The Basel Accord and the Value of Bank Differentiation

68 Pages Posted: 31 Dec 2004 Last revised: 2 Jun 2013

See all articles by Eberhard Feess

Eberhard Feess

Frankfurt School of Finance & Management gemeinnützige GmbH

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Date Written: December 22, 2010

Abstract

We investigate optimal capital requirements in a model in which banks decide on their investment in credit scoring systems. Our main result is that regulators should encourage sophisticated banks to keep their asset portfolios safe, while assets with high systematic risk should be concentrated in smaller banks. The proposed regulatory differentiation follows the Basel Accord's distinction between internal ratings-based and standard approach. Sophisticated banks should increase their equity capital relative to other banks, leading to further size differentiation. We analyze the moral hazard problem of banks misrepresenting their loan portfolio risk, and find that it induces stricter capital requirements.

Keywords: bank capital regulation, bank failure, risk-taking, Basel Accord, internal ratings.

JEL Classification: K13, H41

Suggested Citation

Feess, Eberhard and Hege, Ulrich, The Basel Accord and the Value of Bank Differentiation (December 22, 2010). CFS Working Paper No. 2004/25; AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=637864 or http://dx.doi.org/10.2139/ssrn.637864

Eberhard Feess

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Ulrich Hege (Contact Author)

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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