This paper develops a model of bank behavior that focuses on the interaction between the incentives created by fixed rate deposit insurance and a bank's choice of its loan portfolio and its portfolio of market-traded financial assets. The model is used to analyze the consequences of adopting the...

This study analyzes the efficacy and efficiency of alternative bank regulatory policies. Consequences of generalizing banks' investment and financing opportunities for results in the existing literature are examined. Under costless equity issuance, a narrow banking requirement costlessly...

The Basel II Advanced Internal Ratings (AIRB) approach is compared to capital requirements set using an equilibrium structural credit risk model. Analysis shows the AIRB approach undercapitalizes credit risk relative to regulatory targets and allows wide variation in capital requirements for a...

Capital allocation rules are derived that maximize leverage while maintaining a target solvency rate for credit portfolios where risk is driven by a single common factor and idiosyncratic risk is fully diversified. Equilibrium conditions ensure that capital allocations depend on interest...

This paper derives unbiased capital allocation rules for portfolios in which credit risk is driven by a single common factor and idiosyncratic risk is fully diversified. The methodology for setting unbiased capital allocations is developed in the context of the Black-Scholes-Merton (BSM)...

Bank regulators are developing several approaches to international capital standards for market risks in bank trading accounts. One approach would use a regulatory standard measure of market risks for trading positions and the other would rely on risk estimates from banks' internal risk...

Currently, there is no regulatory capital requirement that accounts for market risks in banks' trading accounts. Bank regulators are considering a capital charge for such risks based directly on risk estimates from banks' internal models typically used to measure one-day exposures. While an...

Risk exposures are typically quantified in terms of a quot;value at riskquot; (VaR) estimate. A VaR estimate corresponds to a specific critical value of a portfolio's potential one-day profit and loss distribution. Given their functions both as internal risk management tools and as potential...

At present, there is no regulatory capital requirement for the market risk exposures a bank takes in its trading account activities. Alternative approaches are being considered for setting regulatory capital requirements on such risks. One proposal would use a regulatory model for measuring such...

Shortcomings make credit VaR estimates an unsuitable basis for setting bank regulatory capital requirements. If, alternatively, banks are required to issue subordinated debt that has a minimum market value and maximum acceptable probability of default, banks must set their equity capital in a...