En økonomisk analyse af den danske bankregulering

Jesper Mailand Hjort

Student thesis: Master thesis

Abstract

The coming of the financial crisis in the United States of America in 2007 changed depositors trust in the banking sector. In 2008 the crisis spread from the USA into a global crisis. In addition to the economic consequences entailed by the financial crisis, the crisis was a symbol of a banking sector in distress. It was evident that the regulation of the banking sector in place was inadequate in providing a stable banking environment. As a reaction to the financial crisis the Basel Commission tried to identify the areas where existing banking regulation did not properly address the issues the banks were exposed to in a reasonable manner. This entailed an expansion of the previous Basel 2 regulations into the current Basel 2.5 rules. In addition a set of rules known as Basel 3 scheduled for implementation on 31 December 2019 have been agreed upon. This thesis examines whether these new rules can facilitate a stable banking sector in which depositors once again can put their trust in. The analysis will be based on the economic models used by the banks to assess their risks. The purpose of these models is to create density functions which reflect the distribution of possible outcomes. The minimum capital requirements are calculated directly on the basis of these density functions. It is crucial for society that the conversion is carried out in a suitable manner. A trade-off between adequate security for depositors and imposing too stringent strains on liquid funds will always persist. This compromise is directly evidenced in the Basel rules from the critical quantiles chosen from the given density functions. Since these quantiles are the result of a compromise, and accordingly merely a subjective threshold chosen in Basel 3, they will not be discussed further in this thesis. Generally a risk-averse investor would choose higher quantiles and the opposite is true for a risk lover. One thing all investors agree upon independently of their risk aversion is that the rules should calculate the size of the different risks correctly and at the same time not disregard market equilibriums unnecessarily. Examples that the Basel Commission unfortunately did not achieve these goals with the Basel 3 regulation will be given. For instance, the way in which different risks are aggregated does not take diversification effects into account, which leads to inflated capital requirements. Also the solution to prevent a new liquidity crisis, which the banks experienced during the financial crisis, has the undesirable effect that it effectively shut down the interbank-market. In addition to the unfortunate interference with the interbank market and the mistaken assumption, whereby 100 % correlation between all types of risks is assumed, the minimum capital requirements for market risk fail to properly reflect the actual risks that banks are exposed to. The reason for this is that the capital requirements are based partly on dated data and in some instances fictional data. Therefore the rules implicitly provide banks an incentive to lower their capital requirements by disposing of assets with a historically high standard deviation which is not necessarily representative anymore. In addition there is a restriction on the calculation of market risk that disallows banks taking fat tailed data into account. These issues, and a series of smaller issues, will be addressed and discussed in detail in this thesis.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageDanish
Publication date2014
Number of pages100