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Capital Requirements (capital + requirement)
Kinds of Capital Requirements Selected AbstractsBANK RUNS: DEPOSIT INSURANCE AND CAPITAL REQUIREMENTS*INTERNATIONAL ECONOMIC REVIEW, Issue 1 2002RUSSELL COOPER Diamond and Dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs. We extend the Diamond,Dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors. We find that complete deposit insurance alone will not support the first-best outcome: depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects. However, an additional capital requirement for banks can restore the first-best allocation. [source] BANK CAPITAL REQUIREMENTS, BUSINESS CYCLE FLUCTUATIONS AND THE BASEL ACCORDS: A SYNTHESISJOURNAL OF ECONOMIC SURVEYS, Issue 5 2009Ines Drumond Abstract In order to survey the mechanisms through which the introduction of Basel II bank capital requirements is likely to accentuate the procyclical tendencies of banking, this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the Basel Accords. We conclude that the theoretical models that revisit the bank capital channel under the new accord generally support the Basel II procyclicality hypothesis and that the magnitude of the procyclical effects essentially depends on (i) the composition of banks' asset portfolios, (ii) the approach adopted by banks to compute their minimum capital requirements, (iii) the nature of the rating system used by banks, (iv) the view adopted concerning how credit risk evolves through time, (v) the capital buffers over the regulatory minimum held by the banking institutions, (vi) the improvements in credit risk management and (vii) the supervisor and market intervention under Basel II. The recent events and instability in financial markets all over the world have led the procyclicality issue to enter the agendas of several political international,fora,and some measures to mitigate procyclicality are being put forward. The bank capital channel literature should now play an important role in evaluating their effectiveness. [source] Competition Among Banks, Capital Requirements and International SpilloversECONOMIC NOTES, Issue 3 2001Viral V. Acharya The design of prudential bank capital requirements interacts with the industrial organization of the banking sector, in particular, with the level of competition among banks. Increased competition leads to excessive risk-taking by banks which may have to be counteracted by tighter capital requirements. When capital requirements are internationally uniform but the levels of competition among banks in different countries are not, international spillovers arise on financial integration of these countries. This result begs a more careful analysis of the effect of financial liberalization on the stability of banking sectors in emerging countries. It also calls into question the merits of employing uniform capital requirements across countries that diverge in the industrial organization of their banking sectors. (J.E.L.: G21, G28, G38, F36, E58, D62) [source] Perverse Effects of an External Ratings-Related Capital Adequacy SystemECONOMIC NOTES, Issue 3 2001Patrick Honohan It has recently been proposed that banks should be allowed to hold less capital against loans to borrowers who have received a favourable rating by an approved external credit assessment institution (ECAI), or rating agency. But a plausible model of rating agency behaviour shows that this strategy could have perverse results, actually increasing the risk of deposit insurance outlays. First, there is an issue of signalling, whereby low-ability borrowers may alter their behaviour so as to secure a lower capital requirement for their borrowing. Second, the establishment of a regulatory cut-off may actually reduce the amount of risk information made available by raters. Besides, the credibility of rating agencies may not be damaged by neglect of the risk of unusual systemic shocks, though it is these that cause the major bank failure costs. (J.E.L.:E53, G21, G33) [source] BANK RUNS: DEPOSIT INSURANCE AND CAPITAL REQUIREMENTS*INTERNATIONAL ECONOMIC REVIEW, Issue 1 2002RUSSELL COOPER Diamond and Dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs. We extend the Diamond,Dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors. We find that complete deposit insurance alone will not support the first-best outcome: depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects. However, an additional capital requirement for banks can restore the first-best allocation. [source] Will Basel II Lead to a Specialization of Unsophisticated Banks on High-Risk Borrowers?,INTERNATIONAL FINANCE, Issue 1 2005Bertrand Rime The stability of the banking sector is an essential precondition for a well-functioning economy. Enhancing this stability was one of the main motivations for the elaboration of the new capital adequacy framework, Basel II. The present paper examines the impact of Basel II on risk allocation in the banking sector and its implications for bank capital adequacy. Basel II introduces a two-layer framework for the calculation of the capital requirement for credit risk: (i) a very risk-sensitive internal ratings-based (IRB) approach that will be used by large sophisticated banks and (ii) a standardized approach, much less risk sensitive, which will be used by smaller, less sophisticated