Analysis And Relevant Demonstration On IRB Approach In New Basel Capital Accord

The Basel Committee on Banking Supervision released the Basel Capital Accordin 1988, bringing fierce reverberation, and Basel Capital Accord has been beingacknowledged as the holy treaty in the industry of bank in the world. The New BaselCapital Accord in 2001 improved the old one in 1988, as it substituted the threepillars-"minimum capital requirement, supervisory review process and marketdiscipline" for the single pillar of minimum capital requirement, advocatingall-around risk management. The first pillar is the most important part among thethree pillars, while the IRB approach is the core of the first pillar, and it is also thecore of New Basel Capital Accord.Taking a chance in the new accord and introducing the international managementconcept are very important for our commercial banks to build up the risk-protectingcapability and for our financial system to progress stably. However, according to thestandard of the new accord, our commercial banks face many difficulties in capitalmanagement. Therefore, thoroughly studying the new accord in time, and making itclear how to attain the conditions for carrying out the new accord in China arequestions our banks should pay close attention to.On the background of Basle accord, this paper introduces the theory about IRBformula, extracts the four parameters, analyzes the relationship between the capitalrequirement and them through diagram, and discusses how to estimate the twoparameters of them. The effect that the hypothesis about the asset's return rate in IRBis in accordance with the CAPM model is proved. KMV model is adopted to estimatethe PD, and the demonstration about the validity of KMV model in China stockmarket is conducted through selecting typical stock samples. Then we evaluate theadvantages and disadvantages of IRB formula and introduce the state of the researchon improving this method. The problem of administrating New Basel Capital Accordin China is discussed at last.