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| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | A Cost-Benefit Analysis of Capital Requirements Adjusted for Model Risk |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Journal of Corporate Finance |
| Publisher | Elsevier |
| Geographical Reach | international |
| ISSN | 0929-1199 |
| Volume | 65 |
| Page Range | 101753 |
| Date | 2020 |
| Abstract Text | Capital adequacy is the key microprudential and macroprudential tool of banking regulation. Financial models of capital adequacy are subject to errors, which may prevent from estimating a sufficient capital base to absorb bank losses during economic downturns. In this paper, we propose a general method to account for model risk in capital requirements calculus related to market risk. We then evaluate and compare our capital requirements values with those obtained under Basel 2.5 and the new Basel 4 regulation. Capital requirements adjusted for model risk perform well in containing losses generates in normal and stressed times. In addition, they are as conservative as Basel 4 capital requirements, but they exhibit less fluctuations over time. |
| Free access at | Related URL |
| Official URL | https://www.sciencedirect.com/science/article/pii/S0929119920301978?casa_token=XwdUBWP4o4EAAAAA:K98KLP61kyUOmMVJ5ZlIhSnsh2MXqlcGRExp1CJXOoWmlSvkTk1Rju1h9FEZOvAlE-R61UuA9k0 |
| Related URLs |
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| Digital Object Identifier | 10.1016/j.jcorpfin.2020.101753 |
| Other Identification Number | merlin-id:19903 |
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