capital requirements and bank behaviour empirical evidence for switzerland abstract in recent years regulators have increased their focus on the capital adequacy of banking institutions to enhance the stability of the financial system the purpose of the present paper is to shed some light on whether and how swiss banks react to constraints placed by the regulator on their capital building on previous work by shrieves and dahl cf shrieves r e dahl d 1992 the relationship between risk and capital in commercial banks journal of banking and finance 16 439 457 we use a simultaneous equations model to analyse adjustments in capital and risk at swiss banks when those approach the minimum regulatory capital level our results indicate that regulatory pressure induce banks to increase their capital but does not affect the level of risk

the effectiveness of bank capital adequacy regulation a theoretical and empirical approach the aim of this paper is to analyse how banking firms set their capital ratios that is the rate of equity capital over assets in order to study this isue two theoretical models are developed both models deal with the existence of an optimal capital ratio the first one for firms not affected by capital adequacy regulation the second one for firms which are the models have been tested by estimating a disequilibrium model using data of spanish savings banks

a note on the optimal tariff retaliation and the welfare loss from tariff wars in a framework with intraindustry trade abstract this paper uses krugman s 1980 model of trade with product differentiation and monopolistic competition to examine the effects of a uniform ad valorem tariff the main results are there exists an optimal tariff even for a small economy and the optimal tariff rate is an increasing function of the size of the economy and the degree of production differentiation under reasonable parameter assumptions a tariff war between two countries of equal size in which each country retaliates by imposing its own optimal tariff causes a welfare loss equivalent to a drop in income of about 4 percent

theories of bank behavior under capital regulation abstract this paper reviews academic studies of bank capital regulation in an effort to evaluate the intellectual foundation for the imposition of the basel i and basel ii systems of risk based capital requirements the theoretical literature yields general agreement about the immediate effects of capital requirements on bank lending and loan rates and the longer term impacts on bank ratios of equity to total or risk adjusted assets this literature produces highly mixed predictions however regarding the effects of capital regulation on asset risk and overall safety and soundness for the banking system as a whole thus the intellectual foundation for the present capital regulation regime is not particularly strong the mixed conclusions in the academic literature on banking certainly do not provide unqualified support for moving to an even more stringent and costly system of capital requirements these widely ambiguous results do suggest however that assessing the implications of capital regulation for balance sheet risk and monitoring effort in diverse banking systems is an important agenda for future theoretical research in the banking area

tax competition and tax co ordination under destination and origin principles a synthesis this paper proposes a general framework for analysing commodity tax competition under destination and origin principles based on three possible tax spillovers the consumer price spillover the producer price terms of trade spillover and rent spillovers a model is presented which can be extended to accommodate all three spillovers using this model many of the results in the existing literature can be derived compared and extended

comparing regional technical efficiency in uk manufacturing plants the case of northern ireland 1974 1995 this paper uses estimates based on the stochastic frontier production function approach applied to more than 200 four digit uk manufacturing industries covering the period 1974 95 it is shown that manufacturing plants in northern ireland on average operated at lower levels of technical efficiency when compared to their counterparts in other regions of the uk and especially plants located in south east england this lower level of efficiency in the province is analysed both at the aggregate level and the industry level at the industry level the province has fewer plants exhibiting the highest levels of efficiency within most industries and too few plants open and close to cleanse manufacturing of the worst plants and those plants that do open and close often do not have efficiency levels such as to bring about improvements to the aggregate efficiency level the major conclusion is that northern ireland needs to reduce the long tail of weaker plants that tend to drag down average efficiency one w

does the basle capital accord reduce bank fragility an assessment of the value at risk approach abstract we examine the economic implications arising from a bank using a var constrained mean variance model for the selection of its trading portfolio as a consequence of the basle capital accord surprisingly we show that when a var constraint is imposed it is plausible that certain banks will end up selecting riskier portfolios than they would have chosen in the absence of the constraint accordingly regulators such as the basle committee on banking supervision should be aware that allowing a bank to use var to determine its minimum regulatory capital may increase its fragility alternatives to var based bank capital regulation that mitigate or even preclude its perverse implications are presented

