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From Basel I To Basel Ii: An Analysis Of The Three Pillars

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Author Info
Abel Elizalde () (CEMFI, Centro de Estudios Monetarios y Financieros)
Abstract

This paper presents a dynamic model of banking supervision to analyze the impact of each of Basell II three pillars on banks’ risk taking. We extend previous literature providing an analysis of ratings-based supervisory policies. In Pillar 2 (supervisory review) the supervisor audits more frequently low rated banks and restricts their dividend payments in order to build capital. In Pillar 3 (market discipline) the supervisor reduces the level of deposit insurance coverage compelling not-fully insured depositors to adjust interest rates contingent on the bank’s external rating. We also analyze the risk sensitiveness of Pillar 1 (capital requirements) concluding that all three Pillars reduce banks’ risk taking incentives.

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Paper provided by CEMFI in its series Working Papers with number wp2007_0704.

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Date of creation: Jun 2007
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Handle: RePEc:cmf:wpaper:wp2007_0704

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Related research
Keywords: Capital requirements; market discipline; ratings-based policies; risk taking decisions; supervisory review.;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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  1. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," Journal of Business, University of Chicago Press, vol. 51(3), pages 439-52, July. [Downloadable!] (restricted)
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  2. Dangl, Thomas & Lehar, Alfred, 2004. "Value-at-risk vs. building block regulation in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 96-131, April. [Downloadable!] (restricted)
  3. Bhattacharya, Sudipto & Plank, Manfred & Strobl, Gunter & Zechner, Josef, 2002. "Bank capital regulation with random audits," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1301-1321, July. [Downloadable!] (restricted)
    Other versions:
  4. Bjarne Højgaard & Søren Asmussen & Michael Taksar, 2000. "Optimal risk control and dividend distribution policies. Example of excess-of loss reinsurance for an insurance corporation," Finance and Stochastics, Springer, vol. 4(3), pages 299-324. [Downloadable!] (restricted)
  5. Milne, Alistair & Robertson, Donald, 1996. "Firm behaviour under the threat of liquidation," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1427-1449, August. [Downloadable!] (restricted)
  6. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January. [Downloadable!] (restricted)
  7. Decamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoit, 2004. "The three pillars of Basel II: optimizing the mix," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 132-155, April. [Downloadable!] (restricted)
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  8. Aggarwal, Raj & Jacques, Kevin T., 2001. "The impact of FDICIA and prompt corrective action on bank capital and risk: Estimates using a simultaneous equations model," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1139-1160, June. [Downloadable!] (restricted)
  9. Benston, George J & Kaufman, George G, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-58, Summer. [Downloadable!] (restricted)
  10. Fan, Hua & Sundaresan, Suresh M, 2000. "Debt Valuation, Renegotiation, and Optimal Dividend Policy," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(4), pages 1057-99.
  11. Hassan Naqvi, 2004. "The Valuation of Corporate Debt with Default Risk," Finance 0410010, EconWPA. [Downloadable!]
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This page was last updated on 2009-12-12.

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