New methodology for retail lending reduces credit risk and boosts economy.
The article discusses how to use collateral for retail loans in a way that follows Basel II guidelines. There are two ways to do this: the standardized approach and the Internal Ratings-Based (IRB) Approach. The standardized approach is simpler and uses set risk weights, while the IRB approach needs internal risk estimates. These estimates include the chance of default, loss if default happens, and the amount owed at default. These factors help determine how much capital is needed for each loan type.