Working Paper: CEPR ID: DP9205
Authors: Dennis Bams; Magdalena Pisa; Christian C. Wolff
Abstract: This paper generalizes the existing asymptotic single-factor model to address issues related to industry heterogeneity, default clustering and parameter uncertainty of capital requirement in US retail loan portfolios. We argue that the Basel II capital requirement overstates the riskiness of small businesses even with prudential adjustments. Moreover, our estimates show that both location and spread of loss distribution bare uncertainty. Their shifts over the course of the recent crisis have important risk management implications. The results are based on a unique representative dataset of US small businesses from 2005 to 2011 and give fundamental insights into the US economy.
Keywords: credit risk
JEL Codes: G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Basel II capital requirement (G28) | overstates the riskiness of small businesses (G32) |
| observed default frequencies (C46) | reveal that small businesses are less sensitive to macroeconomic conditions (E32) |
| firm-specific characteristics (G32) | drive default risk (G32) |
| sensitivity to common risk factors (D91) | remains low (E39) |
| idiosyncratic risk (D81) | predominates in small business portfolios (M13) |
| retail exposures (L81) | are safer investments than suggested by regulatory models (G18) |