Capital Requirements with Different Risky Assets

Posted: 16 Jan 2014

See all articles by Mahmoud Arayssi

Mahmoud Arayssi

Lebanese American University; Lebanese American University

Date Written: January 14, 2014


History shows that prohibition diminishes the supply of capital and raises its returns. However, for value-added investors such as private equity investments, regulation potentially reduces capital quality. The regulatory measures introduced in Basel II Capital Framework and in the EU Capital requirements Directive (CRD) are meant to encourage more complete risk measurement and thus risk management, without reducing the competition. Basel III re-emphasizes a leverage ratio sort of rule. We focus on banks investing in buyouts; the main risk from these investments comes from the increased leverage. We use a structural and comprehensive model of the firm’s asset growth to describe buy-out portfolios’ stylized facts. The debt and equity are modeled as contingent claims on the assets. This method is more transparent and requires fewer parameters than other commonly used methods. The leverage ratio restriction balances between excess return of these investments and overall power of the supervisor enforcing the capital requirements; it is used to gauge the incentive of banks to carry the adequate amount of capital and enhances the supervisors’ ability to enforce the rules after the returns are realized.

Keywords: Private Equity; banks; capital requirements; Leveraged ratio restriction; Basel III; CRD

JEL Classification: G21, G28

Suggested Citation

Arayssi, Mahmoud and Arayssi, Mahmoud, Capital Requirements with Different Risky Assets (January 14, 2014). Available at SSRN:

Mahmoud Arayssi (Contact Author)

Lebanese American University

P.O.Box 36
Chouran-Beirut 1102 2801

Lebanese American University ( email )

Lebanese American University
P.O. Box 13-5053 Chouran
Beirut, 1102 2801


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