Basel and procyclicality: a comparison of the standardised and IRB approaches to an improved credit risk method

Publication Date
Financial Markets Group Discussion Papers DP 524
Publication Authors

Our procedure here is to try to reconstruct a typical bank portfolio for a country and then, holding the presumed loan book unchanged over time, (i.e. replacing failed loans with loans of a similar quality), to examine how the loan ratings would have shifted, and hence how the capital adequacy requirements (CAR’s) for the banks would have varied over time; for other similar exercises see Kashyap and Stein (2003 and 2004) and Gordy and Howells (2004). To do this we use Moody’s data on U.S. corporate bonds, included on Moody’s Investors Service, Credit Risk Calculator. We can only do this exercise for those countries for which Moody’s data on credit ratings has a long enough time series. Unfortunately this rules out most large European countries since adequate Moody’s data only go back to 1988 for the U.K., 2001 for Germany; 2002 for France; 2003 for Italy; 2002 for Spain. In practice we also used data provided by the Mexican Financial Regulatory Agency and the Norwegian Central Bank on Corporate Loans for these latter two countries. The Mexican data incorporates statistics between 1995 and 2000 and the Norwegian data incorporates statistics between 1988 and 2001.