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Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title A Cost-Benefit Analysis of Capital Requirements Adjusted for Model Risk
Organization Unit
  • Erich Walter Farkas
  • Fulvia Fringuellotti
  • Radu Tunaru
Item Subtype Original Work
Refereed Yes
Status Published in final form
  • English
Journal Title Journal of Corporate Finance
Geographical Reach international
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.
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Digital Object Identifier 10.1016/j.jcorpfin.2020.101753
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