Asset correlations and bank capital adequacy |
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Authors: | Giampaolo Gabbi Pietro Vozzella |
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Affiliation: | 1. Department of Financial Management , University of Siena , Italy;2. Banks, Financial Institutions and Insurance Companies Division , SDA Bocconi School of Management , Milan , Italy gabbi@sdabocconi.it;4. Department of Financial Management , University of Siena , Italy |
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Abstract: | This paper addresses the estimation of confidence sets for asset correlations used in credit risk portfolio models. Research on the estimation of asset correlations using endogenous probabilities of default estimations has focused on the impact of concentration risk factors, such as firm size and industry. The empirical evidence from Italian small- and medium-size companies show that the assumptions underlying the Basel Committee regulatory capital risk weight function are not substantiated. The regulatory impact is that the capital adequacy is significantly compromised, driving an adverse selection, which favors the worst companies, and transferring the procyclical effects from firms to banks. |
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Keywords: | asset correlation default correlation credit risk capital adequacy |
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