Capital Adequacy Beyound Basel: Banking, Securities, and Insurance

354 Pages·2005·4.24 MB·English

by  Hal S. Scott

Capital Adequacy Beyond Basel
This page intentionally left blank
CAPITAL ADEQUACY BEYOND BASEL
Banking, Securities, and Insurance
Edited by
Hal S. Scott
1
2005
1
Oxford NewYork
Auckland Bangkok BuenosAires CapeTown Chennai
DaresSalaam Delhi HongKong Istanbul Karachi Kolkata
KualaLumpur Madrid Melbourne MexicoCity Mumbai Nairobi
Sa˜oPaulo Shanghai Taipei Tokyo Toronto
Copyright #2005byOxford University Press, Inc.
PublishedbyOxfordUniversityPress,Inc.
198MadisonAvenue,NewYork,NewYork10016
www.oup.com
OxfordisaregisteredtrademarkofOxfordUniversityPress
Allrightsreserved.Nopartofthispublicationmaybereproduced,
storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,
electronic,mechanical,photocopying,recording,orotherwise,
withoutthepriorpermissionofOxfordUniversityPress.
LibraryofCongressCataloging-in-PublicationData
CapitaladequacybeyondBasel:banking,securities,andinsurance/
editedbyHalS.Scott.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN-13978-0-19-516971-3
ISBN0-19-516971-9
1.Bankreserves—Governmentpolicy.
2.Insurance—Reserves—Governmentpolicy.
3.Banksandbanking—Statesupervision.
4.Financialinstitutions—Statesupervision.
5.Bankloans. I.Scott,HalS.
HG1656.A3C278 2005
332.1006801—dc22 2004004468
1 3 5 7 9 8 6 4 2
PrintedintheUnitedStatesofAmerica
onacid-freepaper
Acknowledgments
The opinions shared in this book are those of the authors and not neces-
sarily those of the institutions for which they work.
The contributors would like to thank Swiss Reinsurance Company,
without whose financial support this research project would not have been
possible; Jens Drolshammer, for helping to formulate the idea for this pro-
ject; Jenepher Moseley, for her amazing editing skills and dedication; Paul
DonnellyandKarenCapriaatOxfordUniversityPressforseeingthebook
through to production; and from the Program on International Financial
Systems, Melissa Greven, our in-house editor, and J Weinstein, who man-
aged this project every step of the way.
This page intentionally left blank
Contents
Contributors ix
Introduction 3
1 Capital Regulation for Position Risk in Banks, Securities Firms,
and Insurance Companies 15
Richard Herring and Til Schuermann
2 Capital Adequacy in Insurance and Reinsurance 87
Scott E. Harrington
3 Consolidated Capital Regulation for Financial Conglomerates 123
Howell E. Jackson
4 Using a Mandatory Subordinated Debt Issuance Requirement
to Set Regulatory Capital Requirements for Bank Credit Risks 146
Paul Kupiec
5 No Pain, No Gain? Effecting Market Discipline via ‘‘Reverse
Convertible Debentures’’ 171
Mark J. Flannery
6 The Use of Internal Models: Comparison of the New Basel Credit
Proposals with Available Internal Models for Credit Risk 197
Michel Crouhy, Dan Galai, and Robert Mark
7 Sizing Operational Risk and the Effect of Insurance: Implications
for the Basel II Capital Accord 258
Andrew P. Kuritzkes and Hal S. Scott
8 Enforcement of Risk-Based Capital Rules 284
Philip A. Wellons
Index 331
This page intentionally left blank
Contributors
MichelCrouhyispartneratBlackDiamondConsultingandformerlySenior
Vice President, Business Analytic Solutions, Treasury Balance Sheet and
Risk Management Division at CIBC (Canadian Imperial Bank of Com-
merce). His responsibilities included the approval of all pricing, balance
sheet,risk,andcapital-relatedmodels,thedevelopmentofriskmeasurement
methodologies and models for market, credit (corporate and retail), and
economic capital attribution, as well as customer behavior analytics.
PriortohiscurrentpositionatCIBC,MichelCrouhywasaProfessorof
Finance at the HEC School of Management in Paris, where he was also
Director of the M.S. HEC in International Finance. He has been a visiting
