Publication

This paper explores the impact of the 2004 Basel II banking recommendations on capital requirements for financial institutions engaged in retail banking. It notes that under the revised framework, banks will for the first time be permitted to group their loans to private individuals and small corporate clients into a 'retail portfolio,' which is then subject to either an internal ratings based (IRB) approach or the standardized approach for calculating credit risk. The paper focuses on the IRB approach and finds that, by segmenting loans according to selective predictors of default, banks can achieve significant savings in terms of ensuring lower regulatory capital requirements.