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A Case for Economic Capital as a P illar 1 Regulatory Tool
Author(s) -
Jacobs Johann,
Vuuren Gary
Publication year - 2014
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12041
Subject(s) - capital requirement , scrutiny , capital (architecture) , capital adequacy ratio , economic capital , financial capital , financial crisis , business , economics , finance , financial institution , financial system , market economy , human capital , macroeconomics , political science , archaeology , law , history , incentive
Regulatory capital – as a tool for financial regulation – has come under scrutiny following the financial crisis of 2007‐2010 in terms of its ability to achieve the major objectives of financial regulations, namely contributing to financial stability; the provision of equally competitive regulatory conditions for financial institutions; and aiming to ensure that regulatory capital requirements are risk‐sensitive. This article investigates and compares the risk‐sensitivity of economic capital and regulatory capital requirements empirically from a systemic and institution‐specific perspective. The results are assessed to determine whether current regulatory capital requirements are representative of the relevant risks financial institutions face. Given these results as well as calls to strengthen B asel's P illar 2 disciplines in the aftermath of the crisis, it also presents a case for regulators to place a heavier reliance on economic capital – rather than regulatory capital numbers.