The Risk-Relevant Information Content of Changes in the Basel Capital Regulations in Taiwan

Huang Der-Fen (), Chenen Ko () and Chi-Chun Liu ()
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Huang Der-Fen: Department of Accounting, National Dong Hwa University, Shou Feng, Hualien, 974 Taiwan, ROC
Chenen Ko: Department of Accounting, National Taiwan University, 50, Lane 144, Section 4, Keelung Road, Taipei, 106 Taiwan, ROC
Chi-Chun Liu: Department of Accounting, National Taiwan University, 50, Lane 144, Section 4, Keelung Road, Taipei, 106 Taiwan, ROC

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2004, vol. 07, issue 01, 91-117

Abstract: This paper examines the risk-relevance of the Basel capital regulations in Taiwan. We investigate (1) whether the regulatory information can explain bank risk, (2) whether the new 1998 version provides incremental information to assess bank risk, given the old 1992 version, and (3) which regulatory version is more useful in assessing bank risk. This paper employs an option pricing methodology to calculate implied asset risk as a proxy for total risk. We find that the Basel capital ratio and its components help explain risk and that the components under the new version have incremental explanatory power over those under the old. Additionally, the new version has greater information regarding risk than the old. Finally, two risk dimensions categorized by supervisors, credit risk and market risk have different explanatory power. Regulatory information about credit risk has explanatory power, but market risk does not. It implies that the Basel accord, contrary to expectation, does not fully capture all risk. Overall, this study contributes to capturing the risk-relevance of the ongoing evolution of the Basel capital regulations in an emerging market economy.

Keywords: Basel; capital adequacy ratio; credit risk; market risk; risk reporting (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219091504000044

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