professor at the Wharton School and at UCLA. Dr. Crouhy holds a Ph.D.
from the Wharton School and is Doctoris Honoris Causa from the Uni-
versity of Montreal.
He is coauthor of Risk Management and has published extensively in
academic journals in the areas of banking, options, and financial markets.
He is also associate editor of the Journal of Derivatives, the Journal of
Banking and Finance, and is on the editorial board of the Journal of Risk.
Mark J. Flannery is the BankAmerica Eminent Scholar in Finance at the
Warrington College of Business, University of Florida. Professor Flannery
teachescorporatefinanceandfinancialmanagementoffinancialinstitutions
in the graduate program. He has consulted with various federal banking
agencies and the two housing GSEs. His published work deals primarily
with the management and regulation of financial institutions, but it also
includes work on asset pricing and corporate finance. Flannery’s current
x Contributors
research focuses on the information content of security prices. He is an
Editor of the Journal of Money, Credit and Banking, and the outside Di-
rectoroftheFDIC’sCenterforFinancialResearch.ProfessorFlanneryhas
servedonthefacultyoftheUniversityofPennsylvaniaandtheUniversityof
North Carolina, and as a visiting professor at the London Business School
and the University of New South Wales.
Dan Galai is the Abe Gray Professor of Finance and Business Adminis-
tration at the Hebrew University School of Business Administration in
Jerusalem. He was a visiting professor of finance at INSEAD and at the
UniversityofCalifornia,LosAngeles,andhasalsotaughtattheUniversity
of Chicago and at the University of California, Berkeley. Dr. Galai holds
a Ph.D. from the University of Chicago and undergraduate and graduate
degrees from the Hebrew University. He has served as a consultant for the
Chicago Board of Options Exchange and the American Stock Exchange as
well as for major banks. He has published numerous articles in leading
business and finance journals, on options, risk management, financial
markets and institutions, and corporate finance. He is a coauthor of Risk
Management.
He was a winner of the first annual Pomeranze Prize for excellence in
options research presented by the CBOE. Dr. Galai is a principal in Sigma
P.C.M., which is engaged in portfolio management and corporate finance.
Scott E. Harrington is the W. Frank Hipp Professor of Insurance and Pro-
fessorofFinanceintheMooreSchoolofBusinessattheUniversityofSouth
Carolina. During 1978–1988, he was on the faculty of the Wharton School
attheUniversityofPennsylvania.AformerPresidentofboththeAmerican
Risk and Insurance Association and the Risk Theory Society, he has pub-
lished articles in numerous academic and policy journals, including the
Journal of Business, the Journal of Law and Economics, the Review of Eco-
nomicsandStatistics,theJournalofRiskandInsurance,theJournalofBank-
ingandFinance,theJournalofFinancialIntermediation,theJournal ofRisk
and Uncertainty, the Journal of Insurance Regulation, and Science. He has
contributedarticlestobookspublishedbytheAmericanEnterpriseInstitute,
theBrookingsInstitution,theFederalReserveBankofBoston,theFederal
ReserveBankofChicago,OxfordUniversityPress,W.W.Norton,andother
publishers. He is coauthor or coeditor of numerous scholarly books, in-
cluding Cycles and Crises in Property/Casualty Insurance and Rate Regula-
tionofWorkers’CompensationInsurance:HowPriceControlsIncreaseCosts,
and coauthor of the textbook Risk Management and Insurance. Dr. Har-
ringtoncurrentlyservesontheShadowFinancialRegulatoryCommittee.He
isanAssociateEditoroftheJournalofRiskandInsuranceandamemberof
theeditorial advisory board for Regulation magazine.
RichardHerringisJacobSafraProfessorofInternationalBanking,Director
of The Lauder Institute of Management & International Studies, and