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SUMMARY:Capital Adequacy\, Pro-cyclicality and Systemic Risk - Douady\, R 
 (CNRS (Centre national de la recherche scientifique))
DTSTART:20140923T143000Z
DTEND:20140923T151500Z
UID:TALK54459@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:VaR-based capital adequacy as specified by Basel II accords is
  subject to procyclical effects\, potentially aggravating systemic risk\, 
 when it is supposed to mitigate it\, as observed during 2008 crisis. Suppo
 sed improvements in Basel III\, not only dont resolve the problem\, but in
 troduce new sources of systemic risk. The method proposed here for computi
 ng the regulatory capital of financial institutions avoids the pitfalls of
  the Value-at-Risk. The computation is based on a generalized stress testi
 ng method\, with the following principles: (i) market scenarios are define
 d by the regulator\; (ii) institutions compute the impact of scenarios def
 ined by the regulator and report them\; (iii) the regulator not only count
 s the number of violations of the risk reporting but also their size\; (iv
 ) the regulatory capital is a multiple of the worst stress test\, where th
 e multiplier depends on the size and the frequency of the violations. By l
 etting the institutions estimate their sensitivities to extreme market shi
 fts\, the regulator not only avoids a costly burden\, but also keeps insti
 tutions responsible for their reporting. On the other hand\, by keeping co
 ntrol on the list of stress tests involved in the computation of the capit
 al\, the regulator offers itself a very strong lever to prevent speculativ
 e bubbles\, by making them costly in terms of capital requirements.\n
LOCATION:Seminar Room 1\, Newton Institute
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