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The minimal confidence levels of Basel capital regulation

  • Alexander Zimper

    ()

    (Department of Economics, University of Pretoria)

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.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201305.

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Length: 22 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:pre:wpaper:201305
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