Credit risk measures – a case of renewable energy companies

Abstract

The Basel III will have a significant impact on the European banking sector. In September 2010, supervisors of several countries adopted the new rules proposed by the prudential Committee on Banking Supervision to be applied to the business of credit institutions (hereinafter called CIs) in a phased starting in 2013 and assuming to its full implementation by 2019. The purpose of this new regulation is to limit the excessive risk that these institutions took on the period preceding the global financial crisis of 2008. This new regulation is known in slang by Basel III. Depending on the requirement of Basel II for banks and their supervisors to assess the adequacy of internal risk measurement and credit management systems, the development of methodologies for the validation of internal and external evaluation systems is clearly an important issue. More specifically, there is a need to develop tools to validate the systems used to generate the parameters (such as PD, LGD, EAD and ratings of perceived risk) that serve as starting points for the IRB approach for credit risk. In this context, the work is composed by an approach and tool used to evaluate the credit risk in a IRB system, applied to the renewable energy sector in Portugal.