Transcript Is the New Basel Accord Incentive Compatible?

Is the New Basel Accord Incentive
Compatible?
Comments by
Klaas Knot
Outline

Value added of the paper
Four main comments:
 NBA versus PONBA
 Perfect competition / fair pricing
 Risk sensitive deposit insurance premiums
 Incentives: entity versus agent

Value added of the paper (1)

“While BCBS consultative documents fully
embrace the goal of harmonizing capital
regulation with bank internal processes, it is
troubling that the BCBS fail to discuss the
nature of the externalities that mandate
capital regulation or provide any analysis that
supports the claim that banks’ internal
processes can be harnessed to control the
underlying market failure(s).” (p.3)
Value added of the paper (2)

“While the BCBS has been studying the
potential regulatory capital implications of the
NBA by having cooperating banks estimate
their potential capital requirements under the
proposed IRB approaches, these estimates
are based on banks current portfolio
compositions. Given incentives created under
the NBA, it is likely that the composition of
banks’ credit portfolios will change…” (p.16)
NBA versus PONBA (1)
 Main
criticism of the paper:
New Basel Accord is not only about minimum
requirements!
=> This challenges its two main assertions:
NBA versus PONBA (2)
 Paper:
Since Pillar One of NBA does not
include any economic incentive to switch to
IRB, there would be no reason to expect
banks to voluntarily evolve toward IRB
 Response:
PILLAR 3!
Market discipline will force systemically
relevant banks onto IRB.
NBA versus PONBA (3)
 Paper:
From the incentives created by NBA
natural banking clienteles will emerge within
which poor quality credits will be concentrated
in SA banks
 Response:
PILLAR 2!
Concentration risk => no sensible
supervisor would allow small standardized
approach banks to operate at 8 percent
Hence, equations 6-8 are no equalities
Perfect competition / fair pricing
 Deposit
insurance value is only source of
profits in the model
=> Rather extreme assumption!
 Relaxing
this assumption would lead to other
sources of profits not always maximized by
stripping the deposit insurance scheme
imperfect competition, franchise values
asymmetric info and adverse selection
securitization: cost-of-capital argument
Deposit insurance premiums
 Deposit
insurance premiums are assumed
lump sum (and therefore normalized at zero)
 But
what about risk sensitive deposit
insurance premiums, as proposed a.o. by
Baltensperger and Dermine, Economic Policy
1987, and Garcia, IMF Occasional Paper
2000?
Incentives
 Paper
maintains neoclassical view of banks
as holistic entities
 What
if more behavioral aspects would be
taken into account?
decentralized decision making: principal
versus agents
RAROC type incentive schemes
Conclusion

Attention for interaction between deposit
insurance and minimum capital requirements
is well deserved, but …
… strong results and concomitant assertions
are strongly conditional upon equally strong
assumptions, and
 … resolution may well have to be found in
deposit insurance scheme rather than NBA
