Retail Loans and Basel II: Using Portfolio Segmentation to Reduce Capital Requirements

ECRI Research Report No. 8

36 Pages Posted: 8 Feb 2012

See all articles by Daniel Kaltofen

Daniel Kaltofen

Ruhr University of Bochum - Faculty of Economics; BiTS Business and Information Technology School

Stephan Paul

Ruhr University of Bochum - Faculty of Economics

Stefan Stein

University of Bochum - Department of Finance and Banking

Date Written: August 20, 2006

Abstract

The key concept underlying the Basel II framework for risk measurement and corresponding equity capital standards is that the existing regulations pertaining to credit risk will be individualised through reference to the internal ratings of banks. In accordance with the regulatory guidelines, Daniel Kaltofen, Stephan Paul and Stefan Stein develop an ‘optimised segmentation approach’ with regard to the credit default event and measure the implications for regulatory capital requirements. As regards methodology, they present an innovative technique and test it on a data set of approximately 413,000 motor vehicle loans. By classifying loans according to selective predictors of default, the authors find that banks can achieve significant savings in terms of ensuring a lower regulatory capital requirement. This provides banks with the opportunity to increase lending capacity. The technique overcomes the disadvantages of the more familiar standard methods used in today’s bank risk management and delivers more robust results.

Keywords: Basel II, retail loans, portfolio segmentation, bank risk management, risk measurement, optimised segmentation approach

Suggested Citation

Kaltofen, Daniel and Paul, Stephan and Stein, Stefan, Retail Loans and Basel II: Using Portfolio Segmentation to Reduce Capital Requirements (August 20, 2006). ECRI Research Report No. 8, Available at SSRN: https://ssrn.com/abstract=2001386 or http://dx.doi.org/10.2139/ssrn.2001386

Daniel Kaltofen (Contact Author)

Ruhr University of Bochum - Faculty of Economics ( email )

Ruhr University of Bochum
Faculty of Economics
Bochum, DE 44780
Germany

BiTS Business and Information Technology School ( email )

Reiterweg 26b
Iserlohn, D-58636
Germany

Stephan Paul

Ruhr University of Bochum - Faculty of Economics ( email )

Ruhr University of Bochum
Faculty of Economics
Bochum, DE 44780
Germany

Stefan Stein

University of Bochum - Department of Finance and Banking ( email )

Bochum, DE 44780
Germany

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