Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/209875 
Year of Publication: 
2006
Series/Report no.: 
Working Paper No. 2006/12
Publisher: 
Norges Bank, Oslo
Abstract: 
I evaluate a bank's incentives to implement a risk sensitive regulatory capital rule and to invest in improved risk measurement. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of risk. I also evaluate the situation where exercise or non-exercise of the options to implement or invest are signals about the underlying quality of the loan portfolio. The framework is used for a numerical evaluation of banks' decision of whether to use internal rating based models for credit risk (the IRB-approach) under the new Basel accord (Basel II), where the dynamic behavior of risk is described by an Ohrnstein-Uhlenbeck process. I discuss empirical implications of the evaluation framework.
Subjects: 
Basel II
risk measurement
capital structure
real options
JEL: 
G13
G21
G28
G32
Persistent Identifier of the first edition: 
ISBN: 
82-7553-373-2
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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