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A cost-benefit analysis of capital requirements adjusted for model risk
journal contribution
posted on 2023-06-09, 21:49 authored by Walter Farkas, Fulvia Fringuellotti, Radu TunaruRadu TunaruCapital 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.
History
Publication status
- Published
File Version
- Accepted version
Journal
Journal of Corporate FinanceISSN
0929-1199Publisher
ElsevierExternal DOI
Volume
65Page range
1-22Article number
a101753Department affiliated with
- Accounting and Finance Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2020-10-08First Open Access (FOA) Date
2022-04-22First Compliant Deposit (FCD) Date
2020-10-07Usage metrics
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