 Internal models for deposits: Effects on banks' capital and interest rate risk of assetsJournal of Banking & Finance, 2022, vol. 135, issue C Abstract: This study first investigates why only some banks use the internal models (IMs) introduced by Basel II that lead to more risk-sensitive capital ratios than standardized approaches (SA). I predict that banks opt for an IM if it allows economizing on capital requirements, given their underlying risk. I find support for this hypothesis by analyzing Mexican banks’ adoption of an IM for deposit maturity, a key input to measure interest rate risk, between 2006 and 2016. Secondly, I examine whether banks increase the duration of assets after IM adoption—high-maturity assets can be offset with deposits, leading to a lower risk exposure and additional capital savings. For the average maturity of total assets, I find no support for this conjecture. However, when a flattening of the yield curve spurs firms’ demand for high-maturity debt, micro data reveal that banks using the IM increase the duration of commercial loans more than those using the SA. These findings have broad implications for the design of internal risk models and of capital regulation. Keywords: Basel II; Internal model; Standardized approach; Interest rate risk; Bank regulatory capital; Demand deposits; Asset repricing maturity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:135:y:2022:i:c:s0378426620302028 DOI: 10.1016/j.jbankfin.2020.105940 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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