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Analysis of Granularity Adjustment for Regulatory Capital

Author

Listed:
  • Mario Krali

    (Technische Universität München, Munich, Germany)

  • Andrey Gurov

    (American University in Bulgaria, Blagoevgrad, Bulgaria)

Abstract

The lack of portfolio granularity in terms of exposure has been shown to have important implications for the amount of a financial institution’s economic capital. Based on a numerical simulation model, we provide concrete examples of how granularity affects capital levels. We achieve this by following two simulation approaches, including a dynamic setup as a more realistic version of the analysis. We show that granularity has an indirect effect on the expected loss component. This could lead to significant changes in the competitive environment should banks consider adding a granularity adjustment to the estimated amount of capital and account for it in their pricing.

Suggested Citation

  • Mario Krali & Andrey Gurov, 2019. "Analysis of Granularity Adjustment for Regulatory Capital," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 8(3), pages 111-132.
    • Handle: RePEc:cbk:journl:v:8:y:2019:i:3:p:111-132
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    File URL: http://www.cbcg.me/repec/cbk/journl/vol8no3-7.pdf
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    Citations

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    Cited by:

    1. Jan Nokkala, 2022. "Are large credit exposures a source of concentration risk?," Bank i Kredyt, Narodowy Bank Polski, vol. 53(4), pages 375-398.

    More about this item

    Keywords

    Finance; Regulation; Basel; Granularity; Banks; Capital; Concentration; Risk; Corporate Exposures.;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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