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With the overhaul of the capital adequacy requirements for credit institutions (Basle II) the Basle Committee on Banking Supervision is endeavouring to align the regulatory definition of equity with the economic definition in that more equity is to be required as a buffer against risk where a greater risk exists, and vice versa. This will mark the discarding of a banking supervision currently oriented towards quantitative criteria for one oriented towards qualitative criteria, i.e. the individual bank’s risk profile. In future, banks will gear lendings and relevant interest rates more closely than in the past to the individual borrower’s creditworthiness and the quality of the collateral. To this end they may refer to external quality gradings or their own credit assessments (internal credit).
Under the advanced internal credit-based approach of Basle II, parameters for determining the capital backing requirement are Probability of Default (PD), Loss Given Default (LGD) and Exposure At Default (EAD). These parameters are to be computed by the banks themselves, subject to adherence to strict supervisory specifications. The member banks of the Association of German Mortgage Banks (vdp) have together developed a model for determining the loss after realization of collateral (LGD grading). Thus, an important component of the advanced approach will be fulfilled which guarantees that the high valuableness of the real estate lien, the security instrument of real estate finance, is adequately reflected in the capital backing.
Interview Dr. Hagen with Immobilie & Finanzierung
Basle II and risk of default
Article Dr. Hagen and Dr. Marburger
Implications of Basle II for the mortgage banks and their customers – the progress so far
LGD grading under Basle II.pdf |
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