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A real options approach for evaluating the implementation of a risk‐sensitive capital rule in banks

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  • Kjell Bjørn Nordal

Abstract

I evaluate a bank's incentives to implement a risk‐sensitive regulatory capital rule. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of credit risk. I provide a numerical example for the implementation of internal ratings based models for credit risk (the IRB approach) under the new Basel Accord (Basel II).

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  • Kjell Bjørn Nordal, 2009. "A real options approach for evaluating the implementation of a risk‐sensitive capital rule in banks," Review of Financial Economics, John Wiley & Sons, vol. 18(3), pages 132-141, August.
    • Handle: RePEc:wly:revfec:v:18:y:2009:i:3:p:132-141
    DOI: 10.1016/j.rfe.2009.04.002
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