Retail Credit Risk Modeling and the Basel Capital Accord

On December 14, 2001, the Payment Cards Center of the Federal Reserve Bank of Philadelphia held a workshop exploring retail credit risk modeling practices and evolving techniques. The workshop was led by Paul Calem, a senior economist at the Board of Governors, Division of Research and Statistics. Calem is currently involved in the Board's efforts supporting reforms to the international Basel Capital Accord intended to refine risk-based bank capital standards. Existing credit risk modeling practices in the banking industry are being evaluated by the international regulatory community in the context of developing an internal ratings-based (IRB) approach to capital requirements. While the broader effort encompasses both wholesale and retail lending, Calem's comments and the workshop discussion focused specifically on the retail sector. As credit card outstandings have become the fastest growing proportion of consumer debt, the application of risk assessment models to regulatory capital requirements is a particularly relevant issue for the Payment Cards Center. This paper provides highlights from Calem's presentation and the ensuing discussion and is complemented by additional background information on the Basel Accord and industry capital allocation practices.