Risk Aggregation, Tail Risk, Correlation: Capital Allocation Efficiency and Regulator-Set Standard Models for Bank Capital

“… model uncertainty is a vital component of the current challenges in risk measurement, and therefore the regulator should design risk measures encouraging well-understood prudent decisions over (less understood) risky ones. From this perspective robust regulation should be a desirable goal. To achieve such an objective, simple – but not simpler – rules are needed.” Lire

Do Insurers Use Internal Capital Markets to Manage Regulatory Scrutiny Risk?

“… almost 50 percent of insurers at risk of facing additional regulatory scrutiny due to failing four Insurance Regulatory Information System (IRIS) ratios received sufficient internal capital to avoid enhanced regulation. Moreover, the likelihood and extent of internal capital allocation are related to regulatory scrutiny risk and the amount of capital allocated is typically just enough to avoid regulatory […]

The ECB Single Supervisory Mechanism: Effects on Bank Performance and Capital Requirements

“Under the Single Supervisory Mechanism (SSM) introduced in 2014, the European Central Bank directly supervises significant euro area banks, which hold about 82% of total banking assets. We find that this important supervisory change has positive effects on the return on assets and the return on risk-weighted assets of SSM banks without increasing the risk weights used to […]

Fat Tails, Tipping Points and Asymmetric Time Horizons: Dealing With Systemic Climate-Related Uncertainty in the Prudential Regime

“Even pioneering forward-looking stress tests cannot feasibly capture all possible tail risks. We propose supplementing the existing capital requirements regime by giving it a stronger precautionary and macroprudential focus, paying particular attention to the prevention of environmental tipping points to avoid systemic and catastrophic impacts on the financial system and macroeconomy.”    Lire

Regulatory Capital and Asset Risk Transfer

“… most modified coinsurance is purchased from reinsurers located in countries with lower regulatory capital requirements and within the same insurance holding group. Our findings expose how insurers use reinsurance to obfuscate their asset risk.” Lire

Bank Capital Adequacy Framework

“This paper considers the question from a non-technical point of view and surveys the regulatory requirements for capital adequacy contained in the so-called Basel framework. It analyses all contributing parts of the Capital Adequacy Ratio (CAR), including regulatory capital, credit risk, market risk and operational risk, raising in each case the concerns of the literature as well as recent […]

What Drives Bank-Specific Capital Requirements? Evidence from the Ssm

“Drawing on recently disclosed information on the Pillar 2 capital requirements of banks directly supervised by the ECB, we find that bank-specific capital requirements are mostly driven by business model and profitability, credit risk, and internal governance and risk management issues. Moreover, we propose a novel measure of bank governance quality that teases out the qualitative dimension of […]

The Status of People Risk Management in UK Banks

“… some operational risk managers are working more closely with their human resources partners to develop a more cohesive approach to people risk management. In the context of current reforms to the capital requirements for operational risk” Lire

Regulatory Capital Management to Exceed Thresholds

“We find that banks manage regulatory capital to exceed the threshold and thus to pay lower deposit insurance fees and to have access brokered deposits and financial activities. To reach the threshold, banks use accounting discretion over accruals and real activities, increase equity, and change risk-weighted assets.”    Lire

The Next Decade of EU Macroprudential Policy

“This paper presents an overview of key proposals formulated by the European Systemic Risk Board (ESRB), the European Banking Authority (EBA) and the European Central Bank (ECB) in the context of the review of the macroprudential policy framework of the European Union (EU), aimed at improving its operation and efficiency over the medium term.” Lire

Capital Requirements and Growth in an Open Economy

“… capital requirements can promote growth by mitigating the risk of financial crises, possibly by encouraging… prudent lending. However, financial development and financial openness tend to mitigate the growth benefits of these policies, because of increased scope for (domestic and cross-border) regulatory arbitrage and, in the case of financial openness, greater opportunities to borrow abroad.” Lire

Inconsistent Capital Regulation

“Using variation across insurers within the same country, and across countries for the same insurance group, we show that market risk insurance via guaranteed return products is more prevalent in countries with more lax capital requirements. Moreover, we show that the interest rate exposure of insurance companies increased as interest rates declined in recent years, and this […]