An Overview and Comparison of Risk-Based Capital Standards

This article provides an overview and comparison of risk-based capital (RBC) requirements as they currently exist in the United States, the European Union, Switzerland, and New Zealand. These four systems are representative of different ways capital standards are implemented around the globe. The United States uses a static factor model; Switzerland considers dynamic cash-flow-based approaches; New Zealand integrates private rating agencies into its supervisory process. Other differences between these three countries include the use of different risk measures, the use of internal models, and varying consideration of operational risk and catastrophe risk. Regulators in the European Union are being influenced by all three of these approaches as they finalize the design of their new regulatory framework Solvency II. We integrate the current version of this approach in our analysis.