A Study On The Effectiveness Of Capital Adequacy Of Corporate Credit Risk

The most important part of capital regulation is the quality and quantity of the capital. The purpose of the study is to quantify capital needed for corporate credit risk. The1988Basel Accord (Basel â… ) has standardized the capital adequacy of the bank. Basel â…¡ established three options for the bank to calculate capital requirement:standardized approach, internal rating-based (IRB) foundation approach and internal rating-based (IRB) advanced approach. In Basel â…¢, banks are required to build-up a capital conservation buffer. In2012, China Banking Regulatory Commission (CBRC) has issued Administrative Measures for the Capital of Commercial Banks (for Trial Implementation). It refers to Basel â…¡ and Basel â…¢, and will be implemented in2013.The intention of capital regulation is to cover the unexpected loss of banking. We call it economic capital. There are four major models to measure economic capital. In this paper, we use CreditRisk+model. It will simplify our calculation and have a more accurate result.We measure the capital requirement based on the requirement of Basel Commission and CBRC. Approaches we use are standardized approach and IRB (foundation and advanced). If the regulation is in validation, it should cover the unexpected loss of banking, and have a good return on asset result.The result shows that IRB advanced approach is best for banks to meet the requirement. However, the conclusion is based on some assumptions. Obligor default rate used in the paper comes from the report of standard and poor company. It is the global average default rate and may not represent default rate of China. Furthermore, there are other conclusions in the paper. First, there is a big concentration risk in the portfolio. Second,45percent loss given default (LGD) assumption is too low in China. Third, the mix of debt maturity in the target bank reduces the unexpected loss.