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Market crises and Basel capital requirements: Could Basel III have been different? Evidence from Portugal, Ireland, Greece and Spain (PIGS)

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  • Rossignolo, Adrián F.
  • Fethi, Meryem Duygun
  • Shaban, Mohamed

Abstract

Basel III represents a crucial step in strengthening the capital rules underlying banking operations, aimed at reducing the probability and severity of a systemic crisis. Alongside two supplementary capital buffers, the Basel Committee of Banking Supervision imposed severe pressure on the Value-at-Risk based Internal Models Approach in order to increase. This is to increase the capital base by adding the stressed Value-at-Risk component in an effort to reduce reliance on internal models while keeping the Standardized Approach avenue open. However, even though those measures might appear theoretically correct, evidence gathered for long and short exposures in Portugal, Italy, Greece and Spain highlights several defects in Basel III. We emphasize that leptokurtic models, primarily those derived from Extreme Value Theory, should be enforced in the regulations given their superior performance in market crises, and that Basel II could have shielded against 2008 mayhem provided that heavy-tailed techniques had been employed.

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  • Rossignolo, Adrián F. & Fethi, Meryem Duygun & Shaban, Mohamed, 2013. "Market crises and Basel capital requirements: Could Basel III have been different? Evidence from Portugal, Ireland, Greece and Spain (PIGS)," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1323-1339.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:5:p:1323-1339
    DOI: 10.1016/j.jbankfin.2012.08.021
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    6. Nikola Radivojevic & Milena Cvjetkovic & Saša Stepanov, 2016. "The new hybrid value at risk approach based on the extreme value theory," Estudios de Economia, University of Chile, Department of Economics, vol. 43(1 Year 20), pages 29-52, June.
    7. Benbouzid, Nadia & Mallick, Sushanta K. & Sousa, Ricardo M., 2017. "Do country-level financial structures explain bank-level CDS spreads?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 135-145.
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    More about this item

    Keywords

    Value-at-risk; Extreme value theory; PIGS; Basel III; Internal models approach; Standardized approach;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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