Risks. Senses. Capital. On the concept of banking capital risk-sensitivity

Abstract

The paper considers selected issues of prudential banking capital adequacy regulation. Current regulatory concept (Basel III) is based on the parallel usage of risk-sensitive and risk-insensitive approaches with the decisive role of the former. The paper provides a comparative analysis of their strengths and weaknesses in the context of capital regulation targets. The conclusion is that there is no notable advantage of either of the two approaches: the risk-sensitive approach as much as the risk-insensitive one is not able to ensure theoretically and/or empirically well-founded measuring of total regulatory capital needs. The risk-sensitive approach evolution leads to increased complexity and resource requirements for banks and regulators. The view is grounded that the advanced risk-sensitive approach (IRB) creates unfair regulatory advantages for IRB-banks and impair competition in banking industry. The practicability of the risk-sensitive approach application for capital adequacy regulation is put under doubt.