bank capital regulation of trading portfolios an assessment of the basel framework in setting minimum capital requirements for trading portfolios the basel committee on banking supervision 1996 2011a 2013 initially used value at risk var then both var and stressed var svar and most recently stressed conditional var scvar accordingly we examine the use of scvar to measure risk and set these requirements assuming elliptically distributed asset returns we show that portfolios on the mean scvar frontier generally lie away from the mean variance m v frontier in a plausible numerical example we find that such portfolios tend to have considerably higher ratios of risk measured by e g standard deviation to minimum capital requirement than those of portfolios on the m v frontier also we find that requirements based on scvar are smaller than those based on both var and svar but exceed those based on just var finally we find that requirements based on scvar are less procyclical than those based on either var or both var and svar overall our paper suggests that the use of scvar to measure risk and set requirements is not a panacea

how bank capital buffers vary across countries the influence of cost of deposits market power and bank regulation abstract this paper analyzes the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002 after controlling for adjustment costs and the endogeneity of explanatory variables the results show that capital buffers are positively related to the cost of deposits and bank market power although the relations vary across countries depending on regulation supervision and institutions their impact is the result of two generally opposing effects restrictions on bank activities and official supervision reduce the incentives to hold capital buffers by weakening market discipline but at the same time they promote higher capital buffers by increasing market power institutional quality has the two opposite effects better accounting disclosure and less generous deposit insurance however have a clear positive effect on capital buffers by both strengthening market discipline and making charter value better able to reduce risk taking incentives

the niehans paradox flexible exchange rates and macroeconomic stability abstract this paper re examines dornbusch s suggestion that monetary expansion under a floating rate system will not cause a temporary decline in economic activity the niehans paradox because households will cut their saving to maintain consumption spending on domestic goods despite this terms of trade effect on saving it turns out that devaluation in the standard keynesian model in which trade flows however respond to the exchange rate with a simple distributed lag produces a temporary decline in economic activity under certain plausible conditions consequently the niehans paradox still can arise if domestic expenditures respond sluggishly to lower interest rates

assessing the risk return trade off in loan portfolios abstract this paper proposes a methodology to analyse the risk and return of large loan portfolios in a joint setting i propose a tractable model to obtain the distribution of loan returns from observed interest rates and default frequencies i follow a sectoral approach that captures the heterogeneous cyclical features of different kinds of loans and yields moments in closed form i investigate the validity of mean variance analysis with a value at risk constraint and study its relationship with utility maximisation finally i study the efficiency of corporate and household loan portfolios in an empirical application to the spanish banking system

technical efficiency and productivity change of china s iron and steel industry abstract the recent economic reform of china s iron and steel industry has resulted in its rapid expansion to become the largest in the world however the resultant increase in the use of energy and other resources has resulted in severe environmental degradation to further increase output while reducing emissions and waste will require increased productivity in this paper the technical efficiency and malmquist productivity indexes of a sample of 88 enterprises producing 72 percent of the industry s output were determined for the period 1989 1997 with the aim of gaining some insights into the policy options likely to achieve this

risk based capital requirements and bank portfolio risk abstract we construct a linear programming model and analyze the effectiveness of r b capital adequacy standards when bank deposits are fully insured we derive a set of optimal asset risk weights given a constraint in raising equity and using these weights the r b capital plan is an effective regulation mechanism without a constraint on equity maximum leverage restrictions and r b capital plans are mutually exclusive alternatives as we deviate from the optimal risk weights a combination of a leverage restriction and a r b equity ratio seems to be the more appropriate approach to controlling bank portfolio risk

banks buffer capital how important is risk abstract most banks hold a capital to asset ratio well above the required minimum defined by the present capital adequacy regulation basel i using bank level panel data from norway important hypotheses concerning the determination of this buffer capital are analyzed focus is on the importance of i risk ii the buffer as an insurance iii the competition effect iv supervisory discipline and v economic growth a negative or non significant risk effect is found which suggests that introducing a more risk sensitive capital regulation basel ii is likely to affect norwegian banks support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements

bank regulation and international financial stability a case against the 2006 basel framework for controlling tail risk in trading books abstract in attempting to promote international financial stability the basel committee on banking supervision 2006 provided a framework that sought to control the amount of tail risk that large banks around the world would take in their trading books relative to their corresponding minimum capital requirements however many of these banks suffered significant trading losses during the recent financial crisis our paper examines whether the basel framework allowed banks to take substantive tail risk in their trading books without a capital requirement penalty we find that it allowed banks to do so and that its minimum capital requirements can be notably procyclical hence focusing on the way the basel framework sought to control the amount of tail risk in trading books relative to their corresponding minimum capital requirements our paper supports the view that it was not properly designed to promote financial stability we also discuss alternative regulatory frameworks that would potentially be more effective than the basel framework in preventing banks from taking substantive tail risk in their trading books without a capital requirement penalty

