Banks' Risk Estimates Align with Portfolio Risk, Impacting Capital Requirements.
The study looked at how well banks' internal risk estimates match the actual risk in their loan portfolios. They found that the risk estimates from Basel II/III are closely linked to loan performance, while those from Basel I are not. Banks using the advanced internal ratings approach have higher capital requirements, especially for risky portfolios like mortgages. The internal risk estimates are more sensitive to actual portfolio risk compared to the fixed risk weights of Basel I.