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291. A Market-based Calibration of Capital Requirements
Invited abstract in session WC-63: Applications to Economics and Finance, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.
Wednesday, 12:30-14:00Room: S14 (building: 101)
Authors (first author is the speaker)
| 1. | Andrea Consiglio
|
| Dept. of Economics, Business and Statistics, University of Palermo | |
| 2. | Mahmoud Fatouh
|
| Economics, Bank of England | |
| 3. | Simone Giansante
|
| Economics, Business and Statistics, University of Palermo |
Abstract
This study introduces a market-based calibration approach for risk-based capital requirements under Basel III reforms. An advanced Merton Distance-to-Default model, modified for non-normal asset distributions, estimates the minimum leverage and risk-weighted capital ratios to maintain a default risk tolerance of 0.1\%. This market-oriented method externally evaluates asset uncertainty and default risk, overcoming the limitations of internal models, which often underrate systemic risk in banking. The paper also integrates a novel optimization model to align capital requirements with actual equity levels, ensuring global solution convergence by transforming the initial discontinuous, non-linear model into a smooth convex programming framework. This approach enhances the robustness and reliability of determining capital requirements in the banking sector.
Keywords
- Finance and Banking
- Optimization in Financial Mathematics
- Simulation
Status: accepted
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