Basel Accords versus Solvency II - Regulatory Adequacy and Consistency Under the Postcrisis Capital Standards

Abstract

Over the past decade, European banking and insurance regulation has been subject to significant reforms. In this regard, one of the declared goals of the authorities is the enhancement of market stability through adequate and consistent capital standards. This paper provides a critical analysis of the Basel II, III, and Solvency II capital standards for asset risks in light of this objective. Our discussion begins with a detailed overview of the current standard approaches for market and credit risk. Subsequently, we describe the two new capital adequacy proposals under Basel III -the partial and fuller risk factor approach. Based on empirical data, we calibrate a realistic asset portfolio and implement the models to compare the resulting capital charges. Our findings reveal huge differences in required capital across the financial sectors for the same type of asset risk. Moreover, the critical assessment of the standard approaches' mechanics displays an inadequate treatment of asset classes that might lead to severe distortions in the financial institutions' investment decisions. In this context, the unduly promotion of government bond holdings under all three frameworks is able to further deteriorate the postcrisis issues of moral hazard in the financial industry.

The corporate governance–risk-taking nexus: evidence from insurance companies

“…Therefore, a strong board of directors can increase value to agents by periodically reviewing and appraising insurance companies' management plans and strategies (Bhimani, 2009;Jensen & Meckling, 1976;Laas & Siegel, 2013). However, some previous studies have argued that a large board may lead to delays in decision-making, as well as conflicts and time-wasting for the board (Fama & Jensen, 1985;Jensen, 2001).…”

“…Adams and Jiang (2016) argue that having a stronger board of directors can have a moderating role on managerial behaviour if the board of directors is large, especially where they consist of highly qualified and knowledgeable members. Therefore, a strong board of directors can increase value to agents by periodically reviewing and appraising insurance companies’ management plans and strategies (Bhimani, 2009; Jensen and Meckling, 1976; Laas and Siegel, 2013). However, some previous studies have argued that a large board may lead to delays in decision-making, as well as conflicts and time-wasting for the board (Fama and Jensen, 1985; Jensen, 2001).…”

The Evolution of Insurance Regulation in the EU Since 2005

“…Given the primary importance of the insurance sector in the funding channels of the EU economies, this could lead to severe consequences regarding the financing of long-term growth. Laas and Siegel (2015) have shown this tendency to be a direct result of the standard formula, which imposes far higher capital requirements on stocks than on sovereign debt, thus negating the benefits of the former excess return. Source: insurance Europe It seems difficult to disentangle the combined effects of a major financial crisis from the anticipation of S2 by the companies in order to form a definite opinion of the impact of the Directive on the financing of long-term growth, however Pradier and El Khalloufi in this volume (section 3) argue that regulatory uncertainty surrounding Basel III is detrimental to the funding of the EU economy by the banks; the same point could be made about S2 and the insurance companies.…”

An investigation into the best approach to the implementation of Basel II in Swaziland

“…The BCBS must also work in harmony with regulatory standard setters such as the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) so that common cross-sectoral standards can be developed to reduce chances for regulatory arbitrage among industry players and achieve a more comprehensive stability of the global and jurisdictional financial system (Laas & Siegel, 2014 (Goodhart, 2011).…”