banks. We show that because the two bank types compete in the loan market, Basel II may induce sophisticated banks to specialize on low-risk borrowers and unsophisticated banks to specialize on high-risk borrowers. As a consequence, we may face a trade-off between the capital adequacy of the two types of banks, with an ambiguous net effect on financial stability: the risk sensitivity of the IRB approach improves the capital adequacy of sophisticated banks, but it deteriorates the capital adequacy of unsophisticated banks, as their increased risk taking is not appropriately reflected by the standardized capital requirement. [source] Downturn Credit Portfolio Risk, Regulatory Capital and Prudential Incentives,INTERNATIONAL REVIEW OF FINANCE, Issue 2 2010DANIEL RÖSCH ABSTRACT This paper analyzes the level and cyclicality of bank capital requirement in relation to (i) the model methodologies through-the-cycle and point-in-time, (ii) four distinct downturn loss rate given default concepts, and (iii) US corporate and mortgage loans. The major finding is that less accurate models may lead to a lower bank capital requirement for real estate loans. In other words, the current capital regulations may not support the development of credit portfolio risk measurement models as these would lead to higher capital requirements and hence lower lending volumes. The finding explains why risk measurement techniques in real estate lending may be less developed than in other credit risk instruments. In addition, various policy recommendations for prudential regulators are made. [source] CHALLENGES FOR FINANCIAL STABILITY POLICY,ECONOMIC AFFAIRS, Issue 4 2004Alastair Clark Financial stability issues have attracted increasing attention as the global financial system has become more complex and more integrated. This article discusses some challenges posed by this environment for financial stability policy-makers. The challenges identified are: how to assess the relative merits of different policy measures and calibrate their effects; how to design regulatory capital requirements that are not too prescriptive or detailed; how incentive structures for individuals within firms can be better aligned with a firm's objectives for both return and risk; how,the authorities' should relate to large, complex financial institutions; and how to improve the handling of sovereign debt crises. The article gives a flavour of the official debate in each of these areas. [source] The New Basel Capital Adequacy FrameworkECONOMIC NOTES, Issue 3 2001Giovanni Carosio The Basel Committee on Banking Supervision is about to publish a second consultative paper on the reform of the 1988 Accord on capital adequacy. The new document takes into account the comments received on the June 1999 consultative paper, gives a much clearer picture of crucial aspects of the reform that were only presented in very general terms in the earlier paper, and quantifies most of the parameters that will be needed to calculate the capital requirements. Although considerable progress has been made towards reaching operational status, several aspects of the regulation still need to be worked out and further reflection is needed on the best way to tackle some of the more problematic issues that have been identified. Comments, suggestions, criticisms such as today's seminar will certainly provide, are therefore most welcome. There will be time to take them into consideration, as the final draft of the regulation will not be completed before the end of 2001. My presentation is divided into three parts: I first illustrate the objectives of the reform, then describe the essential features of the new regulation, and finally discuss the possible impacts of its implementation. (J.E.L. G21, G28). [source] Competition Among Banks, Capital Requirements and International SpilloversECONOMIC NOTES, Issue 3 2001Viral V. Acharya The design of prudential bank capital requirements interacts with the industrial organization of the banking sector, in particular, with the level of competition among banks. Increased competition leads to excessive risk-taking by banks which may have to be counteracted by tighter capital requirements. When capital requirements are internationally uniform but the levels of competition among banks in different countries are not, international spillovers arise on financial integration of these countries. This result begs a more careful analysis of the effect of financial liberalization on the stability of banking sectors in emerging countries. It also calls into question the merits of employing uniform capital requirements across countries that diverge in the industrial organization of their banking sectors. (J.E.L.: G21, G28, G38, F36, E58, D62) [source] Downturn Credit Portfolio Risk, Regulatory Capital and Prudential Incentives,INTERNATIONAL REVIEW OF FINANCE, Issue 2 2010DANIEL RÖSCH ABSTRACT This paper analyzes the level and cyclicality of bank capital requirement in relation to (i) the model methodologies through-the-cycle and point-in-time, (ii) four distinct downturn loss rate given default concepts, and (iii) US corporate and mortgage loans. The major finding is that less accurate models may lead to a lower bank capital requirement for real estate loans. In other words, the current capital regulations may not support the development of credit portfolio risk measurement