An Alternative Model to Basel Regulation

19 Pages Posted: 23 May 2013 Last revised: 21 Jun 2015

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Emmanuel Lepinette

Université Paris-Dauphine - CEREMADE, CNRS

Date Written: May 22, 2013

Abstract

The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic risk. Indeed, Basel agreement is designed to guide a judgement about minimum universal levels of capital and remains mainly microprudential in its focus rather than being macroprudential.

An alternative model to Basel framework is derived where systemic risk is taken into account in each bank's dynamic. This might be a new departure for prudential policy. It allows for the regulator to compute capital and risk requirements for controlling systemic risk. Moreover, bank regulation is considered in a two-scale level, either at the bank level or at the system-wide level.

We test the adequacy of the model on a data set containing 19 banks of 5 major countries from 2005 to 2012. We compute the capital ratio threshold per year for each bank and each country and we rank them according to their level of fragility. Our results suggest to consider an alternative measure of systemic risk that requires minimal capital ratios that are bank-specific and time-varying.

Suggested Citation

Aboura, Sofiane and Lepinette, Emmanuel, An Alternative Model to Basel Regulation (May 22, 2013). Available at SSRN: https://ssrn.com/abstract=2268578 or http://dx.doi.org/10.2139/ssrn.2268578

Sofiane Aboura (Contact Author)

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Emmanuel Lepinette

Université Paris-Dauphine - CEREMADE, CNRS ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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