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Economic versus Regulatory Capital for Financial Conglomerates

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  • J.A. Bikker
  • I.P.P. van Lelyveld

Abstract

The new Basel Capital Accord will result in more risk sensitive regulatory capital for banks. Likewise, financial conglomerates' internal models will become more important in group-wide supervision. Such models are relatively well developed for market and credit risk but for others, such as operational risk, many issues remain to be resolved. An even greater challenge is the development of models that aggregate risks across risk areas and business units, in particular across bank and insurance activities. Such internal economic capital models should deliver the total amount of capital needed to cover risks, as perceived by a financial conglomerate. An important determinant of total risk, and hence capital, are the diversification effect that the combination of different activities, such as banking and insurance, might offer. Two empirical analyses investigate cross-sector correlations and diversification effects in order to find the optimal level of capital for Financial Conglomerates. The results suggest substantial diversification effects but they may be offset by contagion risk.

Suggested Citation

  • J.A. Bikker & I.P.P. van Lelyveld, 2002. "Economic versus Regulatory Capital for Financial Conglomerates," Research Series Supervision (discontinued) 45, Netherlands Central Bank, Directorate Supervision.
  • Handle: RePEc:dnb:ressup:45
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    References listed on IDEAS

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    1. Wall, Larry D., 1987. "Has bank holding companies' diversification affected their risk of failure?," Journal of Economics and Business, Elsevier, pages 313-326.
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    Cited by:

    1. J.W.B. Bos, 2003. "Improving Market Power Tests: Does it matter for the Dutch Banking Market?," Research Series Supervision (discontinued) 56, Netherlands Central Bank, Directorate Supervision.
    2. Slijkerman, Jan Frederik & Schoenmaker, Dirk & de Vries, Casper G., 2013. "Systemic risk and diversification across European banks and insurers," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 773-785.
    3. Jacob A. Bikker, 2002. "Cross-sector diversification in financial conglomerates: simulations with a fair-value assets and liabilities model," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 55(223), pages 363-389.
    4. Nadine Gatzert & Hato Schmeiser & Stefan Schuckmann, 2008. "Enterprise risk management in financial groups: analysis of risk concentration and default risk," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, pages 241-258.
    5. Iman van Lelyveld & Arnold Schilder, 2002. "Risk in Financial Conglomerates: Management and Supervision," Research Series Supervision (discontinued) 49, Netherlands Central Bank, Directorate Supervision.
    6. W. Allard Bruinshoofd & Clemens J. M. Kool, 2004. "Dutch corporate liquidity mangement: New evidence on aggregation," Journal of Applied Economics, Universidad del CEMA, vol. 7, pages 195-230, November.
    7. Mukherjee, Arijit & Pennings, Enrico, 2011. "Unionization structure, licensing and innovation," International Journal of Industrial Organization, Elsevier, pages 232-241.
    8. De Vries, C.G., 2005. "The simple economics of bank fragility," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 803-825, April.
    9. K. Minderhoud, 2006. "Systemic Risk in the Dutch Financial Sector," De Economist, Springer, pages 177-195.

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