The Risk-Weights in the New Basel Capital Accord: Lessons from Bond Spreads Based on a Simple Structural Model

Posted: 10 Oct 2007

See all articles by Andrea Resti

Andrea Resti

Bocconi University - Department of Finance

Andrea Sironi

Bocconi University - Department of Finance

Abstract

The Basel Committee designed a system of risk weights ("standardised approach") to measure the riskiness of banks' loan portfolios. We investigate its ability to adequately reflect risk through an analysis of the economic capital implied in corporate bond spreads. This is based on a dataset of issuance spreads, ratings and other relevant bond variables including 7,232 eurobonds issued by an internationally-diversified sample during 1991-2003. Three main results emerge: the spread/rating relationship is strongly significant; the estimated spreads per rating class indicate a steeper risk/rating relationship than the one approved by the Basel Committee; no significant difference appears in the spread/rating relation of banks and non-financial firms issuers.

Keywords: eurobonds, credit ratings, spreads, structural models, capital regulation, deposit insurance, banks

JEL Classification: G15, G21, G28

Suggested Citation

Resti, Andrea and Sironi, Andrea, The Risk-Weights in the New Basel Capital Accord: Lessons from Bond Spreads Based on a Simple Structural Model. Journal of Financial Intermediation, Vol. 16, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=1020312

Andrea Resti (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Andrea Sironi

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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