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Mitigating Procyclicality due to Minimum Capital Requirements in the Swedish Banking Sector

Hultin, Christian and Arnljots, Eirikur (2013) FMS820 20131
Mathematical Statistics
Abstract (Swedish)
This study explores methods for mitigating procyclicality due to calculations
of minimum capital requirements to cover credit risk. The basis for calculations
are provided by the Basel Committee in the Basel accords and the main
concern is that they could strengthen the amplitude of economic cycle fluctuations.
Our study constructs a portfolio that aims to replicate the Swedish
market for corporate lending by using external Probability of Default data for
Swedish companies in the span of 2005-2013. The data is used together with
the Basel guidelines for calculations to compute the corresponding minimum
capital requirements series, which in turn is used in testing four different
options to prevent the apparent procyclical... (More)
This study explores methods for mitigating procyclicality due to calculations
of minimum capital requirements to cover credit risk. The basis for calculations
are provided by the Basel Committee in the Basel accords and the main
concern is that they could strengthen the amplitude of economic cycle fluctuations.
Our study constructs a portfolio that aims to replicate the Swedish
market for corporate lending by using external Probability of Default data for
Swedish companies in the span of 2005-2013. The data is used together with
the Basel guidelines for calculations to compute the corresponding minimum
capital requirements series, which in turn is used in testing four different
options to prevent the apparent procyclical behaviour. The evaluation of the
options is conducted by comparing the root-mean-square deviations of the
adjusted series with respect to the Hodrick-Prescott trend of the unadjusted
series. It turns out that adjusting the input with logistic regression or the
output with a business multiplier are the best performing options, where the
latter is favoured due to its simplicity in implementation.
Key Words: Credit Risk, Procyclicality, Regulatory Capital, Minimum Capital
Requirements, Basel III, Economic Cycles, Probability of Default (Less)
Please use this url to cite or link to this publication:
author
Hultin, Christian and Arnljots, Eirikur
supervisor
organization
course
FMS820 20131
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
3866713
date added to LUP
2013-06-20 10:49:32
date last changed
2013-06-20 10:49:32
@misc{3866713,
  abstract     = {This study explores methods for mitigating procyclicality due to calculations
of minimum capital requirements to cover credit risk. The basis for calculations
are provided by the Basel Committee in the Basel accords and the main
concern is that they could strengthen the amplitude of economic cycle fluctuations.
Our study constructs a portfolio that aims to replicate the Swedish
market for corporate lending by using external Probability of Default data for
Swedish companies in the span of 2005-2013. The data is used together with
the Basel guidelines for calculations to compute the corresponding minimum
capital requirements series, which in turn is used in testing four different
options to prevent the apparent procyclical behaviour. The evaluation of the
options is conducted by comparing the root-mean-square deviations of the
adjusted series with respect to the Hodrick-Prescott trend of the unadjusted
series. It turns out that adjusting the input with logistic regression or the
output with a business multiplier are the best performing options, where the
latter is favoured due to its simplicity in implementation.
Key Words: Credit Risk, Procyclicality, Regulatory Capital, Minimum Capital
Requirements, Basel III, Economic Cycles, Probability of Default},
  author       = {Hultin, Christian and Arnljots, Eirikur},
  language     = {eng},
  note         = {Student Paper},
  title        = {Mitigating Procyclicality due to Minimum Capital Requirements in the Swedish Banking Sector},
  year         = {2013},
}