The Implications of the "New Capital Adeqaucy Framework" for Credit Risk and Capital Management in the Banking Industry

Diplomarbeit von Miriam Benz

Abstract:

In their role as financial intermediaries, banks have the inherent task of assuming risks. This statement follows Diamond’s model (1984) that financial intermediaries exist because they have a comparative advantage in the production of private information. Higher competition and complexity as well as a riskier environment however have increased the importance of managing and controlling one of the banks’ core risks: credit risk. Before analysing the implications on specific credit risk instruments, the thesis will describe the relevant content of“The New Basel Capital Accord” and explain the general context of credit risk and capital management within a bank. An analysis of the implications of „The New Basel Capital Accord” implies the question of how the new incentive structures will modify credit risk and capital management activities within banks and shape the competitive environment of the banking industry. More specifically, it will be investigated how the significance and type of credit risk and capital management will change and what effect ”The New Basel Capital Accord” will have on the development of credit risk measurement instruments. The paper will also describe the impacts of the new Accord on the market for credit derivatives and securitizations and on the structure of these transactions. Moreover, it is important to consider how the scarce and essential resource capital will be affected and what potential conclusions can be drawn.

The thesis will show that ”The New Basel Capital Accord” is a major step forward in banking regulation that will better align regulatory and economic capital. It will encourage the usage of internal rating approaches, credit derivatives and securitizations. It will also influence capital allocation and lead to an extended use of active portfolio management. As a consequence of changed incentive structures the analysis will indicate that ”The New Basel Capital Accord” will be an important driver for the advancement and improvement of credit risk measurement and internal credit risk models.

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