<abstract xmlns="http://www.w3.org/1999/xhtml"><p>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.</p></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.

Analysis of Granularity Adjustment for Regulatory Capital

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Analysis of Granularity Adjustment for Regulatory Capital"}

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...

Analysis of Granularity Adjustment for Regulatory Capital

Published Online: Sep 19, 2019

Page range: 111 - 132

Received: Mar 22, 2018

Accepted: May 25, 2018

DOI: https://doi.org/10.2478/jcbtp-2019-0027

Keywords
Finance, Regulation, Basel, Granularity, Banks, Capital, Concentration, Risk, Corporate Exposures

© 2019 Mario Krali et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Analysis of Granularity Adjustment for Regulatory Capital

Published Online: Sep 19, 2019

Page range: 111 - 132

Received: Mar 22, 2018

Accepted: May 25, 2018

DOI: https://doi.org/10.2478/jcbtp-2019-0027

KeywordsFinance, Regulation, Basel, Granularity, Banks, Capital, Concentration, Risk, Corporate Exposures

© 2019 Mario Krali et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
Finance, Regulation, Basel, Granularity, Banks, Capital, Concentration, Risk, Corporate Exposures