Risk based regulation has emerged as the primary ingredient in the Basel-II proposals, where a bank capital is to become a direct funtion of a bank's riskiness. While the notion that bank capital be risk sensitive is intuitively appealing, the actual implementation, in the form of Basel-II,...

This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models...

Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model...