Risk Management and Value Creation in ... - Arabictrader.com

Capital Structure in Banks 145
Additionally, given the opaqueness of banks, it is impossible for outsiders—and
even for regulators with some insight 46 —to determine the exact
capital requirement. Therefore, regulators have to rely on higher capital
requirements (than the private sector with the same perspective would)
because they do not have the option to ration credit or their guarantees, or
other means the private sector has for this. Regulatory requirements also
have to differ from economically driven capital requirements because they
have to be general, crude guidelines that cannot be tailored exactly to the
riskiness of an individual bank. 47 The optimal regulatory capital ratio is,
hence, likely to differ from the economically optimal capital ratio, and any
deviation from that will reduce the value of the bank and will incur social
costs. 48
Therefore—given the focus of this book on value creation in banks—we
adopt the purely economic perspective that encompasses the views and interests
of all stakeholder groups to determine the (economically driven) capital
requirement.
Available Capital Before we turn to how the differing views of the various
stakeholders can be combined into a single (equity) capital amount, it is
worthwhile to briefly discuss what regulators accept as capital when they
compare their (relatively undifferentiated capital) requirements with the actual
capital available at a bank. We will take the regulatory view as a starting
point for our discussion of the purely economically driven view, because it
is unclear in the first place what should be accepted as a buffer against
unexpected losses and how the required capital amount should be compared
to observable and actual capital amounts. 49 Table 5.2 provides an overview
of the terms for this discussion. 50
46 This is true despite the fact that regulators (may) have an informational advantage
because they have access to information during the examination process that the
private sector does not have. See Berger and Davies (1994).
47 Note that the unavoidable inaccuracies in setting the regulatory capital requirements
will destroy value. For instance, the current risk-weighted (credit) assets approach
(Basle [I] Accord) does not reflect the obvious determinants of credit risk
such as the differences in credit quality across loans; concentrations of risk in a specific
asset class or to a specific borrower, industry, or geography; or the covariances between
these components.
48 The optimal regulatory capital ratio would trade off between the marginal benefits
from reducing the risk of bank failure and the marginal (social) costs of diminishing
intermediation (i.e., banks would increase the prices to their customers to pass through
the regulatory costs, and the customers would then do less business through banks).
Inaccuracies in setting the regulatory capital requirement will worsen this trade-off.
See Berger et al. (1995b), p. 425.
49 Note that equity capital is a residual amount.
50 Note that these four measures of capital may not be equal.