Comparison of assessment of capital adequacy for Czech Commercial Bank

Abstract

The contribution is dealing with selected assessments of the most important risk in the banking sector in the Czech Republic. The aim of this article is calculate, compare capital requirements and calibrate effective portfolio of business loans regarding to the optimal amount of the final capital adequacy of the given commercial bank in the Czech Republic. Paper is focused on the credit risk management where the evaluation of the capital adequacy with using Standardized Based Approach (STA approach) with external rating and Foundation Internal Rating Based Approach (IRB approach) methodology of legislative framework of Basel III is used. Results of our calculations show that IRB methodology is beneficial only for big banks that are able to choose their clients (with MA rating, low credit risk and default rate). On the other hand, if the bank would like to make an offer to client with the rating B and worse, compared to the competitor who is used only Standardized Approach without External Rating, it has competitive disadvantage, because of higher entitlement on the amount of bank's equity which has to be hold and which could represent higher prices of provided loans. On the other hand, because of the possibility still using the old STA methodology and their non-sensibility on PDs, small banks could focus on worse customers and offer them lower (better) interest rate because of the possibility to hold lower amount of the capital.