Leonard Kofman - Academia.edu (original) (raw)
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Papers by Leonard Kofman
Journal of Economic Dynamics and Control, 2010
We analyze a bank that operates under the Basel credit and market risk requirements, and that max... more We analyze a bank that operates under the Basel credit and market risk requirements, and that maximizes its value through recapitalizations, dividends, and liquid asset investments. According to our model, a significant effect of the market risk requirement is to postpone recapitalization, which may increase the bank's default probability. We show that this is indeed the case if the liquid asset's volatility is high, i.e., then the market risk requirement raises the default probability of the bank. In this sense the market risk requirement is inefficient. We estimate the model parameters from U.S. commercial banks' accounting data and find that on average the market risk requirement decreases the default probability by 0.01% and the bank value by 0.37%.
Journal of Economic Dynamics and Control, 2010
We analyze a bank that operates under the Basel credit and market risk requirements, and that max... more We analyze a bank that operates under the Basel credit and market risk requirements, and that maximizes its value through recapitalizations, dividends, and liquid asset investments. According to our model, a significant effect of the market risk requirement is to postpone recapitalization, which may increase the bank's default probability. We show that this is indeed the case if the liquid asset's volatility is high, i.e., then the market risk requirement raises the default probability of the bank. In this sense the market risk requirement is inefficient. We estimate the model parameters from U.S. commercial banks' accounting data and find that on average the market risk requirement decreases the default probability by 0.01% and the bank value by 0.37%.