Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May 2002 1 “Regulatory and ‘economic’ solvency standards for internationally active.

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Presentation transcript:

Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May “Regulatory and ‘economic’ solvency standards for internationally active banks” by Jackson – Perraudin - Saporta Discussion by Arnoud W.A. Boot University of Amsterdam and CEPR

Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May Message of the paper 1988 Basel accord minimum capital levels facilitate 99%-99.9% one-year survival probability of representative bank Banks choose capital levels significantly higher than minimum standards  Suggestive evidence on importance of sufficient bank capital for access to modern banking activities Hence, Basel II should not increase capital requirements on average?

Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May Remarks Paper gets to very precise numbers, but approach is stylized Representative bank Well-diversified loan portfolio Recapitalization is possible No off-balance sheet activity (e.g. Hedging!) Systematic factors? Only credit risk  Problematic where actual bank capital is used But some more generality because paper focuses on deterioration in credit quality rather than just loan defaults

Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May General Comments Focus is on adequacy of capital in the system, and need to understand the incentives of the banks themselves  Would banks voluntarily choose to have more capital than regulatory standard?  Does competitive environment allow for binding capital requirements?

Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May Interesting issue What is a bank’s incentive to be well capitalized?  On this issue paper becomes suggestive Adequate capitalization needed for passing regulatory threshold in bad times? Or is it needed to be a viable player in the industry?...and... is capital really (that) expensive?

Discussion of Jackson, Perraudin, Saporta by A. Boot Basel II - Basel, May Conclusions Numerical outcomes robust? Understanding bank incentives is key Lesson for Basel II: no (excessive) fine-tuning?