The maturity effect on credit risk capital

In a mark-to-market approach to credit risk capital, ratings or spread volatility has the effect of making longer-maturity loans more capital-intensive. This is incorporated in the current Basel II proposals via a maturity adjustment factor. Arguing that regulatory capital rules should focus on extreme risks rather than migration risk, Michael Kalkbrener and Ludger Overbeck simulate the effect of various migration data on model portfolios, and conclude that the Basel II maturity factor should be set considerably lower.

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