MULTIPERIOD BANKING SUPERVISION

Karl-Theodor Eisele () and Philippe Artzner
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Karl-Theodor Eisele: LaRGE Research Center, Université de Strasbourg

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: This paper is based on a general method for multiperiod prudential supervision of companies submitted to hedgeable and non-hedgeable risks. Having treated the case of insurance in an earlier paper, we now consider a quantitative approach to supervision of commercial banks. The various elements under supervision are the bank’s current amount of tradeable assets, the deposit amount, and four flow processes: future trading risk exposures, deposit flows, flows of loan repayments and of deposit remunerations. The approach uses a multiperiod risk assessment supposed not to allow supervisory arbitrage. Coherent and non-coherent examples of such risk assessments are given. The risk assessment is applied to the risk bearing capital process composed out of the amounts of assets and deposits, and the four flow processes mentioned above. We give a general definition of a supervisory margin which uses the risk assessment under the assumption of optimal trading risk exposures. The transfer principle together with a cost-of-capital ratio gives quantitative definitions of the risk margin and of the non-hedgeable equity capital requirement. The hedgeable equity capital requirement measures the inadequacy of the bank’s portfolio of tradeable assets with respect to the optimal trading risk exposures. The hierarchy of different interferences of a supervisor is related to these quantities. Finally, a simple allocation principle for margins and the equity capital requirements is derived.

Keywords: equity capital requirements; hierarchy of supervisor’s interferences; multiperiod risk assessment; optimal trading risk exposures; supervisory margin. (search for similar items in EconPapers)
JEL-codes: G18 G21 G32 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:lar:wpaper:2013-05

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