The New Basel Capital Accord: Structure, Possible Changes and Micro- and Macroeconomic Effects. CEPS Reports in Finance and Banking No. 30, 1 September 2002

During the last 12 years, the 1988 Basel Capital Accord dealing with minimum capital requirements for internationally active financial institutions has grown more pervasive, being integrated into national regulations in most advanced countries. Meanwhile, the limitations and drawbacks of the simple rules on which it is based have become increasingly apparent. In other words, the existence of a gap between supervisory requirements and risk-based measures of economic capital has led to forms of regulatory arbitrage (whereby loopholes in the regulation have been exploited to increase the real leverage of a bank without reducing its capital ratios). Paradoxically, the inability of the 1988 protocol to discriminate between investment grade and junk borrowers might also have made some financial institutions more risk-seeking, instead of helping them control their risks. To address such challenges, the Basel Committee on Banking Supervision has been engaged for several years in a revision process that will finally lead to a New Basel Capital Accord (NBCA). Remarkably, the new Accord is not being engineered inside a secluded laboratory by a handful of regulators and financial rocket-scientists, but its contents have been thoroughly discussed by national supervisors, banks and academics. Thus, the NBCA drafting has become a meeting point for many different perspectives: legal experts, accountants, bank managers, central bankers and finance scholars (to name only a few) have been working together, merging their professional backgrounds to make the NBCA more robust in its structure and parameters. This report tries to provide a complete, up-to-date, critical picture of the new Basel approach to bank capital, by summarising its structure and possible changes, and by focusing on some limitations and pitfalls that might deserve further investigation

THE BASEL COMMITTEE APPROACH TO RISK-WEIGHTS AND EXTERNAL RATINGS: WHAT DO WE LEARN FROM BOND SPREADS?

The Basel Committee for Banking Supervision designed a system of risk weights (the so called standardised approach) to measure the riskiness of banksÂ’ loan portfolios. Its ability to adequately reflect risk is empirically investigated in this paper, through an analysis of the economic capital allocations implied in corporate bond spreads. This is based on a unique dataset of issuance spreads, ratings and other relevant bond variables (such as maturity, face value, time of issuance and currency of denomination) including 7,232 eurobonds issued mostly by Canadian, European, Japanese and U.S. companies during 1991-2003. Three main results emerge. First, the spread/rating relationship is strongly significant with spreads increasing when ratings worsen. Second, the estimated spreads per rating class indicate that the risk/rating relationship might be steeper than the one approved by the Basel Committee. Finally the difference between the spread/rating relation of banks and non-financial firms appears quite blurred and statistically questionable. Following this empirical evidence, we underline some adjustments in the standardised approach risk-weights that might be considered for the future versions of the Basel Accord.eurobonds, credit ratings, spreads, capital regulation, banks.

The liquidity of corporate and government bonds: drivers and sensitivity to different market conditions

In this report we investigate the liquidity of the European fixed income market using a large sample of government, corporate and covered bonds. We construct a robust liquidity index, based on PCA, to aggregate several measures and proxies for liquidity and estimate a multivariate regression models to identify the main factors driving bond liquidity in ordinary times as well as in times of market stress. We find that European bond liquidity is driven by bonds’ specific characteristics such as duration, rating, amount issued and time to maturity. The sensitivity of bond liquidity to these factors is larger when markets are under stress. We also analyze the link between the liquidity of individual bonds and the liquidity of the market as a whole. This is done through the estimation a liquidity market model that controls for bonds’ duration and rating as well as for periods of market stress. Results show that the illiquidity of individual bonds follows the illiquidity of the market. This effect is more pronounced for bonds with longer duration and lower rating, especially in times of market stress. Our results confirm the importance of rating in driving asset allocation decision (flight-to-safety) and suggest specific interventions that regulators might consider to introduce. First, provided that duration plays a very important role in bond liquidity, bond eligibility for the purposes of the LCR might be subject to a penalization based on duration. Second, given that the size of the bond issue affects the liquidity, regulators might create incentives for plain vanilla issues and re-openings of old issues.JRC.G.1-Financial and Economic Analysi

The Link between Default and Recovery Rates

This paper analyzes the association between aggregate default and recovery rates on credit assets, and seeks to empirically explain this critical relationship. We examine recovery rates on corporate bond defaults, over the period 1982-2002. Our econometric univariate and multivariate models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities, with default rates playing a pivotal role. Such a link would bring about a significant increase in both expected and unexpected losses as measured by some widespread credit risk models, and would affect the procyclicality effects of the New Basel Capital Accord. Our results have also important implications for investors in corporate bonds and bank loans, and for all markets (e.g., securitizations, credit derivatives) that depend on recovery rates as a key variable

The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications

This paper analyzes the association between aggregate default and recovery rates on credit assets, and seeks to empirically explain this critical relationship. We examine recovery rates on corporate bond defaults, over the period 1982-2002. Our econometric univariate and multivariate models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities, with default rates playing a pivotal role. Such a link would bring about a significant increase in both expected and unexpected losses as measured by some widespread credit risk models, and would affect the procyclicality effects of the New Basel Capital Accord. Our results have also important implications for investors in corporate bonds and bank loans, and for all markets (e.g., securitizations, credit derivatives, etc.) which depend on recovery rates as a key variable

The Link between Default and Recovery Rates: Implications for Credit Risk Models and Procyclicality

