The Capital Asset Pricing Model (CAPM) predicts a positive relation between risk and return, but empirical studies find the actual relation to be flat, or even negative. This paper provides a broad overview of explanations for this ‘volatility effect' that have been proposed in different...

Bank supervisors have long recognized two types of shortcomingsin the Basle Accord’s risk-based capital (RBC)framework. First, the regulatory measures of “capital” maynot represent a bank’s true capacity to absorb unexpectedlosses. Deficiencies in reported loan loss reserves, forexample,...

This paper was presented at the conference "Financial services at the crossroads: capital regulation in the twenty-first century" as part of session 2, "Credit risk modeling." The conference, held at the Federal Reserve Bank of New York on February 26-27, 1998, was designed to encourage a...

The authors provide examples by which information from internal credit risk models might be usefully incorporated into regulatory or supervisory capital policies. In view of the modeling concerns described, incorporating internal credit risk measurement and capital allocation systems into the...