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September 2013 issue
List of authors
 
Bénétrix, Lane
Gordy, Lütkebohmert
Verona, Martins, Drumond
Anzuini, Lombardi, Pagano
Jung
Agénor, Alper, Pereira da Silva
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Granularity Adjustment for Regulatory Capital Assessment

by Michael B. Gordya and Eva Lütkebohmertb

Abstract

The credit value-at-risk model underpinning the internal ratings-based approach of Basel II and III assumes that idiosyncratic risk has been fully diversified in the portfolio, so that economic capital depends only on systematic risk contributions. We propose a simple granularity adjustment (GA) for approximating the effect of undiversified idiosyncratic risk on required capital. To mitigate operational burden in implementation, we derive upper and lower bounds on the GA under incomplete information on the portfolio. We assess the magnitude and accuracy of the proposed GA on a set of bank portfolios drawn from the German credit register.

JEL Codes: G32, G28, G17.

 
Full article (PDF, 40 pages 629 kb)

 


a Federal Reserve Board
b University of Freiburg