An integrated macro-financial risk-based approach to the stressed capital requirement

摘要

In order to fulfill the stressed minimum capital requirement recently implemented by the Basel III Accord, this paper proposes a risk-based approach to integrate the change of macro-financial environments in which financial institutions operate into the modeling of the new required capital charge. Particularly, using a variety of regime-switching models, I characterize the stressed minimum capital requirement from high risk regimes which are associated with economic recessions and crises. The empirical results show that the proposed approach leads to capital charges 2-3 times higher than those estimated under Basel II Accord, so as to discourage excessive risk taking and hence stabilizing banks' balance sheets. Among competing models, the regime-switching GJR − GARCH model spends the highest proportion of the out-of-sample time in the green zone, which results in the lowest penalties. The results are robust to subsamples.