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The minimal confidence levels of Basel capital regulation

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  • Alexander Zimper

Abstract

The Basel Committee on Banking Supervision sets the official confidence level at which a bank is supposed to absorb annual losses at 99.9 per cent. However, due to an inconsistency between the notion of expected losses in the Vasicek model, on the one hand, and the practice of Basel regulation, on the other hand, actual confidence levels are likely to be lower. This article calculates the minimal confidence levels that correspond to a worst case scenario in which a Basel-regulated bank holds capital against unexpected losses only. I argue that the probability of a bank failure is significantly higher than the official 0.1 per cent if, firstly, the bank holds risky loans and if, secondly, the bank was previously affected by substantial write-offs.

Suggested Citation

  • Alexander Zimper, 2014. "The minimal confidence levels of Basel capital regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 15(2), pages 129-143, April.
  • Handle: RePEc:pal:jbkreg:v:15:y:2014:i:2:p:129-143
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    Cited by:

    1. Michal Skorepa, 2014. "Concurrent Capital Buffers in a Banking Group," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2013/2014, chapter 0, pages 128-136 Czech National Bank, Research Department.
    2. repec:spr:annopr:v:266:y:2018:i:1:d:10.1007_s10479-017-2438-y is not listed on IDEAS

    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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