Details
| Original language | English |
|---|---|
| Pages (from-to) | 329-380 |
| Number of pages | 52 |
| Journal | Journal of Risk and Insurance |
| Volume | 90 |
| Issue number | 2 |
| Publication status | Published - 12 May 2023 |
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.
Keywords
- capital requirements, recovery on liabilities, risk measures, solvency regulation
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Accounting
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of Risk and Insurance, Vol. 90, No. 2, 12.05.2023, p. 329-380.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Capital requirements and claims recovery
T2 - A new perspective on solvency regulation
AU - Munari, Cosimo
AU - Weber, Stefan
AU - Wilhelmy, L.
N1 - Funding Information: We would like to thank Kerstin Awiszus and Pablo Koch-Medina for helpful comments. Open access funding provided by Universitat Zurich.
PY - 2023/5/12
Y1 - 2023/5/12
N2 - 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.
AB - 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.
KW - capital requirements
KW - recovery on liabilities
KW - risk measures
KW - solvency regulation
UR - http://www.scopus.com/inward/record.url?scp=85139402898&partnerID=8YFLogxK
U2 - 10.1111/jori.12405
DO - 10.1111/jori.12405
M3 - Article
AN - SCOPUS:85139402898
VL - 90
SP - 329
EP - 380
JO - Journal of Risk and Insurance
JF - Journal of Risk and Insurance
SN - 0022-4367
IS - 2
ER -