We present a model of risky debt in which collateral value is correlated with the possibility of default. The model is then used to study: 1) the expected amount of debt recovered in the event of default as a function of collateral; and 2) the amount of collateral needed to mitigate the...

of The New Basel Accord, which is to be finalized by the end of 2001. Our focus is on the reforms of the rules for determining minimum capital requirements for credit risk. The discussion is divided into effects at the level of an individual bank, effects on the structure of the financial...

The rating-sensitive capital charges on credit risks under the new Basel Accord are likely to increase the volatility of minimum capital requirements, which may force banks to hold larger capital cushions in excess of minimum requirements. We analyse this claim on the basis of numerical...