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Economic And Regulatory Capital. What Is The Difference?

  • Abel Elizalde

    ()

  • Rafael Repullo

    ()

    (CEMFI, Centro de Estudios Monetarios y Financieros)

This paper analyzes the determinants of regulatory capital (the minimum required by regulation) and economic capital (the capital that shareholders would choose in absence of regulation) in the context of the single risk factor model that underlies the New Basel Capital Accord (Basel II). The results show that economic and regulatory capital do not depend on the same set of variables and values, they are both increasing in the loans' probability of default and loss given default, but variables that affect economic but not regulatory capital, such as the intermediation margin and the cost of capital, can move them significantly apart. The results also show that market discipline, proxied by the coverage of deposit insurance, increases economic capital, although the effect is generally small.

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Paper provided by CEMFI in its series Working Papers with number wp2004_0422.

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Date of creation: Dec 2004
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Handle: RePEc:cmf:wpaper:wp2004_0422
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  1. Almazan, Andres & Suarez, Javier & Titman, Sheridan, 2004. "Stakeholders, Transparency and Capital Structure," CEPR Discussion Papers 4181, C.E.P.R. Discussion Papers.
  2. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
  3. Edward Simpson Prescott, 2004. "Auditing And Bank Capital Regulation," Working Papers wp2004_0412, CEMFI.
  4. Lopez-Salido, Jose David & Michelacci, Claudio, 2004. "Technology Shocks and Job Flows," CEPR Discussion Papers 4426, C.E.P.R. Discussion Papers.
  5. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
  6. Becker, Sascha O. & Bentolila, Samuel & Fernandes, Ana & Ichino, Andrea, 2004. "Job Insecurity and Children’s Emancipation," IZA Discussion Papers 1046, Institute for the Study of Labor (IZA).
  7. Guillermo Caruana & Marco Celentani, 2001. "Career Concerns And Contingent Compensation," Economics Working Papers we014811, Universidad Carlos III, Departamento de Economía.
  8. Pedro Mira & Jes�s M. Carro, 2006. "A dynamic model of contraceptive choice of Spanish couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 955-980.
  9. Peñaranda, Francisco & Sentana, Enrique, 2012. "Spanning tests in return and stochastic discount factor mean–variance frontiers: A unifying approach," Journal of Econometrics, Elsevier, vol. 170(2), pages 303-324.
  10. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers 3658, C.E.P.R. Discussion Papers.
  11. Evans, David S & Padilla, Atilano Jorge, 2004. "Excessive Prices: Using Economics to Define Administrable Legal Rules," CEPR Discussion Papers 4626, C.E.P.R. Discussion Papers.
  12. Claudio Michelacci, 2003. "Low Returns in R&D Due to the Lack of Entrepreneurial Skills," Economic Journal, Royal Economic Society, vol. 113(484), pages 207-225, January.
  13. Javier Suarez & Samuel Bentolila & Claudio Michelacci, 2004. "Social Contacts and Occupational Choice," 2004 Meeting Papers 593, Society for Economic Dynamics.
  14. David A. Marshall & Edward Simpson Prescott, 2004. "State-Contingent Bank Regulation With Unobserved Actionas And Unobserved Characteristics," Working Papers wp2004_0407, CEMFI.
  15. Victor Aguirregabiria & Pedro Mira, 2004. "Sequential Estimation of Dynamic Discrete Games," Industrial Organization 0406006, EconWPA.
  16. Enrique Sentana & Giorgio Calzolari & Gabriele Fiorentini, 2004. "Indirect Estimation Of Conditionally Heteroskedastic Factor Models," Working Papers wp2004_0409, CEMFI.
  17. Javier F. Mencia & Enrique Sentana, 2004. "Estimation and testing of dynamic models with generalised hyperbolic innovations," LSE Research Online Documents on Economics 24742, London School of Economics and Political Science, LSE Library.
  18. Josep Pijoan-Mas, 2007. "Pricing Risk in Economies with Heterogeneous Agents and Incomplete Markets," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 987-1015, 09.
  19. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
  20. Manuel Arellano, 2003. "Modelling Optimal Instrumental Variables For Dynamic Panel Data Models," Working Papers wp2003_0310, CEMFI.
  21. Juan J. Dolado & Vanesa Llorens, 2004. "Gender Wage Gaps By Education In Spain: Glass Floors Vs. Glass Ceilings," Working Papers wp2004_03, CEMFI.
  22. Ana Fernandes, 2005. "Knowledge, Technology Adoption and Financial Innovation," Diskussionsschriften dp0513, Universitaet Bern, Departement Volkswirtschaft.
  23. Fiorentini, Gabriele & Sentana, Enrique & Calzolari, Giorgio, 2004. "On the validity of the Jarque-Bera normality test in conditionally heteroskedastic dynamic regression models," Economics Letters, Elsevier, vol. 83(3), pages 307-312, June.
  24. Guillermo Caruana & Liran Einav & Daniel Quint, 2004. "Multilateral Bargaining With Concession Costs," Working Papers wp2004_0415, CEMFI.
  25. Rafael Repullo, 2004. "Policies For Banking Crises: A Theoretical Framework," Working Papers wp2004_0418, CEMFI.
  26. Gerard Llobet & Meritxell Albertí & Ángel León, 2003. "Evaluation Of A Taxi Sector Reform: A Real Options Approach," Working Papers wp2003_0312, CEMFI.
  27. Samuel Bentolila & Juan F. Jimeno, 2003. "Spanish Unemployment: The End of the Wild Ride?," CESifo Working Paper Series 940, CESifo Group Munich.
  28. Guillermo Caruana & Liran Einav, 2008. "A Theory of Endogenous Commitment," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 99-116.
  29. Hernandez-Murillo, Ruben & Llobet, Gerard, 2006. "Patent licensing revisited: Heterogeneous firms and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 149-175, January.
  30. David S. Evans & A. Jorge Padilla, 2004. "Designing Antitrust Rules For Assessing Unilateral Practices: A Neo-Chicago Approach," Working Papers wp2004_0417, CEMFI.
  31. Kühn, Kai-Uwe & Machado, Matilde Pinto, 2004. "Bilateral Market Power and Vertical Integration in the Spanish Electricity Spot Market," CEPR Discussion Papers 4590, C.E.P.R. Discussion Papers.
  32. Javier Alvarez & Manuel Arellano, 2004. "Robust Likelihood Estimation Of Dynamic Panel Data Models," Working Papers wp2004_0421, CEMFI.
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