Journal of Financial Services Research

, Volume 28, Issue 1–3, pp 43–75

Credit Risk Versus Capital Requirements under Basel II: Are SME Loans and Retail Credit Really Different?

Article

DOI: 10.1007/s10693-005-4356-4

Cite this article as:
Jacobson, T., Lindé, J. & Roszbach, K. J Finan Serv Res (2005) 28: 43. doi:10.1007/s10693-005-4356-4

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 (Carey, Mark. “Credit Risk in Private Debt Portfolios.” Journal of Finance 53, no. 4 (1998), 1363–1387.) 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.

Key words

Internal ratings credit risk Value-at-Risk banks Basel II retail credit SME credit corporate credit regulatory capital economic capital 

Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Research DivisionSveriges RiksbankStockholmSweden

Personalised recommendations