Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-13
Basel II: A Case for Recalibration
October 2006
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-13
Basel II: A Case for Recalibration
October 2006
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Basel II: A Case for Recalibration
by
Paul H. Kupiec∗
Revised October 2006
ABSTRACT
Objectives for Basel II include the promulgation of a sound standard for risk measurement
and risk-based minimum capital regulation. The AIRB approach, which may be mandatory
for large U.S. banks, will give rise to large reductions in regulatory capital. This paper assess
whether the reductions in minimum capital are justified by improvements in the accuracy of
risk measurement under Basel II. Review of credit loss data and analysis of the economics of
capital allocation methods identify important shortcomings in the AIRB framework that lead
to undercapitalization of bank credit risks.
∗ Division of Insurance and Research, Federal Deposit Insurance Corporation. The views
expressed are those of the author and do not reflect the views of the FDIC. I am grateful to
Rosalind Bennett, Steve Burton, Sanjiv Das, Lee Davidson, Mark Flannery, Bob Jarrow, and
Ed Kane for useful discussions and comments on an earlier draft of this paper. Email:
pkupiec@fdic.gov
by
Paul H. Kupiec∗
Revised October 2006
ABSTRACT
Objectives for Basel II include the promulgation of a sound standard for risk measurement
and risk-based minimum capital regulation. The AIRB approach, which may be mandatory
for large U.S. banks, will give rise to large reductions in regulatory capital. This paper assess
whether the reductions in minimum capital are justified by improvements in the accuracy of
risk measurement under Basel II. Review of credit loss data and analysis of the economics of
capital allocation methods identify important shortcomings in the AIRB framework that lead
to undercapitalization of bank credit risks.
∗ Division of Insurance and Research, Federal Deposit Insurance Corporation. The views
expressed are those of the author and do not reflect the views of the FDIC. I am grateful to
Rosalind Bennett, Steve Burton, Sanjiv Das, Lee Davidson, Mark Flannery, Bob Jarrow, and
Ed Kane for useful discussions and comments on an earlier draft of this paper. Email:
pkupiec@fdic.gov