2009
29/2009
Bank safety under Basel II capital requirements
Author(s): Jukka Vauhkonen
2009. 33 pages.
Publisher: Bank of Finland
ISBN 978-952-462-546-3 (Printed publication)
ISBN 978-952-462-547-0 (Web publication)
Search words: Basel II, capital requirements, information disclosure, market discipline, moral hazard, D43, D82, G14, G21, G28, Jukka Vauhkonen
We consider the impact of mandatory information disclosure on bank safety in a spatial model of banking competition in which a bank’s probability of success depends on the quality of its risk measurement and management systems. Under Basel II capital requirements, this quality is either fully or partially disclosed to market participants by the Pillar 3 disclosures. We show that, under stringent Pillar 3 disclosure requirements, banks’ equilibrium probability of success and total welfare may be higher under a simple Basel II standardized approach than under the more sophisticated internal ratings-based (IRB) approach.