Banks, Internal Models and the Problem of Adverse Selection

Christian Ewerhart

No 02-14, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Recent empirical studies indicate that financial institutions tend to overestimate their market risks in disclosures to supervisory authorities. The evidence is surprising because overstated risk figures imply a costly restriction to the bank's trading activity. This paper offers a stylized model of the regulatory process, in which conservative risk reporting is the consequence of an adverse selection problem between bank and regulator. The analysis suggests that efficiency gains may be feasible when regulators disencourage conservative reporting especially for banks with a history of low capital ratios. The basic argument applies also to the internal ratings-based approach to credit risk supervision. The results have an immediate bearing on the recently proposed Basle II framework.

Pages: 37 pages
Date: 2002-02-17
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
References: Add references at CitEc
Citations: View citations in EconPapers (3)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:xrs:sfbmaa:02-14

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim Contact information at EDIRC., Sonderforschungsbereich 504, University of Mannheim
Bibliographic data for series maintained by Carsten Schmidt ( this e-mail address is bad, please contact ).