On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
ENDOGENOUS/EXOGENOUS SEGMENTATION IN THE A-IRB FRAMEWORK AND THE PRO-CYCLICALITY OF CAPITAL: AN APPLICATION TO MORTGAGE PORTFOLIOS
Jose J. Canals-Cerda
Abstract

This paper investigates the pro-cyclicality of capital in the advanced internal ratings-based (A-IRB) Basel approach for retail portfolios and identifies the fundamental assumptions required for stable A-IRB risk weights over the economic cycle. Specifically, it distinguishes between endogenous and exogenous segmentation risk drivers and, through application to a portfolio of first mortgages, shows that risk weights remain stable over the economic cycle when the segmentation scheme is derived using exogenous risk drivers, while segmentation schemes that include endogenous risk drivers are highly pro cyclical. Also analyzed is the sensitivity of the A-IRB framework to model risk resulting from the selection, at the quantification stage, of a data sample period that does not include a period of significant economic downturn. The analysis illustrates important limitations and sensitivities of the A IRB framework and sheds light on the implicit restrictions embedded in recent regulatory guidance that underscore the importance of rating systems that remain stable over time and throughout business cycles.


Download Full text
Cite this item
Jose J. Canals-Cerda, ENDOGENOUS/EXOGENOUS SEGMENTATION IN THE A-IRB FRAMEWORK AND THE PRO-CYCLICALITY OF CAPITAL: AN APPLICATION TO MORTGAGE PORTFOLIOS, Federal Reserve Bank of Philadelphia, Working Papers 17-9, 19 Apr 2017.
More from this series
JEL Classification:
Subject headings:
Keywords: Basel Accord; credit risk; regulatory capital; mortgages
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal