Balzarotti, VeronicaFalkenheim, MichaelPowell, Andrew2014-03-042014-03-042002-05World Bank Economic Reviewhttps://hdl.handle.net/10986/17201A portfolio based model (Credit Risk of Credit Suisse First Boston) and recent Central Bank of Argentina credit bureau data are used to estimate whether current capital and provisioning regulations match actual risks. Arguing that provisions should cover expected losses and that capital requirements should cover potential losses beyond expected losses subject to some statistical level of tolerance, the article assesses how well actual capital and provisioning requirements match the estimated requirements given by the model. Actual provisioning requirements were found to be close to implied levels of expected losses. The estimate of potential losses was found to be highly sensitive to the assumptions of the model, especially the parameter relating the volatility of a loan's rate of default to its mean value. This volatility parameter cannot be estimated accurately with the credit bureau data because of the short time span covered, so proxy data were used to estimate it, and two values around that estimate were tried. The difficulty of estimating this critical parameter implies that the results should only be regarded as suggestive. Moreover, the methodology only does not seek to estimate credit risk and not interest rate risk or exchange rate risk, nor does it fully take into account the indirect effects of interest rates and exchange rates on credit risk. As recent events in Argentina have demonstrated, estimating credit risk along these lines should be thought of as just one tool in attempting to assess the appropriate level of bank provisions and capital.en-USCC BY-NC-ND 3.0 IGOACCOUNTINGACCURATE INFORMATIONADMINISTRATIVE COSTSASSETSBALANCE SHEETSBANK FAILURESBANK LOANSBANKING INDUSTRYBANKING REGULATIONSBANKING SUPERVISIONBANKING SYSTEMBANKSBORROWERCAPITAL ADEQUACYCAPITAL ALLOCATIONCAPITAL ALLOCATIONSCAPITAL REQUIREMENTCAPITAL REQUIREMENTSCASH FLOWCENTRAL BANKCOLLATERALCOMMERCIAL BANKSCOMMERCIAL LOANSCOMPARATIVE ANALYSISCONSUMER LOANSCREDIT BUREAUCREDIT HISTORYCREDIT INFORMATIONCREDIT LOSSCREDIT LOSSESCREDIT QUALITYCREDIT RATINGSCREDIT REPORTINGCREDIT REPORTING SYSTEMSCREDIT RISKCREDIT RISK ASSESSMENTCREDIT RISK MANAGEMENTCREDIT RISK MODELINGCURRENCYDEBT INTERESTDEBTORDEBTORSDEBTSDEFAULT PROBABILITIESDEFAULT RATEDEFAULTSDEPOSITSDISTRIBUTION OF CREDITDIVERSIFIED PORTFOLIODIVIDENDDIVIDENDSDOMESTIC BANKSDUMMY VARIABLEEMERGING MARKETSEQUITY CAPITALEXCHANGE RATEEXCHANGE RATESEXPECTED VALUEFEDERAL RESERVEFEDERAL RESERVE BANKFEDERAL RESERVE BANK OF NEW YORKFINANCIAL CRISESFINANCIAL INSTITUTIONFINANCIAL INSTITUTIONSFINANCIAL STABILITYFINANCIAL SYSTEMFOREIGN EXCHANGEFOREIGN EXCHANGE RISKFUTURE CREDITHOUSINGHUMAN RESOURCESINCOME] RECOGNITIONINDIVIDUAL BANKSINDIVIDUAL DEBTORSINDIVIDUAL DEBTSINDIVIDUAL LOANINDIVIDUAL LOANSINTEREST INCOMEINTEREST MARGININTEREST RATEINTEREST RATE RISKINTEREST RATESINTERNATIONAL BANKINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL CAPITALLENDERLENDERSLENDING INSTITUTIONSLENDING REQUIREMENTSLEVEL OF CREDITLEVEL OF RISKLIQUIDITYLOANLOAN ACCOUNTINGLOAN BALANCELOAN CLASSIFICATIONSLOAN DEFAULTSLOAN LOSSESLOAN PORTFOLIOLOAN PORTFOLIOSMARKET RISKMATURITYMAXIMUM LIKELIHOOD ESTIMATIONNEGOTIATIONSNONPERFORMING LOANSOPERATIONAL RISKPORTFOLIOPORTFOLIO RISKPORTFOLIOSPRIVATE BANKSPRIVATE CREDITPRIVATE FINANCIAL INSTITUTIONSPROBABILITY OF DEFAULTPROBABILITY OF INSOLVENCYPRUDENTIAL STANDARDSRECOVERY RATEREGULATORY POLICYREMEDYRESERVERESERVESRETAINED EARNINGSRETURNRETURNSRISK CAPITALRISK FACTORRISK FACTORSRISK OF DEFAULTRISKY LOANSSHAREHOLDERSSOLVENCYSTRUCTURE OF DEBTSSUBORDINATED DEBTSUPPLEMENTARY CAPITALTAXTOTAL DEBTVALUE AT RISK MODELSWILLINGNESS TO PAYJournal ArticleWorld Bank10.1596/17201