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Economic and Regulatory Capital: What is the Difference?
Company: Centro de Estudios Monetarios y Financieros
Year Of Publication: 2004
Month Of Publication: December
Pages: 26
Download Count: 863
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Comment Num: 0
Language: EN
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Who Can Read: Free
Date: 4-14-2005
Publisher: Administrator
Summary
This paper analyzes the determinants of regulatory capital (the minimum required byregulation) and economic capital (the capital that shareholders would choose inabsence of regulation) in the context of the single risk factor model that underlies theNew Basel Capital Accord (Basel II). The results show that economic and regulatorycapital do not depend on the same set of variables and do not react in the same way tochanges in their common determinants. For plausible parameter values, they are bothincreasing in the loans’ probability of default and loss given default, but variables thataffect economic but not regulatory capital, such as the intermediation margin and thecost of capital, can move them significantly apart. The results also show that marketdiscipline, proxied by the coverage of deposit insurance, increases economic capital,although the effect is generally small
Author(s)
Elizalde, Abel Sign in to follow this author
Repullo, Rafael Sign in to follow this author
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