The Manipulation of Basel Risk-Weights. Evidence from 2007-10
AbstractIn this paper, we analyse a novel panel data set to compare the relevance of alternative measures of capitalisation for bank failure during the 2007-10 crisis, and to search for evidence of manipulated Basel risk-weights.� Compared with the unweighted leverage ratio, we find the risk-weighted asset ratio to be a superior predictor of bank failure when banks operate under the Basel II regime, provided that the risk of a crisis is low.� When the risk of a crisis is high, the unweighted leverage ratio is the more reliable predictor.� However, when banks do not operate under Basel II rules, both ratios perform comparably, independent of the risk of a crisis.� Furthermore, we find a strong decline in the risk-weighted asset ratio leading up to the crisis.� Several empirical findings indicate that this decline is driven by the strategic use of internal risk models under the Basel II advanced approaches.� Evidence of manipulation is stronger�in less competitive banking systems, in banks with low initial levels of Tier 1 capital and in banks that adopted Basel II rules early.� We find tangible common equity and Tier 1 ratios to be better predictors of bank distress than broader measures of capital, and identify market-based measures of capitalisation as poor indicators.� We find no relationship between the probability of a bank being selected into a public recapitalisation plan and regulatory measures of capital.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 621.
Date of creation: 13 Sep 2012
Date of revision:
Banks; Basel risk-weights; Capital; Regulation;
Find related papers by JEL classification:
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-22 (All new papers)
- NEP-BAN-2012-09-22 (Banking)
- NEP-CBA-2012-09-22 (Central Banking)
- NEP-RMG-2012-09-22 (Risk Management)
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