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)...

In a stylized model of a financial intermediary, risk managers expend costly effort to reduce loan PD and LGD. When effort is unobservable, incentive compensation (IC) can induce manager effort, but underwriting and loss mitigation managers require different IC contracts. Subsidized insured...

The Vasicek single factor model of portfolio credit loss is generalized to include credits with stochastic exposures (EADs) and loss rates (LGDs). The model can accommodate any distribution and correlation assumptions for the LGDs and EADs and will produce a closedform expression for an...

Objectives for Basel II include the promulgation of a sound standard for risk measurement and risk-based minimum capital regulation. The AIRB approach, which may be mandatory for large U.S. banks, will give rise to large reductions in regulatory capital. This paper assess whether the reductions...

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...

This study assesses the state of the policy debate that surrounds the Federal regulation of margin requirements. A relatively comprehensive review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility...

Although margin requirements would arise naturally in the context of unregulated trading of clearinghouse-guaranteed derivative contracts, the margin requirements on U.S. exchange-traded derivative products are subject to government regulatory oversight. At present, two alternative methodologies...

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...