The risk sensitivity of capital requirements: evidence from an international sample of large banks

Vallascas, Francesco and Hagendorff, Jens ORCID: https://orcid.org/0000-0002-3567-7826 2013. The risk sensitivity of capital requirements: evidence from an international sample of large banks. Review of Finance 17 (6) , pp. 1947-1988. 10.1093/rof/rfs042

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Abstract

Using an international sample of large banks between 2000 and 2010, we evaluate the risk sensitivity of minimum capital requirements. Our results show that risk-weighted assets (the regulatory measure of portfolio risk, which determines minimum capital requirements) are ill-calibrated to a market measure of bank portfolio risk. We show that this low-risk sensitivity of capital requirements permits banks to build up capital buffers by underreporting their portfolio risk and undermines banks’ ability to withstand adverse shocks. While the risk sensitivity of capital requirements is higher for banks that have adopted Basel II, it remains low across banks and countries.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HG Finance
Additional Information:	First published online 12 January 2013
Publisher:	Oxford University Press
ISSN:	1572-3097
Date of First Compliant Deposit:	30 March 2016
Last Modified:	02 Dec 2024 01:45
URI:	https://orca.cardiff.ac.uk/id/eprint/76281

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