Farkas, Walter, Fringuellotti, Fulvia and Tunaru, Radu (2020) A cost-benefit analysis of capital requirements adjusted for model risk. Journal of Corporate Finance, 65. a101753 1-22. ISSN 0929-1199

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Abstract

Capital adequacy is the key microprudential and macroprudential tool of banking regulation. Financial models of capital adequacy are subject to errors, which may prevent from estimating a sufficient capital base to absorb bank losses during economic downturns. In this paper, we propose a general method to account for model risk in capital requirements calculus related to market risk. We then evaluate and compare our capital requirements values with those obtained under Basel 2.5 and the new Basel 4 regulation. Capital requirements adjusted for model risk perform well in containing losses generates in normal and stressed times. In addition, they are as conservative as Basel 4 capital requirements, but they exhibit less fluctuations over time.

Item Type:	Article
Schools and Departments:	University of Sussex Business School > Accounting and Finance
SWORD Depositor:	Mx Elements Account
Depositing User:	Mx Elements Account
Date Deposited:	08 Oct 2020 06:55
Last Modified:	05 Mar 2021 14:23
URI:	http://sro.sussex.ac.uk/id/eprint/94214

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