{"title":"Capital requirements and claims recovery: A new perspective on solvency regulation","authors":"Cosimo Munari, Stefan Weber, Lutz Wilhelmy","doi":"10.1111/jori.12405","DOIUrl":null,"url":null,"abstract":"<p>Protection of creditors is a key objective of financial regulation. Where the protection needs are high, that is, in banking and insurance, regulatory solvency requirements are an instrument to prevent that creditors incur losses on their claims. The current regulatory requirements based on value at risk (V@R) and average value at risk (AV@R) limit the probability of default of financial institutions, but they fail to control the size of recovery on creditors' claims in the case of default. We resolve this failure by developing a novel risk measure, recovery V@R. Our conceptual approach is flexible and allows the construction of general recovery risk measures for various risk management purposes. We provide detailed case studies and applications. We show that recovery risk measures can be used for performance-based management of business divisions of firms and discuss how to calibrate recovery risk measures to historical regulatory standards. Finally, we analyze how recovery risk measures react to the joint distributions of assets and liabilities on firms' balance sheets and compare the corresponding capital requirements with the current regulatory benchmarks based on V@R and AV@R.</p>","PeriodicalId":51440,"journal":{"name":"Journal of Risk and Insurance","volume":"90 2","pages":"329-380"},"PeriodicalIF":2.1000,"publicationDate":"2022-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jori.12405","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Risk and Insurance","FirstCategoryId":"96","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/jori.12405","RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
Protection of creditors is a key objective of financial regulation. Where the protection needs are high, that is, in banking and insurance, regulatory solvency requirements are an instrument to prevent that creditors incur losses on their claims. The current regulatory requirements based on value at risk (V@R) and average value at risk (AV@R) limit the probability of default of financial institutions, but they fail to control the size of recovery on creditors' claims in the case of default. We resolve this failure by developing a novel risk measure, recovery V@R. Our conceptual approach is flexible and allows the construction of general recovery risk measures for various risk management purposes. We provide detailed case studies and applications. We show that recovery risk measures can be used for performance-based management of business divisions of firms and discuss how to calibrate recovery risk measures to historical regulatory standards. Finally, we analyze how recovery risk measures react to the joint distributions of assets and liabilities on firms' balance sheets and compare the corresponding capital requirements with the current regulatory benchmarks based on V@R and AV@R.
期刊介绍:
The Journal of Risk and Insurance (JRI) is the premier outlet for theoretical and empirical research on the topics of insurance economics and risk management. Research in the JRI informs practice, policy-making, and regulation in insurance markets as well as corporate and household risk management. JRI is the flagship journal for the American Risk and Insurance Association, and is currently indexed by the American Economic Association’s Economic Literature Index, RePEc, the Social Sciences Citation Index, and others. Issues of the Journal of Risk and Insurance, from volume one to volume 82 (2015), are available online through JSTOR . Recent issues of JRI are available through Wiley Online Library. In addition to the research areas of traditional strength for the JRI, the editorial team highlights below specific areas for special focus in the near term, due to their current relevance for the field.