This paper analyzes the impact of various assumptions about the association between aggregate default probabilities and the loss given default on bank loans and corporate bonds, and seeks to empirically explain this critical relationship. Moreover, it simulates the effects on mandatory capital requirements like those proposed in 2001 by the Basel Committee on Banking Supervision. We present the analysis and results in four distinct sections. The first section examines the literature of the last three decades of the various structural-form, closed-form and other credit risk and portfolio credit value-at-risk (VaR) models and the way they explicitly or implicitly treat the recovery rate variable. Section 2 presents simulation results under three different recovery rate scenarios and examines the impact of these scenarios on the resulting risk measures: our results show a significant increase in both expected and unexpected losses when recovery rates are stochastic and negatively correlated with default probabilities. In Section 3, we empirically examine the recovery rates on corporate bond defaults, over the period 1982-2000. We attempt to explain recovery rates by specifying a rather straightforward statistical least squares regression model. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities. Our econometric univariate and multivariate time series models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. Finally, in Section 4 we analyze how the link between default probability and recovery risk would affect the procyclicality effects of the New Basel Capital Accord, due to be released in 2002. We see that, if banks use their own estimates of LGD (as in the “advanced” IRB approach), an increase in the sensitivity of banks’ LGD due to the variation in PD over economic cycles is likely to follow. Our results have important implications for just about all portfolio credit risk models, for markets which depend on recovery rates as a key variable (e.g., securitizations, credit derivatives, etc.), for the current debate on the revised BIS guidelines for capital requirements on bank credit assets, and for investors in corporate bonds of all credit qualities

The Link between Default and Recovery Rates: Implications for Credit Risk Models and Procyclicality

This paper analyzes the impact of various assumptions about the association between aggregate default probabilities and the loss given default on bank loans and corporate bonds, and seeks to empirically explain this critical relationship. Moreover, it simulates the effects on mandatory capital requirements like those proposed in 2001 by the Basel Committee on Banking Supervision. We present the analysis and results in four distinct sections. The first section examines the literature of the last three decades of the various structural-form, closed-form and other credit risk and portfolio credit value-at-risk (VaR) models and the way they explicitly or implicitly treat the recovery rate variable. Section 2 presents simulation results under three different recovery rate scenarios and examines the impact of these scenarios on the resulting risk measures: our results show a significant increase in both expected and unexpected losses when recovery rates are stochastic and negatively correlated with default probabilities. In Section 3, we empirically examine the recovery rates on corporate bond defaults, over the period 1982-2000. We attempt to explain recovery rates by specifying a rather straightforward statistical least squares regression model. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities. Our econometric univariate and multivariate time series models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. Finally, in Section 4 we analyze how the link between default probability and recovery risk would affect the procyclicality effects of the New Basel Capital Accord, due to be released in 2002. We see that, if banks use their own estimates of LGD (as in the “advanced” IRB approach), an increase in the sensitivity of banks’ LGD due to the variation in PD over economic cycles is likely to follow. Our results have important implications for just about all portfolio credit risk models, for markets which depend on recovery rates as a key variable (e.g., securitizations, credit derivatives, etc.), for the current debate on the revised BIS guidelines for capital requirements on bank credit assets, and for investors in corporate bonds of all credit qualities

ANALISIS VEGETASI TUMBUHAN BAWAH DI KAWASAN HUTAN LINDUNG KENAGARIAN PADANG MENTINGGI, KECAMATAN RAO, KABUPATEN PASAMAN

Penelitian mengenai analisis vegetasi tumbuhan bawah di kawasan hutan lindung Kenagarian Padang Mentinggi, Kecamatan Rao, Kabupaten Pasaman telah dilaksanakan pada bulan Februari sampai Mei 2022. Penelitian ini bertujuan untuk mengetahui komposisi dan struktur vegetasi tumbuhan bawah. Analisis vegetasi dilakukan dengan penempatan transek secara purposive sampling. Plot dibuat dengan ukuran 2x2 m, sebanyak 12 plot yang diletakkan secara sistematik berselang seling di sepanjang transek dengan jarak antar plot 8 m. Pada setiap plot dilakukan pengamatan terhadap jenis dan individu masing-masing jenis serta dilakukan pengeloksian semua jenis untuk diidentifikasi di Herbarium Universitas Andalas (ANDA). Berdasarkan dari 26 famili, famili dominan adalah Melastomataceae dengan nilai 20,74%. Jenis paling dominan adalah Clidemia hirta dengan indeks nilai penting 32,01%. Jenis yang paling rendah adalah Sarcandra glabra, Vitex pinnata, Coscinium fenestratum, Ficus villosa, Ficus sp., Syzgium sp. dan Breynia oblongifolia dengan indeks nilai penting 1,72%. Indeks keanekaragaman tumbuhan bawah di kawasan ini tergolong tinggi dengan (H`= 3,18). Berdasarkan penelitian dapat diambil kesimpulan bahwa vegetasi dasar lebih banyak ditemukan dari pada anakan pohon dan tumbuhan yang paling banyak mendominasi daerah penelitian ini adalah Clidemia hirta

The Link between Default and Recovery Rates

This paper analyzes the association between aggregate default and recovery rates on credit assets, and seeks to empirically explain this critical relationship. We examine recovery rates on corporate bond defaults, over the period 1982-2002. Our econometric univariate and multivariate models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities, with default rates playing a pivotal role. Such a link would bring about a significant increase in both expected and unexpected losses as measured by some widespread credit risk models, and would affect the procyclicality effects of the New Basel Capital Accord. Our results have also important implications for investors in corporate bonds and bank loans, and for all markets (e.g., securitizations, credit derivatives) that depend on recovery rates as a key variable