A Modeling of Banks Systemic Risk in a Levy Process Framework (Gideon F.)

Bank Efficiency Basel I-III Regulation Risk-taking and Risk Management

Abstract The focus of the debate on bank management and regulations has been largely on financial risk. In 2010, the Basel Committee on Banking Supervision through its Basel III established tougher capital standards. The new reform will fundamentally impact on profitability and require transformation of the business models of many banks. The Basel accord consider policy options designed to reduce risks related to the failure of systematically relevant, cross - border institutions. In this paper, we discuss a model contributing to the debate of systemic risk in the banks, because they are pivotal for the availability and cost of capital. We classify systemic risk into two definitions: firstly, a risk resulting in increases in the cost of capitals or decreases in its availability, often evidenced by substantial financial - market price volatility. Secondly, a risk of an economic shocks such as market or institutional failure triggers either the failure of a chain of markets or institutions or a chain of significant losses to financial institutions.

We follow a situation characterized in the second definition. In this regard, we consider a L´evy process-driven model that enable us to investigate the stochastic dynamics of banking items. These stochastic dynamic models enable us to analyze framework for solving the problem of systemic risk, focusing on regulatory solution. The solution will consolidate the regulation of financial risk maximizing economic stability and efficiency. We strengthen our discussion by identifying goals which enable us to determine the best approaches for regulating systemic risk. Finally, we conclude by briefly analyzing some of the main issues arising from the above discussion. An illustrative example and numerical results is used to highlight some of the achievements of the paper.
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Libref/ Gideon F. (2011) "A Modeling of Banks Systemic Risk in a Levy Process Framework", p. 1
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