Bank capital regulation and credit risk: assessment of the new Basel Accord.

Summary This thesis studies the prudential regulation of banks under the new Basel Accord. The first chapter examines the foundations of bank capital regulation and its evolving dimension. The second chapter cautions against the regulatory use of credit rating agencies. The empirical results indicate the existence of sectoral biases in the rating practice of these agencies. They also point out that their prudential role leads to asymmetric regulatory treatment among banks located in countries with different levels of development. The third chapter suggests that the different credit risk models can be brought together in a unified framework and that their risk estimates are comparable. The fourth chapter simulates capital dynamics under the new Accord to analyze its pro-cyclical effects. Proposals are made to limit the effects of such dynamics on banking behavior. The last chapter proposes a moral hazard model. It argues that the new Accord mitigates banks' reckless risk taking in the presence of inadequately priced deposit insurance.