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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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File URL: http://www.cemfi.es/ftp/wp/0422.pdf
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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. Francisco Javier Mencía & Enrique Sentana, 2004. "Estimation And Testing Of Dynamic Models With Generalised Hyperbolic Innovations," Working Papers wp2004_0411, CEMFI.
  2. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers 3658, C.E.P.R. Discussion Papers.
  3. David S. Evans & A. Jorge Padilla, 2004. "Excessive Prices: Using Economics To Define Administrable Legal Rules," Working Papers wp2004_0416, CEMFI.
  4. Pijoan-Mas, Josep, 2005. "Precautionary Savings or Working Longer Hours?," CEPR Discussion Papers 5322, C.E.P.R. Discussion Papers.
  5. Pijoan-Mas, Josep, 2006. "Pricing Risk in Economies with Heterogenous Agents and Incomplete Markets," CEPR Discussion Papers 5602, C.E.P.R. Discussion Papers.
  6. Victor Aguirregabiria & Pedro Mira, 2007. "Sequential Estimation of Dynamic Discrete Games," Econometrica, Econometric Society, vol. 75(1), pages 1-53, 01.
  7. David S. Evans & A. Jorge Padilla, 2004. "Designing Antitrust Rules For Assessing Unilateral Practices: A Neo-Chicago Approach," Working Papers wp2004_0417, CEMFI.
  8. Edward Simpson Prescott, 2004. "State-contingent bank regulation with unobserved actions and unobserved characteristics," Working Paper 04-02, Federal Reserve Bank of Richmond.
  9. Guillermo Caruana & Liran Einav & Daniel Quint, 2004. "Multilateral Bargaining With Concession Costs," Working Papers wp2004_0415, CEMFI.
  10. Andres Almazan & Javier Suarez & Sheridan Titman, 2003. "Stakeholder, Transparency and Capital Structure," NBER Working Papers 10101, National Bureau of Economic Research, Inc.
  11. Enrique Sentana & Francisco Penaranda, 2004. "Spanning Tests in Return and Stochastic Discount Factor Mean-Variance Frontiers: A Unifying Approach," FMG Discussion Papers dp497, Financial Markets Group.
  12. Edward Simpson Prescott, 2004. "Auditing and bank capital regulation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 47-63.
  13. Ana Fernandes, 2005. "Knowledge, Technology Adoption and Financial Innovation," Diskussionsschriften dp0513, Universitaet Bern, Departement Volkswirtschaft.
  14. 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).
  15. 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.
  16. repec:oup:restud:v:75:y:2008:i:1:p:99-116 is not listed on IDEAS
  17. Celentani, Marco & Caruana, Guillermo, 2001. "Career concerns and contingent compensation," UC3M Working papers. Economics we014811, Universidad Carlos III de Madrid. Departamento de Economía.
  18. Pedro Mira & Jesús 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.
  19. Gerard Llobet & Meritxell Albertí & Ángel León, 2003. "Evaluation Of A Taxi Sector Reform: A Real Options Approach," Working Papers wp2003_0312, CEMFI.
  20. 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.
  21. Javier Suarez & Samuel Bentolila & Claudio Michelacci, 2004. "Social Contacts and Occupational Choice," 2004 Meeting Papers 593, Society for Economic Dynamics.
  22. Samuel Bentolila & Juan F. Jimeno, 2003. "Spanish Unemployment: The End of the Wild Ride?," CESifo Working Paper Series 940, CESifo Group Munich.
  23. Juan J. Dolado & Vanesa Llorens, 2004. "Gender Wage Gaps By Education In Spain: Glass Floors Vs. Glass Ceilings," Working Papers wp2004_03, CEMFI.
  24. Claudio Michelacci & David Lopez-Salido, 2004. "Technology Shocks And Job Flows," Working Papers wp2004_05, CEMFI.
  25. 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.
  26. Repullo, Rafael, 2004. "Policies for Banking Crises: A Theoretical Framework," CEPR Discussion Papers 4727, C.E.P.R. Discussion Papers.
  27. Kai-Uwe Kühn & Matilde Machado, 2004. "Bilateral Market Power And Vertical Integration In The Spanish Electricity Spot Market," Working Papers wp2004_0414, CEMFI.
  28. 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.
  29. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
  30. Enrique Sentana & Giorgio Calzolari & Gabriele Fiorentini, 2004. "Indirect Estimation Of Conditionally Heteroskedastic Factor Models," Working Papers wp2004_0409, CEMFI.
  31. Javier Alvarez & Manuel Arellano, 2004. "Robust Likelihood Estimation Of Dynamic Panel Data Models," Working Papers wp2004_0421, CEMFI.
  32. Manuel Arellano, 2003. "Modelling Optimal Instrumental Variables For Dynamic Panel Data Models," Working Papers wp2003_0310, CEMFI.
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