Research Discussion Papers, Bank of Finland
Bank safety under Basel II capital requirements
Abstract: We consider the impact of mandatory information disclosure
on bank safety in a spatial model of banking competition in which a bank’s
probability of success depends on the quality of its risk measurement and
management systems. Under Basel II capital requirements, this quality is
either fully or partially disclosed to market participants by the Pillar 3
disclosures. We show that, under stringent Pillar 3 disclosure
requirements, banks’ equilibrium probability of success and total welfare
may be higher under a simple Basel II standardized approach than under the
more sophisticated internal ratings-based (IRB) approach.
Keywords: Basel II; capital requirements; information disclosure; market discipline; moral hazard; (follow links to similar papers)
JEL-Codes: D43; D82; G14; G21; G28; (follow links to similar papers)
33 pages, November 3, 2009
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