Credit Risk versus Capital Requirements under Basel II: Are SME loans and retail credit really different?
by Tor Jacobson of Sveriges Riksbank,
August 1, 2005
Abstract: Under Basel II, retail and SME credit (R&SME) receive special treatment because of a supposedly smaller exposure to systemic risk. Most research on this issue has been based on parameterized credit risk models. We present new evidence by applying Carey's (1998) nonparametric Monte-Carlo resampling method to two banks' complete loan portfolios. By exploiting that a sub-sample of all borrowers has been assigned an internal rating by both banks, we can compare the credit loss distributions for the three credit types, and compute both economic and regulatory capital under Basel II. We also test if our conclusions are sensitive to the definitions of R&SME credit. Our findings show that R&SME portfolios are usually riskier than corporate credit. Special treatment under Basel II is thus not justified.
Keywords: Internal ratings, credit risk, Value-at-Risk, banks, Basel II, retail credit, SME credit, corporate credit, regulatory capital, economic capital.
Published in: Journal of Financial Services Research, Vol. 28, No. 1-3, (October 2005), pp. 43-75.