A market evaluation of the risk-based capital standards for the U.S. financial system

Cordell, Lawrence R.; King, Kathleen Kuester

doi:10.1016/0378-4266(94)00138-s

Cited by 40 publications

(17 citation statements)

References 15 publications

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“…One way a regulator might try to address the potential for at least some banks to choose a riskier asset portfolio is to risk-weight banks' assets, as in the Basel I system. Kim and Santomero (1988) extend the portfolio-selection approach to analysis of an asset-riskweighted system and provide support for this approach, as long as the weights are optimally set (see Bradley et al, 1991;Carey, 2002;Gjerde and Semmen, 1995;Cordell and King, 1995;Gordy, 2003;Kupiec, 2004;Cuoco and Liu, 2006 for more detailed discussions of linking capital regulation to risk-weighted assets).…”

Section: Capital-constrained Portfolio Selectionmentioning

confidence: 99%

Theories of bank behavior under capital regulation

VanHoose

2007

Journal of Banking & Finance

316

122

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Section: Capital-constrained Portfolio Selectionmentioning

confidence: 99%

Theories of bank behavior under capital regulation

VanHoose

2007

Journal of Banking & Finance

316

122

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“…The evidence that the RBC requirements caused signi®cant changes in the composition of bank portfolios is supported by Haubrich and Watchel (1993), Goldberg and Rai (1994), and Berger and Udell (1994). 5 In addition, Keeton (1989), Avery and Berger (1991), Kaufman (1991), Cordell and King (1995) observed that, if the risk weights used in the RBC standards do not accurately re¯ect the true risk of an asset, then banks may actually have an incentive to increase portfolio risk. Jacques and Nigro (1994) provided empirical evidence that the implementation of the RBC standards has had signi®cant impact on bank capital and portfolio risk.…”

Section: Introductionmentioning

confidence: 97%

International capital standards, bank portfolios and bank stock risk

Mohanty¹,

Song²

2002

Applied Financial Economics

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The results suggest that the composition of bank portfolios affect the market risk (beta) of bank stock returns. In particular, the 20% asset category, which primarily includes government agency securities is associated with increases in market risk, indicating assets in this category are exposed to higher interest rate risk and prepayment risk. The market risk is lower for those institutions who concentrate on one-to-four family residential mortgages, suggesting home mortgages are well collateralized assets with low perceived credit risk. The off-balance sheet activities on average exhibit no significant impact on market risk. The results also suggest that the market perception of the insurer's expected liability is heavily influenced by Tier 1 capital ratio.

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“…An exception is Cordell and King (1995) who compare regulatory risk weights with market-based risk weights derived from the performance of bank stocks. Recent studies comparing risk-weighted assets with the market risk of banks include , Das and Sy (2012), and Vallascas and Hagendorff (2013).…”

Section: Introductionmentioning

confidence: 99%

OR Forum—Design of Risk Weights

Glasserman

Kang

2014

Operations Research

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Banking regulations set minimum levels of capital for banks. These requirements are generally formulated through a ratio of capital to risk-weighted assets. A risk-weighting scheme assigns a weight to each asset or category of assets and effectively functions as a linear constraint on a bank's portfolio choice; it also changes the incentives for banks to hold various kinds of assets. In this paper, we investigate the design of risk weights to align regulatory and private objectives in a simple mean-variance framework for portfolio selection. By setting risk weights proportional to profitability rather than risk, the regulator can induce a bank to reduce its overall level of risk without distorting its asset mix. Because the regulator is unlikely to know the true profitability of assets, we introduce an adaptive formulation in which the regulator sets weights by observing a bank's portfolio. The adaptive scheme converges to the same combination of weights and portfolio choice that would hold if the regulator knew the asset profitability. We also investigate other objectives, including steering banks to a target mix of assets, adding robustness, mitigating procyclicality, and reducing system-wide risk in a setting with multiple heterogeneous banks.Subject classifications: portfolio analysis; financial institutions: banks; quadratic programming. Area of review: Financial Engineering.

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A market evaluation of the risk-based capital standards for the U.S. financial system

Cited by 40 publications

References 15 publications

Theories of bank behavior under capital regulation

Theories of bank behavior under capital regulation

International capital standards, bank portfolios and bank stock risk

OR Forum—Design of Risk Weights

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