In this paper we focus on the impact of additive level outliers on the calculation of risk measures such as minimum capital risk requirements and four possible alternatives of reducing these measures’ estimation biases. The first and second alternatives are based on wavelets while the third is based on the traditional proposals in the literature and the three are based on the detection and corr...

We investigate the optimal design of bank regulation by developing a tractable general equilibrium model of competitive banks who are exposed to idiosyncratic and aggregate risk. A comparison of the autarkic equilibrium allocations with the efficient allocations reveals that the autarkic economy underinvests in production when aggregate risk is below a threshold, but overinvests in production w...

This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle m...

This paper analyzes credit risk for residential mortgages. Estimates of the hazard of mortgage default are presented, based upon a large sample of conventional loans issued in the late 1970s. Mean returns are estimated, together with variances and covariances for various loan-to-value (LTV) ratios and geographic groups. These results are then used to analyze capital requirements for institution...

In recent years, securitization and other ®nancial innovations have provided unprecedented opportunities for banks to reduce substantially their regulatory capital requirements with little or no corresponding reduction in their overall economic risks ± a process termed ``regulatory capital arbitrage''. These methods are used routinely to lower the e€ective risk-based capital requirements agains...

In the aftermath of the financial crisis, there is interest in reforming bank regulation such that capital requirements are more closely linked to a bank’s contribution to the overall risk of the financial system. In our paper we compare alternative mechanisms for allocating the overall risk of a banking system to its member banks. We explicitly take into account that overall risk as well as ea...

This paper measures the welfare cost of bank capital requirements and finds that it is surprisingly large. I present a simple framework which embeds the role of liquidity creating banks in an otherwise standard general equilibrium growth model. A capital requirement plays a role, as it limits the moral hazard on the part of banks that arises due to the presence of a deposit insurance scheme. Ho...

We study the dynamic investment and reporting problem of a financial institution subject to capital requirements based on self-reported VaR estimates, as in the Basel Committee’s Internal Models Approach (IMA). With constant price coefficients, we show that optimal portfolios display a local three-fund separation property. VaR-based capital requirements induce financial institutions to tilt the...