Mitigating Procyclicality due to Minimum Capital Requirements in the Swedish Banking Sector
(2013) FMS820 20131Mathematical Statistics
 Abstract (Swedish)
 This study explores methods for mitigating procyclicality due to calculations
of minimum capital requirements to cover credit risk. The basis for calculations
are provided by the Basel Committee in the Basel accords and the main
concern is that they could strengthen the amplitude of economic cycle fluctuations.
Our study constructs a portfolio that aims to replicate the Swedish
market for corporate lending by using external Probability of Default data for
Swedish companies in the span of 20052013. The data is used together with
the Basel guidelines for calculations to compute the corresponding minimum
capital requirements series, which in turn is used in testing four different
options to prevent the apparent procyclical... (More)  This study explores methods for mitigating procyclicality due to calculations
of minimum capital requirements to cover credit risk. The basis for calculations
are provided by the Basel Committee in the Basel accords and the main
concern is that they could strengthen the amplitude of economic cycle fluctuations.
Our study constructs a portfolio that aims to replicate the Swedish
market for corporate lending by using external Probability of Default data for
Swedish companies in the span of 20052013. The data is used together with
the Basel guidelines for calculations to compute the corresponding minimum
capital requirements series, which in turn is used in testing four different
options to prevent the apparent procyclical behaviour. The evaluation of the
options is conducted by comparing the rootmeansquare deviations of the
adjusted series with respect to the HodrickPrescott trend of the unadjusted
series. It turns out that adjusting the input with logistic regression or the
output with a business multiplier are the best performing options, where the
latter is favoured due to its simplicity in implementation.
Key Words: Credit Risk, Procyclicality, Regulatory Capital, Minimum Capital
Requirements, Basel III, Economic Cycles, Probability of Default (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/studentpapers/record/3866713
 author
 Hultin, Christian and Arnljots, Eirikur
 supervisor

 Nader Tajvidi ^{LU}
 organization
 course
 FMS820 20131
 year
 2013
 type
 H2  Master's Degree (Two Years)
 subject
 language
 English
 id
 3866713
 date added to LUP
 20130620 10:49:32
 date last changed
 20130620 10:49:32
@misc{3866713, abstract = {This study explores methods for mitigating procyclicality due to calculations of minimum capital requirements to cover credit risk. The basis for calculations are provided by the Basel Committee in the Basel accords and the main concern is that they could strengthen the amplitude of economic cycle fluctuations. Our study constructs a portfolio that aims to replicate the Swedish market for corporate lending by using external Probability of Default data for Swedish companies in the span of 20052013. The data is used together with the Basel guidelines for calculations to compute the corresponding minimum capital requirements series, which in turn is used in testing four different options to prevent the apparent procyclical behaviour. The evaluation of the options is conducted by comparing the rootmeansquare deviations of the adjusted series with respect to the HodrickPrescott trend of the unadjusted series. It turns out that adjusting the input with logistic regression or the output with a business multiplier are the best performing options, where the latter is favoured due to its simplicity in implementation. Key Words: Credit Risk, Procyclicality, Regulatory Capital, Minimum Capital Requirements, Basel III, Economic Cycles, Probability of Default}, author = {Hultin, Christian and Arnljots, Eirikur}, language = {eng}, note = {Student Paper}, title = {Mitigating Procyclicality due to Minimum Capital Requirements in the Swedish Banking Sector}, year = {2013}, }