From Basel I to Basel II: an analysis of the three pillars

• Autores: Abel Elizalde
• Localización: Documentos de Trabajo ( CEMFI ), Nº. 4, 2007
• Idioma: inglés
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• Resumen

  • This paper presents a dynamic model of banking supervision to analyze the impact of each of Basell II three pillars on banks¿ risk taking. We extend previous literature providing an analysis of ratings-based supervisory policies. In Pillar 2 (supervisory review) the supervisor audits more frequently low rated banks and restricts their dividend payments in order to build capital. In Pillar 3 (market discipline) the supervisor reduces the level of deposit insurance coverage compelling not-fully insured depositors to adjust interest rates contingent on the bank¿s external rating. We also analyze the risk sensitiveness of Pillar 1 (capital requirements) concluding that all three Pillars reduce banks¿ risk taking incentives.