TITLE:
Capital Minimum Requirements under Basel II in the Waemu: The Contribution of Internal Rating Methods
AUTHORS:
Mamadou Bakayoko
KEYWORDS:
Basel Accords, Minimum Capital Requirements, Internal Ratings, WAEMU
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.15 No.3,
September
23,
2026
ABSTRACT: This paper compares the two approaches to calculating capital minimum requirements under Basel II, the standardised approach and the internal ratings-based approach, and their effect on credit risk. We use data from 72 banks in the WAEMU region from 2016 to 2020. Our lending equation is based on a banking business model operating in an environment of uncertainty and on a credit market characterised by imperfect competition. This lending equation, which draws on the work of Monti-Klein, is estimated using the three-stage least squares method. The main results after simulation indicate that the IRB approach provides a more granular assessment of risk than the standardised approach. Furthermore, borrowers with a lower risk profile will benefit from lower interest rates when borrowing from banks that use the IRB approach. By focusing on less risky borrowers, banks using the IRB approach will be able to achieve capital savings. These results suggest the use of internal rating methods as a complement to the standardised approach. The coexistence of banks adopting different approaches could lead to specialisation based on the risk of their borrowers.