The Argentina Credit Risk Indicator within a portfolio theory approach to the capital requirement for credit risk

Working papers (original series)| 1999 | N 8

Abstract

This work addresses the issue of the use of risk weights from a regulatory perspective that explicitly takes into account the objective of limiting banks' insolvency risks through minimum capital requirements. Basel risk weights have often been criticized for not taking into account portfolio phenomena such as the benefit derived from diversification and for not differentiating between loans granted to borrowers with dissimilar ratings (e.g. an AAA company vis-à-vis a B). Most loans in the Basel approach end up having unitary risk weights except when they have very significant collateral. There is no room there to discriminate between more or less prudent banks in allocating their total resources between loans that carry different levels of risk.