Work detail

Regulatory Approaches to Credit Risk Quantification

Author: Mgr. Pavla Stará
Year: 2016 - summer
Leaders: Mgr. Magda Pečená Ph.D.
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 97
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/151905/
Abstract: Credit risk represents one of the most significant risks which a bank must face, and therefore, its
intention is effectively manage and measure this risk. However, management and measurement
methods are supervised and influenced by national regulators. Banking regulatory supervision
plays a significant role among others in determining minimum capital requirements that serve as
buffer against losses stemming from credit risk. This thesis provides theoretical foundation of
regulatory approaches – standardized and internal rating based (IRB) approach – used for
quantification of regulatory capital to credit risk as well as empirical application of such
approaches on created portfolio of corporate loans. As a part of IRB method I suggested a model
composed of financial ratios estimating probability of default using logistic regression. I founded
out that rather the use of combination of financial ratios from different groups of ratios with slight
dominance of profitability ratios forms final model. Therefore, superiority of solvency ratios in
modelling cannot be proved on my portfolio. After estimating and determining necessary
parameters I quantified the minimum regulatory capital requirements to credit risk under
standardized and IRB approaches prescribed by Basel III. In the end, the results are compared with
conclusion that more risk sensitive approach is favorable in terms of less required capital for
selected portfolio of corporates.
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