Credit Risk Capital: More than One Way to Guard a Guarantee

Abstract

In June 1999, the Basle Committee on Banking Supervision issued a consultative paper that outlines a set of proposed changes to the credit risk capital standards set in the 1988 Basle Accord.¹ The consultative paper, “A New Capital Adequacy Framework,” proposes to reclassify bank credits among the Accord’s original 0, 20, 50 and 100 percent risk buckets using external credit ratings to replace the Organization for Economic Cooperation and Development (OECD) membership criteria. It also includes a 150% weight and an asset-backed category that are included to discourage “regulatory arbitrage” activities. The proposal suggests that regulators may consider allowing banks to use internal risk rating systems to allocate credits into the Basle credit risk categories.

The Basle Accord refers to, “International Convergence of Capital Measurement and Capital Standards,” Basle Committee on Banking Supervision 1988.