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

Author/Editor:

Paul H. Kupiec

Publication Date:

September 1, 2002

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 02/157

Subject:

English

Publication Date:

September 1, 2002

ISBN/ISSN:

9781451857504/1018-5941

Stock No:

WPIEA1572002

Format:

Paper

Pages:

30

Please address any questions about this title to publications@imf.org