The minimal confidence levels of Basel capital regulation

Alexander Zimper

Journal of Banking Regulation, 2014, vol. 15, issue 2, 129-143

Abstract: 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, on the other hand, actual confidence levels are likely to be lower. This article calculates the minimal confidence levels that correspond to a worst case scenario in which a Basel-regulated bank holds capital against unexpected losses only. I argue that the probability of a bank failure is significantly higher than the official 0.1 per cent if, firstly, the bank holds risky loans and if, secondly, the bank was previously affected by substantial write-offs.

Date: 2014
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