In this year, new capital adequacy regulation, known as Basel II, came into force. Based on these rules, two directives of the European Parliament and of the Council have been revised and the new decree of Czech National Bank has come into force. This new decree brings some new aspects in credit...

This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk...

In this paper I question whether the risk weights in the advanced (IRB) approach of the Basel 2 regulation are appropriate, on a strictly theoretical ground. The major concern is that the model behind the regulation considers defaults only at the end of the time horizon for which capital is to...

In-spite of large volume of Contingent Credit Lines (CCL) in all commercial banks paucity of Exposure at Default (EAD) models, unsuitability of external data and inconsistent internal data with partial draw-down, has been a major challenge for risk managers as well as regulators for managing CCL...

In this paper I examine whether the probability of default (PD) of an obligor estimated by a logit model can really be considered a good estimate of the true PD. The general answer seems to be no, although in this paper I don’t carry out a large scale (simulation) analysis. With a simple...

In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Act provided for risk-based deposit insurance premiums, put explicit limits on the application of a “too big to fail” principle for banks and required that examiners implement “prompt...

This document describes the main issues of the New Basel Accord, highlights the roles and organization of the Basel Committee on Banking Supervision (BCBS) and the Bank for International Settlements (BIS), and offers some arguments against some of the criticism that has been voiced against the...

Although the economic transition started in the early of 1990s, Hungary had a pioneer role in introducing the two-tier banking system within the former Soviet Eastern Block. The modernization of the banking system was unexpectedly far-reaching as Western banks were allowed to participate in the...

As part of Basel II's incremental risk charge (IRC) methodology, this paper summarizes our extensive investigations of constructing transition probability matrices (TPMs) for unsecuritized credit products in the trading book. The objective is to create monthly or quarterly TPMs with predefined...

We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is...