models as these would lead to higher capital requirements and hence lower lending volumes. The finding explains why risk measurement techniques in real estate lending may be less developed than in other credit risk instruments. In addition, various policy recommendations for prudential regulators are made. [source] The Squam Lake Report: Fixing the Financial System,JOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2010Kenneth French In these excerpts from The Squam Lake Report, fifteen distinguished economists analyze where the global financial system failed, and how such failures might be prevented (or at least their damage better contained) in the future. Although there were many contributing factors to the crisis,including "agency" problems throughout the financial system and a bankruptcy code poorly suited for reorganizing financial firms,at the core of the problem is a potential conflict between the risk-taking proclivity of financial institutions and the interests of the economy at large that must be managed at least in part through more effective regulation. The Squam Lake Report provides a nonpartisan plan to transform the regulation of financial markets in ways designed to limit systemic risk while preserving,to the extent possible and prudent,the economies of scale and scope that justify the existence of today's large financial institutions. To reduce the risks that large banks will fail, the authors call for higher capital requirements based on more effective assessments of the risks of bank assets and liabilities, as well as a new systemic regulator that should be part of the central bank. To reduce the costs of failure when it occurs, the authors propose that banks be required to create "living wills" laying out their plan to sell assets or shut down operations in the event of financial trouble. As part of that plan, regulators are urged to "aggressively encourage" banks to issue "contingent" debt capital securities that convert into equity. [source] TOWARD A MORE COMPLETE MODEL OF OPTIMAL CAPITAL STRUCTUREJOURNAL OF APPLIED CORPORATE FINANCE, Issue 1 2002Roger Heine Most corporate finance practitioners understand the trade-off involved in making effective use of debt capacity while safeguarding the firm's ability to execute its business strategy without disruption. But quantifying that trade-off to arrive at an optimal level of debt can be a complicated and challenging task. This paper develops a simulation model of capital structure that starts by generating multiple estimates of market rates (LIBOR, currency rates) and corresponding company operating cash flows. To arrive at an optimal capital structure, the model then incorporates the shareholder value effects of alternative financing decisions by directly measuring the costs of financial distress, including the costs of missed investment opportunities and higher working capital requirements. The model generates both a target credit rating and a lower fallback rating that permits a higher level of debt to maintain investments and dividends when operating cash flows are weak. As the model shows, companies with volatile cash flows and significant investment opportunities can add substantial shareholder value by establishing a fallback credit rating that is one or two notches below the target rating. The model also optimizes the mix of fixed versus floating debt, the maturity structure, and the currency composition. Another distinctive feature of the model is its ability to estimate the expected cost of alternative liability structures that can provide the liquidity insurance necessary to sustain the firm through periods of severe stress. This cost turns out to be quite small relative to the total market capitalization of the average firm. [source] BANK CAPITAL REQUIREMENTS, BUSINESS CYCLE FLUCTUATIONS AND THE BASEL ACCORDS: A SYNTHESISJOURNAL OF ECONOMIC SURVEYS, Issue 5 2009Ines Drumond Abstract In order to survey the mechanisms through which the introduction of Basel II bank capital requirements is likely to accentuate the procyclical tendencies of banking, this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the Basel Accords. We conclude that the theoretical models that revisit the bank capital channel under the new accord generally support the Basel II procyclicality hypothesis and that the magnitude of the procyclical effects essentially depends on (i) the composition of banks' asset portfolios, (ii) the approach adopted by banks to compute their minimum capital requirements, (iii) the nature of the rating system used by banks, (iv) the view adopted concerning how credit risk evolves through time, (v) the capital buffers over the regulatory minimum held by the banking institutions, (vi) the improvements in credit risk management and (vii) the supervisor and market intervention under Basel II. The recent events and instability in financial markets all over the world have led the procyclicality issue to enter the agendas of several political international,fora,and some measures to mitigate procyclicality are being put forward. The bank capital channel literature should now play an important role in evaluating their effectiveness. [source] Regulation Avoidance in the Banking Industry: The Case of 364 Day Lines of CreditJOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING, Issue 3 2000Michael Mosebach The purpose of this case is