Abstract
In this paper, we study the impact of extreme events on the loan portfolios of the Greek banking system. These portfolios are grouped into three separate groups based on the size of the bank to which they belong, in particular, large, medium, and small size. A series of extreme scenarios was performed and the increase in capital requirements was calculated for each scenario based on the standardized and internal ratings approach of the Basel II accord. The results obtained show an increase of credit risk during the crisis periods, and the differentiation of risk depending on the size of the banking organization as well as the added capital that will be needed in order to hedge that risk. The execution of the scenarios aims at studying the effects which may be brought about on the capital of the three representative banks by the appearance of adverse events.
Highlights
Banks must uphold the appropriate level of equity capital in order to be in a position to deal sufficiently and effectively with the risks they take
There was a model developed based on the alternative approaches for computing capital requirements, introduced by the Basel I and II accords, and we applied a series of simulation scenarios for extreme adverse conditions
In order to compute the capital requirements based on the standardized approach, the various exposures were classified into categories according to their supervisory handling, i.e., (a) Exposure to small business credit (Small Enterprises); (b) Exposure to large business credit (Large Corporate); (c) Exposure to mortgage loans whose loan to value (LTV) is greater than 75%; (d) Exposure to mortgage loans whose loan to value is less than 75%; (e) Consumer credit and credit card exposure (Retail); (f) Loans in default for all the above categories of loans
Summary
Banks must uphold the appropriate level of equity capital in order to be in a position to deal sufficiently and effectively with the risks they take. The Basel committee has taken care when conducting studies that simulate extreme events in which a large number of banks from the member states of the committee take part, in order to form reliable risk management strategies and create a framework of preventive supervision of credit institutions [2,6,7,8]. There was a model developed based on the alternative approaches for computing capital requirements (standardized approach and internal ratings approach), introduced by the Basel I and II accords, and we applied a series of simulation scenarios for extreme adverse conditions. An adverse event was considered to be the increase of defaults on the portfolios of the banks which affects the levels of risk tolerance of the bank and, its survival or collapse
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