frontier production functions and technical efficiency measures the concept of technical efficiency is central to measuring the firm performance the measurement of technical efficiency has proved difficult and complex and the literature provides a range of methodologies this paper reviews the various methodologies for measuring technical efficiency and offers a comparison between established methods of measurements the discussion is literary with less mathematical jargons and equations the objective of this paper is not to be exhaustive but to be up to date and to provide a significant discussion on some of the core methods of measuring technical efficiency

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

optimal bank capital with costly recapitalization we study optimal bank capital choice as a dynamic trade off between the opportunity cost of equity the loss of franchise value following a regulatory minimum capital violation and the cost of recapitalization we introduce a recapitalization delay that results in a strictly positive probability of capital adequacy violation we calibrate the model to bank accounting return data and evaluate the model s ability to explain observed bank capital ratios differences in return volatility explain a significant fraction of the cross sectional variation in bank capital ratios differences in the level of capital market imperfections across banks constitute a secondary explanation

ranking efficiency units in dea using bootstrapping an applied analysis for slovenian farm data this article explores how data envelopment analysis dea along with a smoothed bootstrap method can be used in applied analysis to obtain more reliable efficiency rankings for farms the main focus is the smoothed homogeneous bootstrap procedure introduced by simar and wilson 1998 to implement statistical inference for the original efficiency point estimates two main model specifications constant and variable returns to scale are investigated along with various choices regarding data aggregation the coefficient of separation cos a statistic that indicates the degree of statistical differentiation within the sample is used to demonstrate the findings the cos suggests a substantive dependency of the results on the methodology and assumptions employed accordingly some observations are made on how to conduct dea in order to get more reliable efficiency rankings depending on the purpose for which they are to be used in addition attention is drawn to the ability of the slice model implemented in gams to enable researchers to overcome the computational burdens of conducting dea with bootstrapping

on the use of portfolio risk models and capital requirements in emerging markets the case of argentina a portfolio based model credit risk of credit suisse first boston and recent central bank of argentina credit bureau data are used to estimate whether current capital and provisioning regulations match actual risks arguing that provisions should cover expected losses and that capital requirements should cover potential losses beyond expected losses subject to some statistical level of tolerance the article assesses how well actual capital and provisioning requirements match the estimated requirements given by the model actual provisioning requirements were found to be close to implied levels of expected losses the estimate of potential losses was found to be highly sensitive to the assumptions of the model especially the parameter relating the volatility of a loan s rate of default to its mean value this volatility parameter cannot be estimated accurately with the credit bureau data because of the short time span covered so proxy data were used to estimate it and two values around that estimate were tried the difficulty of estimating this critical parameter implies that the results should only be regarded as suggestive moreover the methodology only does not seek to estimate credit risk and not interest rate risk or exchange rate risk nor does it fully take into account the indirect effects of interest rates and exchange rates on credit risk as recent events in argentina have demonstrated estimating credit risk along these lines should be thought of as just one tool in attempting to assess the appropriate level of bank provisions and capital

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

a measurement of firm and input specific technical and allocative effiencies the objective of this paper is to suggest an alternative modelling to the existing stochastic frontier production function to provide measures of firm and input specific technical and allocative effciencies

measuring local government spending efficiency evidence for the lisbon region afonso a and fernandes s 2006 measuring local government spending efficiency evidence for the lisbon region regional studies 40 39 53 the expenditure efficiency of portuguese local governments in 2001 was assessed using data envelopment analysis for production frontier estimation a composite municipal output indicator was constructed and input and output efficiency scores were computed for 51 portuguese municipalities in the region of lisbon and vale do tejo this allows a determination of the extent of municipal spending that seems to be wasted relative to the theoretical best practice frontier the results suggest that vale do tejo municipalities could achieve on average the same level of output allegedly using around one third fewer resources improving performance without necessarily increasing municipal spending municipal expenditure technical efficiency data envelopment analysis dea lisbon afonso a and fernandes s 2006 l efficacite de la depense de l administration locale d

