Optimal Capital Requirements over the Business and Financial Cycles

I study economies where banks do not fully internalize the social costs of their lending decisions, which leads to real overinvestment. The bank capital requirement that restores investment efficiency varies over time. During booms, more investment is desirable, so the banking sector must be allowed to expand. This suggests a loosening of the requirement. However, there is also more bank capital. Since the banking sector exhibits decreasing returns to scale, this suggests a tightening instead. I find that the latter effect, which I dub the “bank capital channel,” dominates: the optimal capital requirement is tighter during booms than in recessions. (JEL E32, E44, G21, G28, G32)

Operational risk in bank governance and control: How to save capital requirement through a risk transfer strategy. Evidences from a simulated case study

Operational risk management in banking has assumed such importance during the last decade. It has become increasingly important to measure, manage, and assess the impact of operational risk in the economics of banking. The purpose of this paper is to demonstrate how an effective operational risk management provides mitigating effects on capital-at-risk in banking. The paper provides evidences that an implementation of an operational risk transfer strategy reduces bank capital requirement. The paper adopts the loss distribution approach, the Monte Carlo simulation, and copula methodologies to estimate the regulatory capital and simulate an operational risk transfer strategy in banking.

Statistical Models for Operational Risk

A statistical model is a possible representation (not necessarily complex) of a situation of the real world. Models are useful to give a good knowledge of the principal elements of the examined situation and so to make previsions or to control such a situation. In the banking sector, models, techniques and regulations have been developed for evaluating Market and Credit risks, for linking together risks, capital and profit opportunity. The regulations and vigilance standards on the capital have been developed from the Basel Committee founded at the end of 1974 by the G10. The standards for the capital’s measurement system were defined in 1988 with the “Capital Accord” (BIS, 1988); nowadays, it is supported from over 150 countries around the world. In January 2001 the Basel Committee published the document “The New Basel Capital Accord” (BIS, 2001), which is a consultative document to define the new regulation for the bank capital requirement. Such a document has been revisited many times (see BIS, 2005). With the new accord there is the necessity of appraising and managing, beyond the financial risks, also the category of the operational risks (OR) already responsible of losses and bankruptcies (Cruz (Ed.), 2004; Alexander (Ed.), 2003; Cruz, 2002).