Affiliations: [a] International Laboratory of Decision Choice and Analysis, Department of Applied Economics, National Research University Higher School of Economics, Moscow, Russia | [b] Laboratory of Mathematical Modeling of Complex Systems, P.N. Lebedev Physical Institute, Moscow, Russia
Correspondence:
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Corresponding author: H.I. Penikas, Department of Applied Economics, Senior Research Fellow of International Laboratory of Decision Choice and Analysis, National Research University Higher School of Economics, Moscow, Russia. E-mail: penikas@hse.ru.
Note: [1] Any opinions or claims contained in this research do not necessarily reflect the views of Higher School of Economics and P.N. Lebedev Physical Institute.
Abstract: The Central Banks discuss bank recapitalization arrangements. Markup to capital is needed because the current Basel approach is insensitive to some risks. As the Basel Committee moves from comprehensive risk modelling towards a revised, simplified, standardised approach, where one-two triggers measure risk, banking regulators increase demand for a capital add-on to meet unaccounted risks. The paper suggests the add-on estimates for the joint effect of the concentration and PD-LGD correlation risks leaving other unaccounted ones out-of-scope. The previous studies estimated add-ons for each risk separately. We show their joint impact on capital can be higher up to 5.3 times than the sum of two taken apart. Then previous results do not provide sufficient capital for a bank. We obtain that Basel underestimates the joint risk in 1.9 times on average. We expect that our contribution will be useful at least but not last for specialised lending (e.g. real estate and project finance), where the joint effect of concentration and PD-LGD correlation risks is the most observable.
