Comparison of Credit Risk Measurement in Central European Banking

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by Ing. Xiaoshan FENG

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JEL classification

  • International Financial Markets
  • Banks; Depository Institutions; Micro Finance Institutions; Mortgages

Keywords

Banking regulation, credit risk, Exposure classes, IRB, standardised approach.

Abstract

This paper focuses on credit risk measurements in the financial institutions of Central Europe. The objective is to compare IRB approaches and a standardised approach to measuring credit risk in the Czech Republic, Germany and Poland. We compare these risk measurement process and the risk-weighted distribution of the banking industry in the three countries via two approaches. Analysis is based on valid data for the three countries’ bank-ing industries from 2013 to 2017. We find that the banking industry using the IRB model as the main method represents the majority, but a rather big difference exists in the risk weights of using the standard model. Germany applies the highest risk weights in central governments under SA, while the Czech Republic and Poland apply the highest risk weights in retail claims. Under the A-IRB Approach, retail secured by real estate non-SME has the greatest level of risk exposure for the Czech Republic, while the most common exposure classes of Poland are corporate claims.