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
Geopolitical Uncertainty and Banking Risk: International Evidence
“The increased banking risk mainly attributed to reduction in bank capital and escalated fluctuations in bank profitability.” 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 […]
Climate Change and the Role of Regulatory Capital: A Stylized Framework for Policy Assessment
“We summarize core features of a capital regime such as expected and unexpected losses, regulatory ratios and risk-weighted assets, and minimum requirements and buffers, and then consider where climate-related risk drivers may be relevant.” Lire
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
Bank Capital, Risk-Taking and Stability: How Valid are the Relationships Assumed in Capital Regulation?
“We find that bank capital and probability of default PD impact each other, where the total influence of the latter on the former is stronger. PD also affects capital via risk-taking but the opposite effect (i.e., from capital to PD via risk) is not identified, which challenges one of the main assumptions underlying capital regulation.” 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
How to Release Capital Requirements During a Pandemic? Evidence from Euro Area Banks
“… requirement releases are more effective for banks with a low capital headroom over requirements and do not trigger additional risk-taking. These findings provide key insights on how to design effective bank capital requirement releases in crisis time.” Lire
Regulatory Capital and Bank Risk-Resilience Amid the Covid-19 Pandemic: How are the Basel Reforms Faring?
“… banks with robust pre-crisis regulatory capital ratios are less risky (have a lower insolvency risky) relative to less-capitalised banks amid the crisis period. This suggests that the post 2007-09 Basel reforms have succeeded, to some extent, in strengthening the risk-resilience of banks during the Covid-19 economic fallout.” Lire
Bank capital and risk in the South Eastern European region
” A model is set up which assumes that banks’ decisions regarding capital and risk are made endogenously in a dynamic pattern.” 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 […]
Stress Tests and Capital Requirement Disclosures: Do They Impact Banks’ Lending and Risk-Taking Decisions?
“Our results confirm that the publication of capital requirements can have a disciplinary effect since banks publishing their requirements tend to have more robust capital ratios, which improves market discipline and financial stability.” Lire
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
What You Don’t Know Won’t Hurt You: Market Monitoring and Bank Supervisors’ Preference for Private Information
“Our results suggest that a stronger preference for confidential reporting is associated with significantly lower trading volume, return volatility, and absolute returns around banks’ earnings announcements.” 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 […]