Capital Allocation and Bank Management Based on the Quantification of Credit Risk
by Kenji Nishiguchi of Sakura Bank, Limited,
Introduction: Liberalization and deregulation have recently accelerated. It is therefore useful to keep risk within a certain level in relation to capital, considering that financial institutions must control their risk appropriately to maintain the safety and soundness of their operation. In 1988, the Basle Capital Accord--International Convergence of Capital Measurement and Capital Standards--introduced a uniform framework for the implementation of risk-based capital rules. However, this framework applies the same "risk weight" (a ratio applied to assets for calculation of aggregated risk assets) to loans to all the private corporations, regardless of their creditworthiness. Such an approach might encourage banks to eliminate loans that can be terminated easily while maintaining loans with higher risk.
Published in: FRBNY Economic Policy Review, Vol. 4, No. 3, (October 1998), pp. 83-94.