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

innovative performance effects of institutional quality an empirical investigation from the triad using data for a set of 823 r d intense manufacturing firms within the triad and the quality of government qog dataset over the 2002 2010 period this article investigates the effects of institut

the cyclical behaviour of european bank capital buffers using an unbalanced panel of accounting data from 1997 to 2004 and controlling for individual bank costs and risk we find capital buffers of the banks in the eu15 have a significant negative co movement with the cycle for banks in the accession countries there is significant positive co movement capital buffers of commercial and savings banks and of large banks exhibit negative co movement those of co operative and smaller banks exhibit positive co movement speeds of adjustment are fairly slow we interpret these results and discuss policy implications noting that negative co movement of capital buffers will exacerbate the pro cyclical impact of basel ii

on the use of portfolio risk models and capital requirements in emerging markets a portfolio based model creditrisk of credit suisse first boston and recent central bank of argentina credit bureau data are used to estimate whether current capital and provisioning regulations match actual risks arguing that provisions should cover expected losses and that capital requirements should cover potential losses beyond expected losses subject to some statistical level of tolerance the article assesses how well actual capital and provisioning requirements match the estimated requirements given by the model actual provisioning requirements were found to be close to implied levels of expected losses the estimate of potential losses was found to be highly sensitive to the assumptions of the model especially the parameter relating the volatility of a loan s rate of default to its mean value this volatility parameter cannot be estimated accurately with the credit bureau data because of the short time span covered so proxy data were used to estimate it and two values around that estimate

bank capital and equity investment regulations abstract this paper uses an intermediation model to study the efficiency and welfare implications of both banks minimum required capital asset ratio and the regulation that limits and in some countries forbids banks investments in the equity of nonfinancial firms there are two sources of moral hazard in the model one between the bank and the provider of deposit insurance and the other between the bank and an entrepreneur who demands funds to finance an investment project among other things the paper shows that capital regulation improves the bank s stability and can also be pareto improving equity regulation is never pareto improving and does not increase the bank s stability

liquidity provision banking and the allocation of interest rate risk abstract the paper studies the efficient allocation of technology induced interest rate risk and the implications of such risk for efficient liquidity provision complete immunization against interest rate risk is shown to be undesirable as it precludes the exploitation of favourable reinvestment opportunities under the assumptions of diamond dybvig 1983 interest induced valuation risks of long term assets should be born by early withdrawers reinvestment opportunity risks of short term assets by late withdrawers efficient liquidity provision thus entails no shifting of interest rate risk in the absence of additional moral hazard second best allocations can be implemented through unregulated competition among banks

systemic risk and bank business models textabstractin this paper we decompose banks systemic risk into two dimensions the risk of a bank bank tail risk and the link of the bank to the system in financial distress systemic linkage based on extreme value theory we estimate a systemic risk measure that can be decomposed into two subcomponents reflecting these dimensions empirically we assess the relationships of bank business models to the two dimensions of systemic risk the observed differences in these relationships partly explain why micro and macroprudential perspectives sometimes have different implications for banking regulation

or forum design of risk weights banking regulations set minimum levels of capital for banks these requirements are generally formulated through a ratio of capital to risk weighted assets a risk weighting scheme assigns a weight to each asset or category of assets and effectively functions as a linear constraint on a bank s portfolio choice it also changes the incentives for banks to hold various kinds of assets in this paper we investigate the design of risk weights to align regulatory and private objectives in a simple mean variance framework for portfolio selection by setting risk weights proportional to profitability rather than risk the regulator can induce a bank to reduce its overall level of risk without distorting its asset mix because the regulator is unlikely to know the true profitability of assets we introduce an adaptive formulation in which the regulator sets weights by observing a bank s portfolio the adaptive scheme converges to the same combination of weights and portfolio choice that would hold if the regulator knew the asset profitability we also investigate other objectives including steering banks to a target mix of assets adding robustness mitigating procyclicality and reducing system wide risk in a setting with multiple heterogeneous banks

