobson, Jesper Lindé and Kasper Roszbach, 'Corporate Credit Risk Modelling and the Macro Economy', Journal of Banking and Finance

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