Internal Models, Subordinated Debt, and Regulatory Capital Requirements for Bank Credit Risk

September 1, 2002

Preview Citation

Format: Chicago

Paul H. Kupiec Internal Models, Subordinated Debt, and Regulatory Capital Requirements for Bank Credit Risk, (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

Shortcomings make credit VaR estimates an unsuitable basis for setting bank regulatory capital requirements. If, alternatively, banks are required to issue subordinated debt that has a minimum market value and maximum acceptable probability of default, banks must set their equity capital in a manner that limits both the probability of bank default and the expected loss on insured deposits, largely removing any safety net-related funding cost subsidy and the moral hazard incentives it creates. Required equity capital can be estimated using a modified credit-VaR framework, and supervisors can use external credit ratings to indirectly verify the accuracy of bank internal model estimates.

Subject: Banking, Credit, Credit risk, Debt financing, Deposit insurance, Econometric analysis, External debt, Financial institutions, Financial regulation and supervision, Money, Stocks, Vector autoregression

Keywords: Bank default, Bank investment incentive, Bank liability, Bank shareholder, Capital allocation, Capital requirement, Credit, Credit risk, Credit VaR, Debt financing, Debt issue, Equity capital, Funding debt, Internal risk models, Investment opportunity, Market value, Regulatory capital requirements, Safety net, Stocks, Subordinated debt, Vector autoregression, WP

Publication Details

Pages:

30
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2002/157
Stock No:

WPIEA1572002
ISBN:

9781451857504
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers