Internal Models-Based Capital Regulation and Bank Risk-Taking Incentives

July 1, 2002

Preview Citation

Format: Chicago

Paul H. Kupiec Internal Models-Based Capital Regulation and Bank Risk-Taking Incentives, (USA: International Monetary Fund, 2002) accessed November 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Advocates for internal model-based capital regulation argue that this approach will reduce costs and remove distortions that are created by rules-based capital regulations. These claims are examined using a Merton-style model of deposit insurance. Analysis shows that internal model-based capital estimates are biased by safety-net-generated funding subsidies that convey to bank shareholders when market and credit risk regulatory capital requirements are set using bank internal model estimates. These subsidies are not uniform across the risk spectrum, and, as a consequence, internal model regulatory capital requirements will cause distortions in bank lending behavior.

Subject: Banking, Bonds, Credit risk, Insurance, Market risk

Keywords: Market value, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/125
Stock No:

WPIEA1252002
ISBN:

9781451854831
ISSN:

1018-5941

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