Capital Allocation and Bank Management Based on the Quantification of Credit Risk

Liberalization and deregulation have recently accelerated.It is therefore useful to keep risk within a certain level inrelation to capital, considering that financial institutionsmust control their risk appropriately to maintain thesafety and soundness of their operation. In 1988, the BasleCapital Accord—International Convergence of CapitalMeasurement and Capital Standards—introduced a uniformframework for the implementation of risk-basedcapital rules. However, this framework applies the same“risk weight” (a ratio applied to assets for calculation ofaggregated risk assets) to loans to all the private corporations,regardless of their creditworthiness. Such anapproach might encourage banks to eliminate loans thatcan be terminated easily while maintaining loans withhigher risk.[...]