Banks’ holding of reasonable capital buffers in excess of minimum requirements could alleviate the procyclicality problem potentially exacerbated by the rating-sensitive capital charges of Basel II. Determining the required buffer size is an important risk management issue for banks, which the...

The rating-sensitive capital charges on credit risks under the new Basel Accord are likely to increase the volatility of minimum capital requirements, which may force banks to hold larger capital cushions in excess of minimum requirements. We analyse this claim on the basis of numerical...

We present a model of risky debt in which collateral value is correlated with the possibility of default. The model is then used to study: 1) the expected amount of debt recovered in the event of default as a function of collateral; and 2) the amount of collateral needed to mitigate the...

The solvency standards implicit in bank capital levels, as reported e.g. in Jackson et al. (2002), are much higher than those required for top ratings, if standard single period economic capital models are taken seriously. We explain this excess capital puzzle by forward looking rating targeting...

Banks' holding of reasonable capital buffers in excess of minimum requirements could alleviate the procyclicality problem potentially exacerbated by the rating-sensitive capital charges of Basel II. Determining the sufficient buffer size is an important risk management task for banks, which the...

We consider the problem of dynamically hedging a fixed portfolio of assets in the presence of non-linear instruments and transaction costs, as well as constraints on feasible hedging positions. We assume an investor maximizing the expected utility of his terminal wealth over a finite holding...