DDP 742. Carlos F. de la Torre. "The Pricing of Credit Risk in Banking Regulation: The Case of Peru." February 2000. 26 pp.

In this paper, an analytical framework is developed to measure the aggregation of credit risk under the standard method proposed in Basle Committee guidelines. An application of this framework is carried out for Peru. The results indicate that while the standard method would overestimate credit risk, leading Peruvian banks to maintain higher capital levels than would otherwise at the expense of operations and welfare, it may provide an additional cushion against bad loans if that is necessary.

Keywords: applied welfare analysis, banking regulation, benefit-cost analysis, capital requirements, credit risk, public policy, Peru

JEL Codes: D61, G12, G21, G28

Carlos de la Torre has served as an HIID consultant in a number of projects in Asia, Africa and Latin America.

I would like to thank Robert Taliercio, Jr., whose comments resulted in an improved version of this paper. Any errors and omissions are responsibility of the author. Comments on this paper may be addressed to carlos_de_la_torre@usa.net.