Why do people choose bank deposit contracts over a direct participation in asset markets? In their seminal paper, Diamond and Dybvig’s (1983) answer this question by claiming that bank deposit contracts can implement allocations that are welfare superior to asset markets equilibria. The...

The Basel Committee on Banking Supervision sets the official confidence level at which a bank is supposed to absorb annual losses at 99.9 per cent. However, due to an inconsistency between the notion of expected losses in the Vasicek model, on the one hand, and the practice of Basel regulation,...