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The minimal confidence levels of Basel capital regulation

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  • Alexander Zimper

    (Department of Economics, University of Pretoria)

Abstract

The Basel Committee on Banking Supervision sets the official confidence level at which a bank is supposed to absorb annual losses at 99.9%. However, due to an inconsistency between the notion of expected losses in the Vasicek model, on the one hand, and the practice of Basel regulation, on the other hand, actual confidence levels are likely to be lower. This paper calculates the minimal confidence levels which correspond to a worst case scenario in which a Basel-regulated bank holds capital against unexpected losses only. I argue that the probability of a bank failure is significantly higher than the official 0.1% if, firstly, the bank holds risky loans and if, secondly, the bank was previously affeected by substantial write-offs.

Suggested Citation

  • Alexander Zimper, 2013. "The minimal confidence levels of Basel capital regulation," Working Papers 201305, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201305
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    Cited by:

    1. Michal Skorepa, 2014. "Concurrent Capital Buffers in a Banking Group," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 128-136, Czech National Bank.
    2. Mariya Gubareva & Maria Rosa Borges, 2018. "Rethinking economic capital management through the integrated derivative-based treatment of interest rate and credit risk," Annals of Operations Research, Springer, vol. 266(1), pages 71-100, July.

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    More about this item

    Keywords

    Banking Regulation; Probability of Bank Failure; Definition of Expected Losses; Financial Stability;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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