Private equity and regulatory capital

D. Bongaerts, E. Charlier

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)1211-1220
JournalJournal of Banking and Finance
Volume33
Issue number7
Publication statusPublished - 2009

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Private equity
Capital requirements
Equity capital
Regulatory capital
Structural model
Basel II
Parameter uncertainty
Scenarios
European banks
Stylized facts
Simulation
Sensitivity analysis
Incentives
Risk model

Cite this

Bongaerts, D. ; Charlier, E. / Private equity and regulatory capital. In: Journal of Banking and Finance. 2009 ; Vol. 33, No. 7. pp. 1211-1220.
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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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Bongaerts, D & Charlier, E 2009, 'Private equity and regulatory capital' Journal of Banking and Finance, vol. 33, no. 7, pp. 1211-1220.

Private equity and regulatory capital. / Bongaerts, D.; Charlier, E.

In: Journal of Banking and Finance, Vol. 33, No. 7, 2009, p. 1211-1220.

Research output: Contribution to journalArticleScientificpeer-review

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T1 - Private equity and regulatory capital

AU - Bongaerts, D.

AU - Charlier, E.

N1 - Appeared earlier as CentER DP 2008-52

PY - 2009

Y1 - 2009

N2 - 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.

AB - 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.

M3 - Article

VL - 33

SP - 1211

EP - 1220

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

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