The Risk Sensitivity of Capital Requirements: Evidence from an International Sample of Large Banks*

By Francesco Vallascas, Jens Hagendorff. 2013

152 citations recorded by the source corpus.

Using an international sample of large banks between 2000 and 2010, we evaluate the risk sensitivity of minimum capital requirements. Our results show that risk-weighted assets (the regulatory measure of portfolio risk, which determines minimum capital requirements) are ill-calibrated to a market measure of bank portfolio risk. We show that this low-risk sensitivity of capital requirements permits banks to build up capital buffers by underreporting their portfolio risk and undermines banks' ability to withstand adverse shocks. While the risk sensitivity of capital requirements is higher for banks that have adopted Basel II, it remains low across banks and countries. Copyright 2013, Oxford University Press.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/583ecddf73b1eeb734f981bf4e2a7693fb1720fa

How researchers see this paper

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In Economics and Econometrics

1. Kevin Keasey
2. Sabur Mollah
3. Francesco Vallascas

In Finance

1. Sabur Mollah
2. Kevin Keasey
3. Francesco Vallascas

Citations in the corpus

• Does the impact of board independence on large bank risks change after the global financial crisis (2017, methodology): “To measure bank asset return volatility and the market value of bank assets, we follow Flannery and Sorescu (1996), Ronn and Verma (1986), and Vallascas and Hagendorff (2013).”