Abstract: Now in prospect is a major revision of international bank capital
regulations that would embody recent advances in credit risk
measurement and management. Previous regulations have been
simpler in structure, with a primary goal of getting capital
requirements right on average, and thus have largely ignored the
difference between average and marginal. This paper presents
evidence that explicit treatment in new regulations of several
important dimensions of credit risk is necessary to limit banks'
incentives to engage in capital arbitrage activities. Such
activities, if unchecked, may lead to an increase in bank
failure rates over time.
Keywords: Risk management, credit risk, bank regulation, capital requirements
Full paper (174 KB PDF)
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Last update: April 27, 2000
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