Value-at-risk (VaR) models often are used to estimate the equity investment that is required to limit the default rate on funding debt. Typical VaR quot;buffer stockquot; capital calculations produce biased estimates. To ensure accuracy, VaR must be modified by (1) measuring loss relative to...

A key function of capital regulation is to mitigate the potential for systemic financial risk by maintaining public confidence in the ability of regulated market participants to honor their financial obligations in times of market stress. While it is well-known that the portfolios of banks and...

Since the 2009 Supervisory Capital Assessment Program (SCAP), US regulators have employed a representative bank model as the benchmark of comparison in mandatory stress test exercises. For risk management functions, a bank's own stress model must be calibrated to reflect the bank's historical...

The efficacy of the Financial Stability Board's proposed requirement for minimum “total loss absorbing capacity” (TLAC) at global systemically important banks (G-SIBs) is assessed using a stylized model of a bank holding company and an equilibrium asset pricing model to value financial...

We estimate the impact on individual bank loan growth caused by supervisory restrictions associated with a poor bank examination rating. We use a novel approach to control for bank loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 443,000 bank-quarter...

Most credit portfolios contain obligor concentration risk and yet international bank regulatory capital rules and many industry models assume perfect diversification. Multiple methods are available to calculate the approximate capital needs of a concentrated credit portfolio, but many of these...

I develop an algorithm to approximate the loss rate distribution for fixed income portfolios with obligor concentrations. The approximation requires no advanced mathematics or statistics, only the summation of large exposures and the evaluation of binomial probabilities. The approximation is...

We analyze the ability of the “Single Point of Entry” strategy (SPOE) to resolve large banks without financial market disruption. We identify several legal and financial impediments that could prevent SPOE's use. In particular, Title II of the Dodd-Frank Act was conceived by Congress as an...

The Basel II Advanced Internal Ratings (AIRB) approach is compared to capital requirements set using an equilibrium structural credit risk model. Analysis shows the AIRB approach undercapitalizes credit risk relative to regulatory targets and allows wide variation in capital requirements for a...