The Basel Accord and The Value of Bank Differentiation

Feess, Eberhard and Hege, Ulrich (2012) The Basel Accord and The Value of Bank Differentiation. Review of Finance, 16 (4). pp. 1043-1092.

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Official URL: http://tse-fr.eu/pub/30045

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.

Item Type: Article
Language: English
Date: 2012
Refereed: Yes
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 27 Apr 2016 08:36
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:30045
URI: http://publications.ut-capitole.fr/id/eprint/19339

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