Credit Risk Measurement Under Basel II : An Overview and Implementation Issues for Developing Countries

Abstract

The objective of this paper is to provide an overview of the changes in the calculation of minimum regulatory capital requirements for credit risk that have been drafted by the Basel Committee on Banking Supervision (Basel II). Even though the revised credit capital rules represent a dramatic change compared to Basel I, it is shown that Basel II merely seeks to codify (albeit incompletely) existing good practices in bank risk measurement. However, its effective implementation in many developing countries is hindered by fundamental weaknesses in financial infrastructure that will need to be addressed as a priority.

Increasing the resilience of financial intermediaries through portfolio-level insurance against natural disasters

“…This approach would likely contribute to the objectives of policymakers, but would require some adjustments to international banking standards such as the Basel Accords. A great deal of research highlights the limitations of those accords for developing and emerging economies (for example Griffith-Jones, Segoviano, and Spratt, 2003;Stephanou and Mendoza, 2005;Tanveronachi, 2009), and the current transition to Basel III, which is even less relevant, may be a timely moment for tailoring solutions more appropriate for the needs of developing and emerging economies.…”

The Challenges International Banking Standards Pose for Peripheral Developing Countries

“…Many countries outside the Basel Committee do not have national ratings agencies and the penetration of global ratings agencies is limited to the largest corporations (Murinde, 2012). The development of a local credit ratings industry is not straightforward-as well as effective reporting and corporate governance frameworks for companies, it requires strong accounting and external auditing rules, credit bureaus, and the efficient and compliant collection and sharing of borrowers' data (Stephanou and Mendoza, 2005). Where credit ratings are not available the standardized approach can still be used for assessing credit risk, but the risk weights applied to bank assets are very similar to Basel I, undermining the incentive for regulators to move from Basel I to Basel II.…”

“…With regards to the implementation of Basel I, II, and III, there is also substantial variation. Basel I standards spread rapidly around the world and within ten years were being implemented by more than one hundred countries outside of the Basel Committee (Quillin, 2008;Stephanou and Mendoza, 2005;Tarullo, 2008). A recent survey of regulators in one hundred countries outside of the Basel Committee shows that Basel I is still the basis for national regulations in many countries: of the one hundred countries, sixty had national regulations based on Basel I, while ten had national regulations based on Basel II, and thirty on Basel III (Hohl et al, 2018).…”

The Effect of Intellectual Capital and Capital Adequacy on Credit Risks and Financial Performance (A Study of Commercial Banks at the Indonesia Stock Exchange )

“…During the financial crisis, it should focus on the importance of managing all risks and integrated efficiency to reduce the possibility of bankruptcy as a result of the risk of bank insolvency, because the business environment is always changing. The Basel I agreement has been criticized by many researchers (Mingo, 2000;and Stephanou and Mendoza, 2005). The main focus is on credit risk, the use of arbitrary risk categories and arbitrary weights that have nothing to do with default risk and inappropriate methodologies for assessing risk.…”