Preventing Pro-cyclicality in the Bank Capital Regulation
(2014) NEKN01 20142Department of Economics
- Abstract
- In this thesis three different methodologies to convert Point-in-Time (PIT) probability of default (PD) to Through-the-Cycle (TTC) PD are applied on a sample of large Danish firms for the period 2005-2014. These kind of methodologies are important for preventing pro-cyclicality in the capital requirement, i.e. how much capital banks need to hold in order to cope with unexpected losses. The methods are quantitatively evaluated based on the degree of reduction of the cyclicality in the capital requirement and qualitatively evaluated by graphical analysis. The best-performing method is the Business multiplier adjustment that transforms PIT-PDs into TTC-PDs by a counter-cyclical multiplier based on the GDP growth. This method reduces the... (More)
- In this thesis three different methodologies to convert Point-in-Time (PIT) probability of default (PD) to Through-the-Cycle (TTC) PD are applied on a sample of large Danish firms for the period 2005-2014. These kind of methodologies are important for preventing pro-cyclicality in the capital requirement, i.e. how much capital banks need to hold in order to cope with unexpected losses. The methods are quantitatively evaluated based on the degree of reduction of the cyclicality in the capital requirement and qualitatively evaluated by graphical analysis. The best-performing method is the Business multiplier adjustment that transforms PIT-PDs into TTC-PDs by a counter-cyclical multiplier based on the GDP growth. This method reduces the cyclicality of the capital requirement by approximately 45 \% and thus the risk of pro-cyclicality is diminished. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4699121
- author
- Mikkelsen, Sara LU
- supervisor
- organization
- course
- NEKN01 20142
- year
- 2014
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Capital Requirement, Risk Weighted Assets, Credit Risk, Probability of Default, Through-the-Cycle methodology, Basel III, Bank Regulation
- language
- English
- id
- 4699121
- date added to LUP
- 2014-11-03 10:44:03
- date last changed
- 2014-11-03 10:44:03
@misc{4699121, abstract = {{In this thesis three different methodologies to convert Point-in-Time (PIT) probability of default (PD) to Through-the-Cycle (TTC) PD are applied on a sample of large Danish firms for the period 2005-2014. These kind of methodologies are important for preventing pro-cyclicality in the capital requirement, i.e. how much capital banks need to hold in order to cope with unexpected losses. The methods are quantitatively evaluated based on the degree of reduction of the cyclicality in the capital requirement and qualitatively evaluated by graphical analysis. The best-performing method is the Business multiplier adjustment that transforms PIT-PDs into TTC-PDs by a counter-cyclical multiplier based on the GDP growth. This method reduces the cyclicality of the capital requirement by approximately 45 \% and thus the risk of pro-cyclicality is diminished.}}, author = {{Mikkelsen, Sara}}, language = {{eng}}, note = {{Student Paper}}, title = {{Preventing Pro-cyclicality in the Bank Capital Regulation}}, year = {{2014}}, }