nonparametric analysis of technical and allocative efficiencies in production in this paper we extend varian s 1984 nonparametric production analysis to situations when the set of observed output input and price data is not consistent with profit maximization for at least one firm in such cases varian s results imply that no production possibility set containing all observations can rationalize the observed data we identify each firm whose performance given the prices faced by it may be found consistent with profit maximization relative to some production possibility set containing all observed output input vectors we show that the set 4 of all such firms can itself be weaklv rationalized in the sense that there exists a closed convex and monotone production possibility set that contains all the observations and relative to which the performance of all the firms in the set 8o is consistent with profit maximization given their respective prices by definition firms not included in this largest set d of efficient observations unambiguously deviate from profit maximizing behavior for any production possibility set containing all observations we follow farrell 1957 and analyze these deviations into technical and allocative efficiency measures considering as admissible all closed convex and monotone production possibility sets relative to which the performance of each firm in the set g remains consistent with profit maximization we then describe nonparametric methods for determining the tightest upper and lower bounds on the technical allocative and aggregate efficiency measures evaluated relative to all such admissible production possibility sets it is seen that the tightest upper bound on the technical efficiency measure is the same as the value computed by the nonparametric efficiency evaluation technique known as data envelopment analysis thus establishing a link between this literature in management science operations research and the nonparametric production analysis in economics

banks regulatory buffers liquidity networks and monetary policy transmission based on a quarterly regulatory dataset for german banks from 1999 to 2004 this paper analyzes the effects of banks regulatory capital on the transmission of monetary policy in a system of liquidity networks the dynamic panel regression results provide evidence in favor of the bank capital channel theory banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers

bank resolution a framework for the assessment of regulatory intervention more than ever the current crisis has highlighted the cost of banking crises in budgetary and economic growth terms whether or not to restructure a bank is a key determinant of who bears the costs the present article surveys the main issues concerning banks restructuring by considering the bargaining game that is played between regulators and shareholders when a bank is in distress this revolves around the framework of negotiation that was established by the regulator the fall back position which is determined by bankruptcy legislation and the objective function of the regulator in this context we argue that it is possible to improve upon existing restructuring mechanisms by making banks bail outs less costly to taxpayers and improving the ex ante incentives of banks managers and shareholders the authors 2012 published by oxford university press

recent progress in applied bayesian econometrics abstract bayesian methods are widely used by theoretical econometricians and statisticians but have not won widespread acceptance from applied researchers after briefly describing the basic of the bayesian approach we discuss several issues relating to the empirical application of bayesian methods the existing bayesian empirical literature is also partially summarized the remainder of the paper offers a non technical survey of some recent computational advances in bayesian econometrics the overall goal is to persuade economists that bayesian methods are both computationally feasible and easy to implement in empirical research

does collateral fuel moral hazard in banking this paper presents two models in which the fluctuating value of loan collateral real estate generates the problem of moral hazard between a bank and a deposit insurance agent the bank finances risky projects against collateral and relies on the rising collateral value if the collateral value later appreciates the bank enjoys handsome profits otherwise the bank fails the findings are rather consistent with the characteristics of the topical subprime mortgage crisis

bank size and risk taking under basel ii this paper discusses the relationship between bank size and risk taking under pillar i of the new basel capital accord using a model with imperfect competition and moral hazard we find that small banks and hence small borrowers may profit from the introduction of an internal ratings based irb approach if this approach is applied uniformly across banks however the banks right to choose between the standardized and the irb approaches unambiguously hurts small banks who are pushed towards higher risk taking due to fiercer competition this may even lead to higher aggregate risk in the economy

accounting for banks capital regulation and risk taking this paper examines risk taking incentives in banks under dierent accounting regimes with capital regulation in the model the bank s decisions of capital issuance and investment policy are jointly determined given exogenous minimum capital requirement the bank is more likely to issue equity capital in excess of the minimum required level and implement less risky investment policy under either lower of cost ormarket accounting or fair value accounting than under historical cost accounting but fair value accounting may induce more risk taking compared to lower of cost or market accounting due to short term interest in the part of the bank however the disciplining role of lower of cost or market accounting may discourage bank s incentive to exert project discovery eort

capital requirements and the behaviour of commercial banks abstract i study the consequences of capital regulations on the portfolio choices of commercial banks elaborating on previous work by kareken and wallace 1978 koehn and santomero 1980 and kim and santomero 1988 i obtain the following results if the objective of commercial banks is maximization of the market value of their future profits value maximizing banks capital regulations cannot prevent banks from choosing very specialized and very risky portfolios risk based insurance premia are in fact the relevant instrument for that purpose on the other hand if banks behave as portfolio managers utility maximizing banks capital regulations can be effective but only if the weights used in the computation of the ratio are proportional to the systematic risks of the assets their betas because of limited liability of commercial banks a minimum capital regulation or a closing rule may become necessary as well to prevent failing banks from betting for resurrection

