Operational Risk toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation

CHAPTER 17

Toward an Economic and Regulatory Benchmarking Indicator for Banking Systems

John L. Simpson, John Evans, and Jennifer Westaway

 

 

ABSTRACT

This chapter expands a basic benchmark model for systemic regulatory capital introduced by Simpson and Evans (2005). The approach extends control for country risk factors. The importance of underpinning a modern banking system with low levels of country risk through a sound legal framework and financial infrastructure is reiterated. While an international central bank function is not proposed, it is maintained that policymakers will be able to apply an improved benchmark of systemic regulatory capital to ensure their banking system remains internationally competitive. Regulators may be able to use the model to revise the capital adequacy of banks within systems.

17.1 INTRODUCTION

Banking systems play a key role in global trade and in the economic health of countries. Banking markets are also important components of stock markets. At a fundamental level, banks provide the activity for the borrowing and lending of funds and the transfer of ownership of claims within the financial system of a country (Tunstall 2005). From an international perspective, banks provide the mechanism for the transfer of funds across national borders, thus facilitating global trade. As a consequence, financial markets have become more integrated and thus susceptible to cross-border volatilities, which can undermine economic stability. Country risk, with ...