Retail Loans & Basel II: Using Portfolio Segmentation to Reduce Capital Requirements

Download or read book Retail Loans & Basel II: Using Portfolio Segmentation to Reduce Capital Requirements written by Daniel Kaltofen and published by CEPS. This book was released on 2016 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a new technique for grouping retail loans into homogenous risk pools, which adheres to the provisions of Basel II. We use recursive partitioning and test it on a data set of approximately 413,000 auto loans. By classifying loans according to selective predictors of default, we find that banks can achieve significant savings in terms of a lower regulatory capital requirement. Alternatively, this provides the opportunity to increase lending capacity.