Extending Basel Regulatory Capital Requirement under Economic Downturns

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azam tarahian amir; ASADI SAEID

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Journal: Iranian Journal of Economic Research Year:2018 | Volume:23 | Issue:76 Page(s): 159-184

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Information Journal Paper

Title

Extending Basel Regulatory Capital Requirement under Economic Downturns

Author(s)

azam tarahian amir | ASADI SAEID | Issue Writer Certificate

Keywords

Credit RiskQ1

Default CorrelationQ1

CopulaQ2

Portfolio Loss DistributionQ1

BaselQ1

Abstract

This paper studies Credit Risk management in banking industry and proposes a generic model for corporate loan Portfolio Loss Distribution in economic downturns. Basel assumes a one-factor Gaussian Copula for Default Correlations and introduces the regulatory capital on the ground of Vasicek process that works acceptably well in normal economic situations but not in recessions. In this paper, one-factor t-student Copula is used for dependence structure of probability of Defaults (PDs), and Basel has been extended by introducing correlated PDs and Recovery Rates (RRs) through Clayton Copula and the required economic capital is calculated accordingly. Finally, our findings suggest that Expected Shortfall (ES) safeguards banks against losses beyond the VaR level and it is a better risk metric in economic downturns comparing to VaR.

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APA: Copy

azam tarahian, amir, & ASADI, SAEID. (2018). Extending Basel Regulatory Capital Requirement under Economic Downturns. IRANIAN ECONOMIC RESEARCH, 23(76 ), 159-184. SID. https://sid.ir/paper/2539/en

Vancouver: Copy

azam tarahian amir, ASADI SAEID. Extending Basel Regulatory Capital Requirement under Economic Downturns. IRANIAN ECONOMIC RESEARCH[Internet]. 2018;23(76 ):159-184. Available from: https://sid.ir/paper/2539/en

IEEE: Copy

amir azam tarahian, and SAEID ASADI, “Extending Basel Regulatory Capital Requirement under Economic Downturns,” IRANIAN ECONOMIC RESEARCH, vol. 23, no. 76 , pp. 159–184, 2018, [Online]. Available: https://sid.ir/paper/2539/en

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