On the Use of Portfolio Risk Models and Capital Requirements in Emerging Markets : The Case of Argentina
A portfolio based model (Credit Risk of Credit Suisse First Boston) and recent Central Bank of Argentina credit bureau data are used to estimate whether current capital and provisioning regulations match actual risks. Arguing that provisions should...
| Main Authors: | , , |
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| Format: | Journal Article |
| Language: | English en_US |
| Published: |
Washington, DC: World Bank
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/05/17737765/financial-crises-credit-ratings-bank-failures-use-portfolio-risk-models-capital-requirements-emerging-markets-case-argentina http://hdl.handle.net/10986/17201 |
| Summary: | A portfolio based model (Credit Risk of
Credit Suisse First Boston) and recent Central Bank of
Argentina credit bureau data are used to estimate whether
current capital and provisioning regulations match actual
risks. Arguing that provisions should cover expected losses
and that capital requirements should cover potential losses
beyond expected losses subject to some statistical level of
tolerance, the article assesses how well actual capital and
provisioning requirements match the estimated requirements
given by the model. Actual provisioning requirements were
found to be close to implied levels of expected losses. The
estimate of potential losses was found to be highly
sensitive to the assumptions of the model, especially the
parameter relating the volatility of a loan's rate of
default to its mean value. This volatility parameter cannot
be estimated accurately with the credit bureau data because
of the short time span covered, so proxy data were used to
estimate it, and two values around that estimate were tried.
The difficulty of estimating this critical parameter implies
that the results should only be regarded as suggestive.
Moreover, the methodology only does not seek to estimate
credit risk and not interest rate risk or exchange rate
risk, nor does it fully take into account the indirect
effects of interest rates and exchange rates on credit risk.
As recent events in Argentina have demonstrated, estimating
credit risk along these lines should be thought of as just
one tool in attempting to assess the appropriate level of
bank provisions and capital. |
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