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The Risk-Relevant Information Content of Changes in the Basel Capital Regulations in Taiwan

Author

Listed:
  • Der-Fen Huang

    (Department of Accounting, National Dong Hwa University, Shou Feng, Hualien, 974 Taiwan, ROC)

  • Chenen Ko

    (Department of Accounting, National Taiwan University, 50, Lane 144, Section 4, Keelung Road, Taipei, 106 Taiwan, ROC)

  • Chi-Chun Liu

    (Department of Accounting, National Taiwan University, 50, Lane 144, Section 4, Keelung Road, Taipei, 106 Taiwan, ROC)

Abstract

This paper examines the risk-relevance of the Basel capital regulations in Taiwan. We investigate (1) whether the regulatory information can explain bank risk, (2) whether the new 1998 version provides incremental information to assess bank risk, given the old 1992 version, and (3) which regulatory version is more useful in assessing bank risk. This paper employs an option pricing methodology to calculate implied asset risk as a proxy for total risk. We find that the Basel capital ratio and its components help explain risk and that the components under the new version have incremental explanatory power over those under the old. Additionally, the new version has greater information regarding risk than the old. Finally, two risk dimensions categorized by supervisors, credit risk and market risk have different explanatory power. Regulatory information about credit risk has explanatory power, but market risk does not. It implies that the Basel accord, contrary to expectation, does not fully capture all risk. Overall, this study contributes to capturing the risk-relevance of the ongoing evolution of the Basel capital regulations in an emerging market economy.

Suggested Citation

  • Der-Fen Huang & Chenen Ko & Chi-Chun Liu, 2004. "The Risk-Relevant Information Content of Changes in the Basel Capital Regulations in Taiwan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 91-117.
    • Handle: RePEc:wsi:rpbfmp:v:07:y:2004:i:01:n:s0219091504000044
    DOI: 10.1142/S0219091504000044
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    References listed on IDEAS

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    1. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
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    Cited by:

    1. Li-Hua Lai & Li-Chin Hung & Chau-Jung Kuo, 2016. "Do Well-Financial Holding Company Organized Banks in Taiwan Take More Risk?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-30, December.
    2. Syed Moudud-Ul-Huq, 2021. "The Impact of Business Cycle on Banks’ Capital Buffer, Risk and Efficiency: A Dynamic GMM Approach from a Developing Economy," Global Business Review, International Management Institute, vol. 22(4), pages 921-940, August.

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    More about this item

    Keywords

    Basel; capital adequacy ratio; credit risk; market risk; risk reporting;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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