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A bank or other financial institution is potentially subject to at least four types of risk: (1) Credit risk -- defaults or delays in repayments. (2) Fraud -- embezzlement or insider abuse. (3) Liquidity risk -- or high cost of obtaining needed cash. (4) Interest rate risk -- differential changes in the value of assets and liabilities as interest rates shift. This paper reports a study of the interest-rate elasticity of the net worth of a commercial bank. Most of the study is devoted to the development of the necessary methodology to measure the interest-rate elasticity (IRE) of a bank's asset/liability mix. The report is organized into four major sections. The first summarizes the history of interest-rate elasticity models and points out the problems in applying them to bank assets and liabilities. An analytical framework is then developed to calculate the IRE of a portfolio of assets and liabilities. The next three sections apply the framework to a simulated bank. For simplicity, the bank is assumed to have only two classes of assets (commercial loans and cash) and three classes of liabilities(demand deposits, large denomination CD's, and capital). The second section develops models of the cash flows associated with each of the assets and liabilities. The third section quantifies the parameters necessary to calculate the net worth and IRE measures, and the fourth section details the design of a simulation and some simulation results for the 1973-75 period. The report concludes with a discussion of the regulatory implications of the study.
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The first part of this paper provides a historical perspective on bank risks. Five-year moving average measures of total risk, market risk, and nonmarket risk are computed for an index of New York banks from 1929-1975 and for an index of outside New York banks from 1950-1976.We use a carefully constructed series of bank balance sheet data to compute correlations among various components of New York banks' port-folios and observe trends over time. The time series relationship between book values and market values is investigated, and classical measures of capital adequacy are calculated using surrogates for market values rather than book values. Finally, data are presented on the movement of interest rates and the term structure over time. Serial correlations and cross-correlations are computed. The second part of the paper uses the technique proposed in Sharpe ("Bank Capital Adequacy, Deposit Insurance and Security Values," June 1978) to gain information about capital adequacy. He has shown that for a bank with deposit liabilities that do not extend beyond the review period a "value preserving spread" in asset risk is likely to increase the value of capital. Moreover, the less adequate the capital, the larger this effect should be. We outline the method used to develop an econometric model to test for this effect. The model is then applied to time series data from 1938 to 1975.
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Analysis of data from emerging economies suggests that, unless properly managed, the introduction of higher minimum bank capital requirements may well induce an aggregate slowdown or contraction of bank credit in these economies.
Bank capital --- Credit --- Loans
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This paper provides a formal setting for the analysis of the capital adequacy of an institution with deposits insured by a third party. An insured depositor has a claim against the institution and a contingent claim against the insurer. This paper analyzes the effect of the riskiness of the asset mix and the relative amount of deposits and capital on the potential liability of the insurer. It shows that an increase in asset risk, holding value constant, increases the value of equity and raises the potential liability of the insurer.
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Bank capital --- Risk
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This report attempts to set out the basic frameworks and principles underlying U.S. financial regulation and to give some historical context for the development of that system. The first section briefly discusses the various modes of financial regulation and the next section identifies the major federal regulators and the types of institutions they supervise (see Table 1). It then provides a brief overview of each federal financial regulatory agency. Finally, the report discusses other entities that play a role in financial regulation--interagency bodies, state regulators, and international standards.
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Small business --- Credit --- Bank capital
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"Despite recently announced delays, Basel II--the new standard for bank capital--is due to be completed this year for implementation in the 13 Basel Committee member countries by the end of 2006. Should the other 170 plus member countries of the World Bank also adopt Basel II? Basel II was not written with developing countries in mind, but that does not necessarily mean that there is nothing in it for developing countries or that it can be ignored. Basels I and II represent a wide "Sea of Standards." Powell suggests five alternative island-standards and five navigational tools to help countries choose their preferred island within the sea. He suggests that for some developing countries, the standardized approach will yield little in terms of linking regulatory capital to risk, but that countries may need many years of work to adopt the more advanced internal rating-based approach. The author then proposes a centralized rating-based approach as a transition measure. He also makes proposals regarding a set of largely unresolved cross-border issues. This paper--a product of the Financial Sector Operations and Policy Department--is part of a larger effort in the department to inform policymakers on banking regulation and supervision"--World Bank web site.
Bank capital --- Standards. --- Basel II
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