The three pillars of Basel II: optimizing the mix

Décamps, Jean‐Paul; Rochet, Jean‐Charles; Roger, Benoı̂t

doi:10.1016/j.jfi.2003.06.003

Cited by 136 publications

(93 citation statements)

References 55 publications

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“…However, little is known about whether having subordinated debt in place mitigates bank risk taking. In addition, while theories, such as in Decamps et al (2004), Rochet (2004), Distinguin (2008), suggest that the disciplinary effect of subordinated debt on bank risk taking depends crucially on national bank regulations and legal and institutional conditions, to my knowledge, no study has attempted to investigate this issue empirically.…”

Section: Introductionmentioning

confidence: 99%

The disciplinary effect of subordinated debt on bank risk taking

Nguyen

2013

Journal of Empirical Finance

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Section: Introductionmentioning

confidence: 99%

The disciplinary effect of subordinated debt on bank risk taking

Nguyen

2013

Journal of Empirical Finance

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“…Hence, we can recover the mixing distribution F (r, h) using Equations (10) and (11), since π i (r; h) =π ⇔ Solving for F (r, h), this yields…”

Section: Discussionmentioning

confidence: 99%

“…It is worthwhile noting that, although we cast the regulatory objective in terms of maximizing loan-portfolio quality, this formulation is equivalent to the maximization of aggregate surplus from 11 Incorporating a regulatory concern for loan-portfolio quality in the first period does not change the results in any qualitative way. Since the average success probability of borrowers obtaining financing in the first period is just p, the regulator's objective function becomes (ignoring any discounting across periods)…”

Section: Regulatory Objectivementioning

confidence: 99%

Loan-Portfolio Quality and the Diffusion of Technological Innovation

Hauswald

Marquez

2004

SSRN Journal

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We study the economic forces that drive innovation in credit-risk assessment and the role of regulators in fostering technological progress. Recent regulatory proposals base capital-adequacy standards on banks' own internal systems and call for regulators to establish a set of "best practices" for the industry. We find that the dissemination of innovations mandated by this approach generates a tension between lowering aggregate banking-system risk ex post and providing banks with incentives to innovate ex ante. Moreover, this tension arises purely from regulatory concern for bank safety and not from any interest in promoting competition. We show that achieving the optimal level of innovation requires that regulators restrict the diffusion of technology. If regulators are unable to commit to specific dissemination policies, it may be beneficial to let banks assert intellectual property rights through, for instance, the patenting of their innovations.

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“…There has been a significant amount of research dedicated to understanding the features of Basel II, see for example [1], [2] and [3]. In addition the mathematical and statistical properties of the key risk processes that comprise OpRisk, especially those that contribute significantly to the capital charge required to be held against OpRisk losses have also been carefully studied, see for example the book length discussions in [4], [5] and [6].…”

Section: The Changing Landscape Of Capital Accordsmentioning

confidence: 99%

Understanding operational risk capital approximations: First and second orders

Peters¹,

Targino²,

Shevchenko³

2013

JGR

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We set the context for capital approximation within the framework of the Basel II / III regulatory capital accords. This is particularly topical as the Basel III accord is shortly due to take effect. In this regard, we provide a summary of the role of capital adequacy in the new accord, highlighting along the way the significant loss events that have been attributed to the Operational Risk class that was introduced in the Basel II and III accords. Then we provide a semi-tutorial discussion on the modelling aspects of capital estimation under a Loss Distributional Approach (LDA). Our emphasis is to focuss on the important loss processes with regard to those that contribute most to capital, the so called "high consequence, low frequency" loss processes.This leads us to provide a tutorial overview of heavy tailed loss process modelling in OpRisk under Basel III, with discussion on the implications of such tail assumptions for the severity model in an LDA structure. This provides practitioners with a clear understanding of the features that they may wish to consider when developing OpRisk severity models in practice.From this discussion on heavy tailed severity models, we then develop an understanding of the impact such models have on the right tail asymptotics of the compound loss process and we provide detailed presentation of what are known as first and second order tail approximations for the resulting heavy tailed loss process. From this we develop a tutorial on three key families of risk measures and their equivalent second order asymptotic approximations: Value-at-Risk (Basel III industry standard); Expected Shortfall (ES) and the Spectral Risk Measure. These then form the capital approximations.We then provide a few example case studies to illustrate the accuracy of these asymptotic captial approximations, the rate of the convergence of the assymptotic result as a function of the LDA frequency and severity model parameters, the sensitivity of the capital approximation to the model parameters and the sensitivity to model miss-specification.Key words: Basel II/III; Capital Approximation; Loss Distributional Approach; Capital Approximation; Value-at-Risk; Expected Shortfall; Spectral Risk Measure; Subexponential; Regularly Varying. The Changing Landscape of Capital AccordsIn juristictions in which active regulation is applied to the banking sector throughout the world, the modelling of Operational Risk (OpRisk) has progressively taken a prominent place in financial quantitative measurement. This has occurred as a result of Basel II and now Basel III regulatory requirements. For example in the context of banking regulation in Australia, the basic framework of Basel II/III is summarized in Figure 1. In this juristiction one observes that a large amount of the developments in quantitative methodology for estimation of OpRisk capital, development of OpRisk frame- There have been both numerical and simulation based approaches adopted as well as analytical mathematical developments of closed form approximatio...

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The three pillars of Basel II: optimizing the mix

Cited by 136 publications

References 55 publications

The disciplinary effect of subordinated debt on bank risk taking

The disciplinary effect of subordinated debt on bank risk taking

Loan-Portfolio Quality and the Diffusion of Technological Innovation

Understanding operational risk capital approximations: First and second orders

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