Template-Type: ReDIF-Paper 1.0
Author-Name: Martin Birn
Author-X-Name-First: Martin 
Author-X-Name-Last: Birn
Author-Name: Renzo Corrias
Author-X-Name-First: Renzo 
Author-X-Name-Last: Corrias
Author-Name: Christian Schmieder
Author-X-Name-First: Christian 
Author-X-Name-Last: Schmieder
Author-Name: Nikola Tarashev
Author-X-Name-First: Nikola 
Author-X-Name-Last: Tarashev
Title: Banks' credit loss forecasts: lessons from supervisory data
Abstract: Focusing on credit risk, we compare banks' expected loss (EL) rates, collected confidentially by the Basel Committee on Banking Supervision from 2009 to 2022, and the corresponding actual loss (AL) rates, as reported in vendor data. Consistent with the use of through-the-cycle risk estimates for regulatory purposes, EL rates rarely move in line with AL rates over time, which helps explain a large precautionary element in Basel III capital requirements. We also find that the rank-order of EL rates across banks matches closely that of the AL rates, in line with recent and forthcoming regulatory efforts to improve risk-measurement practices. EL rates are more likely to be excessively optimistic on the heels of higher bank profitability and financial overheating, as captured by the credit-to-GDP gap.
Creation-Date: 2023-09
File-URL: https://www.bis.org/publ/work1125.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1125.htm
File-Format: text/html
Number: 1125
Keywords: expected loss forecasts; regulatory capital; portfolio credit risk
Classification-JEL: G21, G28, G32, G33, E44, P52
Handle: RePEc:bis:biswps:1125