a comparison of the original and revised basel market risk frameworks for regulating bank capital abstract recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis the basel committee on banking supervision 2011 revised its regulatory framework for trading portfolios in this paper we compare 1 the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk and 2 the relative adequacy of these frameworks in setting minimum capital requirements our main findings are as follows first both systems allow the selection of portfolios with substantive tail risk but one based on the revised framework tends to be less effective in controlling tail risk second the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework hence on balance the revised framework improves upon the original framework we also suggest further improvements for consideration by bank regulators

equilibrium risk shifting and interest rate in an opaque financial system we analyse the risk taking behaviour of heterogenous intermediaries that are protected by limited liability and choose both their amount of leverage and the risk exposure of their portfolio due the opacity of the financial sector outside providers of funds cannot distinguishing prudent intermediaries from those imprudent ones that voluntarily hold high risk portfolios and expose themselves to the risk of bankrupcy we show how the number of imprudent intermediaries is determined in equilibrium jointly with the interest rate and how both ultimately depend on the cross sectional distribution of intermediaries capital one implication of our analysis is that an exogenous increase in the supply of funds to the intermediary sector following e g capital inflows lowers interest rates and raises the number of imprudent intermediaries the risk taking channel of low interest rates another one is that easy financing may lead an increasing number of intermediaries to gamble for resurection following a bad shock to the sector s capital again raising economywide systemic risk the gambling for resurection channel of falling equity

a reexamination of mean variance analysis of bank capital regulation abstract the mean variance framework has been used to analyze the effects of bank capital regulation on the asset and bankruptcy risk of insured utility maximizing banks this literature claims that more stringent capital regulation will increase asset risk and can increase bankruptcy risk these conclusions are notable because they are opposite to those obtained for insured value maximizing banks in this paper we show that the utility maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank s investment opportunity set by neglecting the option value of deposit insurance

mean variance portfolio selection with at risk constraints and discrete distributions we examine the impact of adding either a var or a cvar constraint to the mean variance model when security returns are assumed to have a discrete distribution with finitely many jump points three main results are obtained first portfolios on the var constrained boundary exhibit k 2 fund separation where k is the number of states for which the portfolios suffer losses equal to the var bound second portfolios on the cvar constrained boundary exhibit k 3 fund separation where k is the number of states for which the portfolios suffer losses equal to their vars third an example illustrates that while the var of the cvar constrained optimal portfolio is close to that of the var constrained optimal portfolio the cvar of the former is notably smaller than that of the latter this result suggests that a cvar constraint is more effective than a var constraint to curtail large losses in the mean variance model 2007 elsevier b v all rights reserved

x efficiency and technical efficiency efficiency measurement has become a very popular field in applied economics in recent years and with this interest there has been a large intellectual investment in refining the empirical methods available to researchers in the area in this paper we relate these developments to harvey leibenstein s original 1966 insight into the psychological ideas underlying the notion that economic agents may not achieve maximal efficiency in their productive decisions and behaviour of course it is always possible to argue that apparent inefficiency only arises from a failure of the observer to realise what it is that is being maximized however we evade this easy escape route into non falsifiable hypothesizing and instead take at face value the fact that too many empirical studies have come up with substantial measures of inefficiency for us to ignore its importance for normative economics

crises and capital requirements in banking we analyze a general equilibrium model in which there is both adverse selection of and moral hazard by banks the regulator can screen banks prior to giving them a licence audit them ex post to learn the success probability of their projects and impose capital adequacy requirements capital requirements combat moral hazard when the regulator has a strong screening reputation and they otherwise substitute for screening ability crises of confidence can occur only in the latter case and contrary to conventional wisdom the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks

why basel ii may need a leverage ratio restriction abstract we analyze regulatory capital requirements where the amount of required capital depends on the level of risk reported by the banks it is shown that if the supervisors have a limited ability to identify or to sanction dishonest banks an additional risk independent leverage ratio restriction may be necessary to induce truthful risk reporting the leverage ratio helps to offset the banks potential capital savings of understating their risks by i reducing banks put option value of limited liability ex ante and by ii increasing the banks net worth which in turn enhances the supervisors ability to sanction banks ex post

solvency regulations and the management of banking risks abstract in the recent years international banking authorities have succeeded implementing harmonized solvency regulations however two stages can be distinguished 1 up to 1993 a rigid approach has prevailed with the cooke ratio for credit risks and the standardized approach to market risks 2 since then a movement towards flexibility has been acknowledged notably with the validation of internal models of the var type and the precommitment proposal of kupiec and o brien the objective of this article is to discuss the pros and cons of these different approaches within a coherent conceptual framework that applies contract theory to the regulation of banking

