Quantitative Analysis of the Impact of Basel II Accord on Greek Banks: The Application of IRB Approach

Abstract

In this paper, after conducting a series of alternative scenarios for various factors, we examine the implementation of Basel II capital adequacy rules on Greek Banks, according to the Internal Rating Based Approach (IRB), introduced by Basel II Accord. The IRB approach allows the development and use of models measuring the three main risks (credit, market, and operational). However, up to now, the researches that have been examined these risks for Greek Banks are very limited, and the impact of adverse events on the loan portfolio of the Greek Banking System has not yet been satisfactorily evaluated. In this empirical study, the Greek Banks are clustered into three separate groups, in particularly large, medium, and small size. The model formed provides information for supervisory reasons as for the level of capital maintained, depending on the nature of activities and risks taken by a Bank. The results show that the IRB approach is more appropriate for larger Banks, which can invest in risk management and maximize profit to risk ratios. For Banks with lower capital, this methodology could entail high risks. From the study, it was, also observed that retail portfolios and mortgage portfolios are favored due to credit risk, a benefit that is attributed to risk dispersion and collaterals (mortgages).