Basel II and default risk: An empirical analysis

The New Accord on Capital, known as Basel II, has induced a progressive harmonization of evaluation processes on credit risk merit in Italy. The present work analyzes the effect of Basel II on the basis of the definition of default that will come into effect at the end of the transition period. The analysis is based on a representative sample of a retail portfolio of one major Italian bank and distinguishes Northern, Central and Southern Italy. The findings highlight that under the new definition of default risk, estimates of portfolio riskiness are higher (mainly due to the different repayment schedule that are customary in Italy), but the impact of new estimates on capital requirements are limited. Additionally, the need to calibrate credit risk models on the basis of territorial diversity emerges.