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Private Equity and Regulatory Capital

Author

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  • Bongaerts, D.
  • Charlier, E.

    (Tilburg University, Center For Economic Research)

Abstract

Regulatory capital requirements for European banks have been put forward in the Basel II Capital Framework and subsequently in the capital requirements directive (CRD) of the EU. We provide a detailed discussion of the capital requirements for private equity investments under different approaches. For the internal model approach we present a structural model that we calibrate to a proprietary dataset. We modify the standard Merton structural model to make it applicable in practice and to capture stylized facts of private equity investments. We also implement the early default feature with a fast simulation algorithm. Our results support capital requirements lower than in Basel II, but not as low as in CRD, thereby giving adverse incentives to banks for using advanced risk models. A sensitivity analysis shows that this finding is robust to parameter uncertainty and stress scenarios.
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Suggested Citation

  • Bongaerts, D. & Charlier, E., 2008. "Private Equity and Regulatory Capital," Discussion Paper 2008-52, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:e783a0bb-8260-4895-b503-e9c9d4e8b204
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    References listed on IDEAS

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    2. Arayssi, Mahmoud, 2015. "Captive Funds and Banks' Capital," MPRA Paper 64912, University Library of Munich, Germany.
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    5. Tarashev, Nikola, 2010. "Measuring portfolio credit risk correctly: Why parameter uncertainty matters," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2065-2076, September.
    6. Kerkhof, Jeroen & Melenberg, Bertrand & Schumacher, Hans, 2010. "Model risk and capital reserves," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 267-279, January.
    7. Radu Tunaru, 2015. "Model Risk in Financial Markets:From Financial Engineering to Risk Management," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 9524, August.
    8. Cardone-Riportella, Clara & Samaniego-Medina, Reyes & Trujillo-Ponce, Antonio, 2010. "What drives bank securitisation? The Spanish experience," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2639-2651, November.

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