Distance to Compliance Portfolios: An Integrated Shortfall Measure for Basel III

Abstract

We develop a metric to measure how far banks are away from regulatory compliance under Basel III. Basel III consists of multiple constraints. Our measure is a portfolio that simultanously covers all constraints and their interdependencies. We apply our measure to a sample of European banks and measure how much additional capital, liquid assets and stable funding are needed for compliance. Our methodology can be generalised to measure the distance to any set of linear constraints that organisations have to (regulatory) or want to (internal) comply with. Furthermore, it is a possibility to provide Basel III - impact studies a sound microeconommic basis missing so far.

Keywords: Basel III, Linear Programming, Linear Programming

JEL Classification: G21, C61