to offer a demonstration of Kane's regulatory dialectic and to discuss a line of credit that is a result of the interaction between the regulators and the regulated. Banks have been affected by new capital requirements. Calculation of these requirements considers not only on-balance sheet activities but off-balance sheet activities. Prior to these requirements, banks issued one year lines of credit for 365 days. These lines of credit have since been replaced with 364 day lines of credit. With maturity less than one year, the percentage of lines of credit considered in the calculations for required capital is reduced from 50% to 20%. Lines of credit are well established financial instruments and there is no reason, other than the changes in regulations, to make banks change the maturity dates by one day. [source] "Qualitative" Bankenaufsicht ,"Königsweg" der Regulierung?PERSPEKTIVEN DER WIRTSCHAFTSPOLITIK, Issue 3 2000Stephan Paul Banking regulation in the twenty-first century is at the crossroads. The article discusses the question whether the supervisory review of bank risk management systems is superior to the minimum capital requirements in traditional style. It points out the serious problems of both ways , especially the first one, which was preferred by the Basle Committee of Banking Supervision in its proposal "A new capital adequacy framework" (June 1999). [source] A Theory of Bank CapitalTHE JOURNAL OF FINANCE, Issue 6 2000Douglas W. Diamond Banks can create liquidity precisely because deposits are fragile and prone to runs. Increased uncertainty makes deposits excessively fragile, creating a role for outside bank capital. Greater bank capital reduces the probability of financial distress but also reduces liquidity creation. The quantity of capital influences the amount that banks can induce borrowers to pay. Optimal bank capital structure trades off effects on liquidity creation, costs of bank distress, and the ability to force borrower repayment. The model explains the decline in bank capital over the last two centuries. It identifies overlooked consequences of having regulatory capital requirements and deposit insurance. [source] Minimum capital requirement calculations for UK futuresTHE JOURNAL OF FUTURES MARKETS, Issue 2 2004John Cotter Key to the imposition of appropriate minimum capital requirements on a daily basis is accurate volatility estimation. Here, measures are presented based on discrete estimation of aggregated high-frequency UK futures realizations underpinned by a continuous time framework. Squared and absolute returns are incorporated into the measurement process so as to rely on the quadratic variation of a diffusion process and be robust in the presence of fat tails. The realized volatility estimates incorporate the long memory property. The dynamics of the volatility variable are adequately captured. Resulting rescaled returns are applied to minimum capital requirement calculations. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:193,220, 2004 [source] A MODEL OF BANK CAPITAL, LENDING AND THE MACROECONOMY: BASEL I VERSUS BASEL II,THE MANCHESTER SCHOOL, Issue 2006LEA ZICCHINO The revised framework for capital regulation of internationally active banks (known as Basel II) introduces risk-based capital requirements. This paper analyses the relationship between bank capital, lending and macroeconomic activity under the new capital adequacy regime. It extends a model of the bank capital channel of monetary policy,developed by Chami and Cosimano,by introducing capital constraints à la Basel II. The results suggest that bank capital is likely to be less variable under the new capital adequacy regime than under the current one, which is characterized by invariant asset risk-weights. However, bank lending is likely to be more responsive to macroeconomic shocks. [source] Continuous-time stochastic modelling of capital adequacy ratios for banksAPPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY, Issue 1 2006Casper H. Fouche Abstract Regulation related to capital requirements is an important issue in the banking sector. In this regard, one of the indices used to measure how susceptible a bank is to failure, is the capital adequacy ratio (CAR). We consider two types of such ratios, viz. non-risk-based (NRBCARs) and risk-based (RBCARs) CARs. According to the US Federal Deposit Insurance Corporation (FDIC), we can further categorize NRBCARs into leverage and equity capital ratios and RBCARs into Basel II and Tier 1 ratios. In general, these indices are calculated by dividing a measure of bank capital by an indicator of the level of bank risk. Our primary objective is to construct continuous-time stochastic models for the dynamics of each of the aforementioned ratios with the main achievement being the modelling of the Basel II capital adequacy ratio (Basel II CAR). This ratio is obtained by dividing the bank's eligible regulatory capital (ERC) by its risk-weighted assets (RWAs) from credit, market and operational risk. Mainly, our discussions conform to the qualitative and quantitative standards prescribed by the Basel II Capital Accord. Also, we find that our models are consistent with data from FDIC-insured institutions. Finally, we demonstrate how our main results may be applied in the banking sector. Copyright © 2005 John Wiley & Sons, Ltd. [source] | |||||||||||||||||||||||||