The Future of Banking by Thorsten Beck

By Thorsten Beck

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Concurrent with these theoretical developments, recent empirical work in progress has begun to study the impact of monetary policy on credit risk-taking by banks. Recent papers that in essence study the impact of short-term interest rates on the risk composition of the supply of credit follow a longstanding and wide literature that has analysed its impact on the aggregate volume of credit in the economy, and on the changes in the composition of credit in response to changes in the quality of the pool of borrowers.

The first is that this capital requirement is fairly simple to interpret and can be calculated in a straightforward manner. What is required is an expectation of a firm’s equity capital loss during a financial crisis. One could employ statistical-based measures of capital losses of financial firms extrapolated to crisis periods. With a number of our colleagues here at NYU Stern, we have done just that with state-of-the-art time-series techniques. nyu. edu/welcome/risk. Of some interest, these measures estimated in 2006 and early 2007 load quite closely on the firms that performed poorly during the financial crisis.

With respect to capital requirements, Basel III effectively increases (with the conservation of capital buffer) capital requirements from 4% to 7%. On top of these requirements, based on a series of firm characteristics related to Basel’s systemic risk criteria, these capital requirements can be increased by an amount ranging from 0%-3%. Along with a number of other adjustments, Basel III introduces a new ‘simple’ leverage ratio as a supplementary measure to risk-based capital which is to be set at 3%.

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