An Alternative Model to Basel Regulation
AbstractThe post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential. An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level. We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specific and time-varying.
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Date of creation: 19 Jul 2013
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Systemic risk; Bank Regulation; Basel Accords;
Other versions of this item:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G1 - Financial Economics - - General Financial Markets
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-28 (All new papers)
- NEP-BAN-2013-07-28 (Banking)
- NEP-CBA-2013-07-28 (Central Banking)
- NEP-FMK-2013-07-28 (Financial Markets)
- NEP-RMG-2013-07-28 (Risk Management)
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