Internal Models, Subordinated Debt, and Regulatory Capital Requirements for Bank Credit Risk
Electronic Access:
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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.
Series:
Working Paper No. 2002/157
Subject:
Banking Credit Credit risk Debt financing Deposit insurance Econometric analysis External debt Financial institutions Financial regulation and supervision Money Stocks Vector autoregression
English
Publication Date:
September 1, 2002
ISBN/ISSN:
9781451857504/1018-5941
Stock No:
WPIEA1572002
Pages:
30
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