Internal Models, Subordinated Debt, and Regulatory Capital Requirements for Bank Credit Risk

Paul Kupiec

No 2002/157, IMF Working Papers from International Monetary Fund

Abstract: Shortcomings make credit VaR estimates an unsuitable basis for setting bank regulatory capital requirements. If, alternatively, banks are required to issue subordinated debt that has a minimum market value and maximum acceptable probability of default, banks must set their equity capital in a manner that limits both the probability of bank default and the expected loss on insured deposits, largely removing any safety net-related funding cost subsidy and the moral hazard incentives it creates. Required equity capital can be estimated using a modified credit-VaR framework, and supervisors can use external credit ratings to indirectly verify the accuracy of bank internal model estimates.

Keywords: WP; equity capital; market value; regulatory capital requirements; credit VaR; subordinated debt; internal risk models; capital requirement; bank default; investment opportunity; debt issue; bank shareholder; safety net; bank investment incentive; funding debt; bank liability; capital allocation; Credit risk; Vector autoregression; Debt financing; Credit; Stocks (search for similar items in EconPapers)
Pages: 30
Date: 2002-09-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=15952 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2002/157

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().