Imanto, Christopher Paulus
(2020).
Essays on Improvements to the Regulatory Capital Framework for Credit Risk.
PhD thesis, Universität zu Köln.
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Abstract
This cumulative thesis consists of three essays: 1) Does the Finalised Basel III Accord Treat Leasing Exposures Adequately? Evidence from a European Leasing Dataset; 2) Is the Regulatory Downturn LGD Adequate? Performance Analysis and Alternative Methods; 3) How A Credit Run Affects Asset Correlation and Financial Stability. All of which address various issues with the current credit risk framework of the Basel III Accord. The first essay points out the excessiveness of the Basel regulatory capital requirement for leasing exposures. Based on a dataset consisting of 2.4 million leasing contracts pooled by Leaseurope, the unexpected loss of a leasing portfolio is simulated via Monte Carlo simulations. The main messages from this analysis are: 1) the current regulatory capital requirement can reach five- to eightfold of the portfolio’s unexpected loss and 2) if the current capital requirement is reduced for 30%, it can remain neutral in the sense that there will be no incentive for institutions to favour offering leases over secured loans from the capital requirement perspective alone. The second essay investigates the mismatch between the downturn definition from the downturn LGD guidelines and the downturn definition in the conditional PD formula from the Internal Ratings-Based Approach. Based on an 18 years default dataset pooled by GCD, we confirm via Monte Carlo simulations that the downturn LGD (based on the guidelines) does not pass the minimum survival probability of 99.9%, as traditionally required in the Internal Ratings-Based Approach. A latent based downturn LGD is offered as an alternative, which suggests that there is at least a solution to the downturn LGD issue. The third essay raises a fundamental problem inherited in the foundation of the Internal Ratings-Based Approach, which inspects the constant asset correlation assumption in the Asymptotic Single-Risk Factor model. Since its introduction with the Basel II Accord, the asset correlation has never been updated. The argument is that the financial crisis should have played a role and may shift the asset correlation temporarily. In particular, the run-like behaviour by borrowers shortly before the financial crisis may cause a higher concentration of a specific asset class and thereby increasing the asset correlation. However, relaxing the assumption is not an easy task from the technical perspective. By a slight model adjustment, the change of the asset correlation can be observed. This analysis is supported by 18 years default dataset pooled by GCD. The results of these essays are aimed for a long-term improvement of the credit risk framework within the regulatory capital requirement to ensure stability in the financial ecosystem.
| Item Type: | Thesis (PhD thesis) | ||||||||
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| URN: | urn:nbn:de:hbz:38-120532 | ||||||||
| Date: | 2020 | ||||||||
| Language: | English | ||||||||
| Faculty: | Faculty of Management, Economy and Social Sciences | ||||||||
| Divisions: | Faculty of Management, Economics and Social Sciences > Business Administration > Finance > Professorship for Business Administration and Bank Management | ||||||||
| Subjects: | Management and auxiliary services | ||||||||
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| Date of oral exam: | 20 August 2020 | ||||||||
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| Refereed: | Yes | ||||||||
| URI: | http://kups.ub.uni-koeln.de/id/eprint/12053 |
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