Basel III versus Solvency II: An Analysis of Regulatory Consistency under the New Capital Standards

Posted: 12 Apr 2013 Last revised: 5 Aug 2016

See all articles by Daniela Laas

Daniela Laas

University of St. Gallen - Institute of Insurance Economics

Caroline Siegel

University of St. Gallen - Institute of Insurance Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2015

Abstract

One of the declared goals of the supervisory authorities for the insurance and banking sectors is to enhance the resilience of the financial system by establishing consistent regulatory frameworks. In view of this goal, this paper provides a critical analysis of the consistency of the Basel III and Solvency II standard approaches for market and credit risks. The analysis comprises both the current Basel III rules and the proposals for the forthcoming standards. Based on a comprehensive description of the market and credit risk modules, we evaluate the consistency in two steps: The first step assesses comparability from a theoretical perspective via a detailed comparison of the mechanics of the standard approaches. In the second step, we perform a numerical analysis and contrast the regulatory capital charges for a stylized balance sheet. Our examination reveals substantial discrepancies in the design and calculation methods behind the capital standards. Moreover, the identified inconsistencies lead to vastly differing capital requirements for the same amount and type of risk. Finally, our examinations indicate that the capital charges for market and credit risks under the Third Basel Accord exceed those under Solvency II, especially after the introduction of the new Basel III market and credit risk frameworks.

Keywords: Basel III, Capital Requirements, Regulatory Arbitrage, Regulatory Consistency, Solvency II

JEL Classification: G11, G21, G22, G28, G32

Suggested Citation

Laas, Daniela and Siegel, Caroline, Basel III versus Solvency II: An Analysis of Regulatory Consistency under the New Capital Standards (February 27, 2015). Available at SSRN: https://ssrn.com/abstract=2248049 or http://dx.doi.org/10.2139/ssrn.2248049

Daniela Laas (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Tannenstrasse 19
St. Gallen, St. Gallen 9000
Switzerland

Caroline Siegel

University of St. Gallen - Institute of Insurance Economics ( email )

Tannenstrasse 19
St. Gallen, St. Gallen 9000
Switzerland

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