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

the measurement and sources of technical inefficiency in the indonesian weaving industry production function models are estimated with a time series of cross section data on indonesian weaving establishments the sources of technical inefficiency are investigated three firm attributes are identified as being potentially related to firm efhciency tbey are firm ownership age and size the importance of these attributes as sources of inefficiency in the indonesian weaving industry is investigated and the implications of the find ings discussed

when more is less using multiple constraints to reduce tail risk abstract financial institutions suffered large trading losses during the 2007 2009 global financial crisis these losses cast doubt on the effectiveness of regulations and risk management systems based on a single value at risk var constraint while some researchers have recommended using conditional value at risk cvar to control tail risk var remains popular among practitioners and regulators accordingly our paper examines the effectiveness of multiple var constraints in controlling cvar under certain conditions we theoretically show that they are more effective than a single var constraint furthermore we numerically find that the maximum cvar permitted by the constraints is notably smaller than with a single constraint these results suggest that regulations and risk management systems based on multiple var constraints are more effective in reducing tail risk than those based on a single var constraint

bayesian efficiency analysis with a flexible form the aim cost function in this article we describe the use of gibbs sampling methods for drawing posterior inferences in a cost frontier model with an asymptotically ideal price aggregator nonconstant returns to scale and composed error an empirical example illustrates the sensitivity of efficiency measures to assumptions made about the functional form of the frontier we also examine the consequences of imposing regularity through parametric restrictions alone

economic efficiency and frontier techniques abstract most of the literature related to the measurement of economic efficiency has based its analysis either on parametric or on non parametric frontier methods the choice of estimation method has been an issue of debate with some researchers preferring the parametric and others the non parametric approach the aim of this paper is to provide a critical and detailed review of both core frontier methods in our opinion no approach is strictly preferable to any other moreover a careful consideration of their main advantages and disadvantages of the data set utilized and of the intrinsic characteristics of the framework under analysis will help us in the correct implementation of these techniques recent developments in frontier techniques and economic efficiency measurement such as bayesian techniques bootstrapping duality theory and the analysis of sampling asymptotic properties are also considered in this paper

are bank capital ratios pro cyclical new evidence and perspectives this paper analyses how the new basel iii leverage ratio and risk weighted regulatory capital ratio behave over the cycle the analysis proposes a set up to test for the cyclical properties of bank capital ratios taking into account structural shifts in banks behaviour during the global financial crisis and its aftermath using a large data set covering international banks headquartered in 14 advanced economies for the period 1994 2012 we find that the basel iii leverage ratio is significantly more countercyclical than the risk weighted regulatory capital ratio it is a tighter constraint for banks in booms and a looser constraint in recessions

on the sources of heterogeneity in banking efficiency literature one learns two main lessons from studying the great quantity of banking efficiency literature these lessons regard the heterogeneity in results and the absence of a comprehensive review aimed at understanding the reasons for this variability surprisingly although this issue is well known it has not been systematically analyzed before in order to fill this gap we perform a meta regression analysis mra by examining 1 661 efficiency scores retrieved from 120 papers published over the period 2000 2014 the meta regression is estimated by using the random effects multilevel model reml because it controls for within study and between study heterogeneity the analysis yields four main results firstly parametric methods yield lower levels of banking efficiency than nonparametric studies this holds true even after controlling for the approach used in selecting the inputs and outputs of the frontier secondly we show that banking efficiency is highest when using the value added approach followed by estimates from studies based on the intermediation method whereas those based on the hybrid approach are the lowest thirdly efficiency scores also depend on the quality of studies and on the number of observations and variables used in the primary papers as far as the effects of sample size dimension and quality of papers are concerned there are significant differences in sign and magnitude between parametric and nonparametric studies finally cost efficiency is found to be higher than profit and production efficiency interestingly mra results are robust to the potential outliers in efficiency and sample size distributions