The minimal confidence levels of Basel capital regulation

Alexander Zimper

No 201305, Working Papers from University of Pretoria, Department of Economics

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%. 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 paper calculates the minimal confidence levels which 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% if, firstly, the bank holds risky loans and if, secondly, the bank was previously affeected by substantial write-offs.

Keywords: Banking Regulation; Probability of Bank Failure; Definition of Expected Losses; Financial Stability (search for similar items in EconPapers)
JEL-codes: G18 G32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-01
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The minimal confidence levels of Basel capital regulation (2014)
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