S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Knut Wicksell Centre for Financial Studies, Lund University Knut Wicksell Working Paper Series, Knut Wicksell Centre for Financial Studies, Lund University

No 2015/8:
Banks’ credit-portfolio choices and riskbased capital regulation

Caren Yinxia Nielsen

Abstract: To address banks’ risk taking during the recent financial crisis, we develop a model of credit-portfolio optimization and study the impact of risk-based capital regulation (Basel Accords) on banks’ asset allocations. The model shows that, when a bank’s capital is constrained by regulation, regulatory cost (risk weightings in the Basel Accords) alters the risk and value calculations for the bank’s assets. The model predicts that the effect of a tightening of the capital requirements – for banks for which these requirements are (will become) binding – will be to skew the risky portfolio towards high-risk, high-earning assets (low-risk, low-earning assets), provided that the asset valuation – i.e., reward-to-regulatory-cost ratio – of the high-risk asset is higher than that of the low-risk asset. Empirical examination of U.S. banks supports the predictions applicable to the dataset. In addition, our tests show the characteristics of banks with different levels of risk taking. In particular, the core banks that use the internal ratings-based approach under Basel II invest more in high-risk assets.

Keywords: Banks; asset risk; credit risk; portfolio choice; risk-based capital regulation; (follow links to similar papers)

JEL-Codes: G11; G18; G21; G28; (follow links to similar papers)

36 pages, October 1, 2015

Full text versions of the paper: http://www.lusem.lu.se/media/kwc/working-papers/2015/wp_2015_8_full.pdf

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

wp_2015_8_full.pdf    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Frederik Lundtofte () or Niclas Andrén ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:luwick:2015_008 This page was generated on 2016-03-07 17:50:13