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Multiperiod Banking Supervision

Author

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  • KARL-THEODOR EISELE

    () (LaRGE Research Center, Université de Strasbourg)

  • PHILIPPE ARTZNER

    () (LaRGE Research Center, Université de Strasbourg)

Abstract

This paper is based on a general method for multiperiod prudential supervision of companies submitted to hedgeable and non-hedgeable risks. Having treated the case of insurance in an earlier paper, we now consider a quantitative approach to supervision of commercial banks. The various elements under supervision are the bank’s current amount of tradeable assets, the deposit amount, and four flow processes: future trading risk exposures, deposit flows, flows of loan repayments and of deposit remunerations. The approach uses a multiperiod risk assessment supposed not to allow supervisory arbitrage. Coherent and non-coherent examples of such risk assessments are given. The risk assessment is applied to the risk bearing capital process composed out of the amounts of assets and deposits, and the four flow processes mentioned above. We give a general definition of a supervisory margin which uses the risk assessment under the assumption of optimal trading risk exposures. The transfer principle together with a cost-of-capital ratio gives quantitative definitions of the risk margin and of the non-hedgeable equity capital requirement. The hedgeable equity capital requirement measures the inadequacy of the bank’s portfolio of tradeable assets with respect to the optimal trading risk exposures. The hierarchy of different interferences of a supervisor is related to these quantities. Finally, a simple allocation principle for margins and the equity capital requirements is derived.

Suggested Citation

  • Karl-Theodor Eisele & Philippe Artzner, 2013. "Multiperiod Banking Supervision," Working Papers of LaRGE Research Center 2013-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  • Handle: RePEc:lar:wpaper:2013-05
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    File URL: http://ifs.u-strasbg.fr/large/publications/2013/2013-05.pdf
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    References listed on IDEAS

    as
    1. Dirk Tasche, 2005. "Measuring sectoral diversification in an asymptotic multi-factor framework," Papers physics/0505142, arXiv.org, revised Jul 2006.
    2. Filipovic, Damir & Kupper, Michael, 2007. "Monotone and cash-invariant convex functions and hulls," Insurance: Mathematics and Economics, Elsevier, vol. 41(1), pages 1-16, July.
    3. Stein W. Wallace & Stein-Erik Fleten, 2002. "Stochastic programming in energy," GE, Growth, Math methods 0201001, EconWPA, revised 13 Nov 2003.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    equity capital requirements; hierarchy of supervisor’s interferences; multiperiod risk assessment; optimal trading risk exposures; supervisory margin.;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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