Reforming Capital Requirements in Emerging Countries: Calibrating Basel II using Historical Argentine Credit Bureau Data and CreditRisk+

Abstract

Emerging economies are likely to be more volatile and asset risk more correlated than in industrialized countries. In this paper we discuss how credit scoring techniques and modern credit risk portfolio models can be used to measure credit risk and check Basel II calibration for such an environment. After reviewing the development of credit risk portfolio models, to explain our choice in using CreditRisk+, we discuss the definition and estimation methodology for a set of essential parameter inputs, which in turn depend on the data available - in this case from the Argentine public credit bureau. We then simulate, bank by bank, the introduction of Basel II's foundation IRB approach using the same data for Argentina and compare the results. We analyze how the IRB approach might be recalibrated and finally discuss a set of other issues regarding IRB implementation in an emerging economy.