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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Economic and Regulatory Capital Allocation for Revolving Retail Exposures
Roberto Perli and William I. Nayda

Abstract: The latest revision of the Internal Ratings Based approach of the Basel Committee on Banking Supervision's New Capital Accord Proposal for retail portfolios contains a significant innovation relative to previous versions: the recognition that, for revolving credits, future margin income will be available to cover losses before a bank's capital is threatened. We assemble a mini-portfolio of revolving exposures and we compare the capital charges generated by the latest Basel's formula with the capital charges generated by two possible earnings-at-risk internal capital allocation models. We find that in general, Basel's capital ratios are closer to those generated by our models for the groups with lower credit risk. We attribute the discrepancies to the different ways Basel and our models account for future margin income, to Basel assumptions about asset correlations, and to one our models taking macroeconomic conditions explicitly into account.

Keywords: Basel, capital allocation, credit risk, revolving retail exposure, one-factor risk rodels, multi-factor risk models

Full paper (202 KB PDF)

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Last update: August 13, 2003