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A real options approach for evaluating the implementation of a risk‐sensitive capital rule in banks
Author(s) -
Nordal Kjell Bjørn
Publication year - 2009
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2009.04.002
Subject(s) - capital requirement , risk adjusted return on capital , risk weighted asset , incentive , basel ii , basel iii , credit risk , capital (architecture) , actuarial science , capital adequacy ratio , economics , economic capital , operational risk , business , risk analysis (engineering) , finance , risk management , microeconomics , financial capital , capital formation , archaeology , profit (economics) , history
I evaluate a bank's incentives to implement a risk‐sensitive regulatory capital rule. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of credit risk. I provide a numerical example for the implementation of internal ratings based models for credit risk (the IRB approach) under the new Basel Accord (Basel II).