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LUND UNIVERSITY LIBRARIES

Preventing Pro-cyclicality in the Bank Capital Regulation

Mikkelsen, Sara LU (2014) NEKN01 20142
Department 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:
author
Mikkelsen, Sara LU
supervisor
organization
course
NEKN01 20142
year
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}},
}