The Risk Sensitivity of Capital Requirements: Evidence from an International Sample of Large Banks*

• DOI: 10.1093/rof/rfs042
• Publication Date: 2013-01-13T01:40:08Z
• Authors: Francesco Vallascas; Jens Hagendorff
• Keywords: Risk-weighted asset; Capital (architecture); Minimum capital; Sample (material); Market risk

Using an international sample of large banks between 2000 and 2010, we evaluate the risk sensitivity minimum capital requirements. Our results show that risk-weighted assets (the regulatory measure portfolio risk, which determines requirements) are ill-calibrated to a market bank risk. We this low-risk requirements permits build up buffers by underreporting their undermines banks' ability withstand adverse shocks. While is higher for have adopted Basel II, it remains low across countries.