Model-based regulation in Germany had unintended consequences, researchers say
Loan defaults and loss rates were higher for loans generated under new regime, paper argues
The move to model-based banking regulation may have serious unintended consequences, a working paper published by the European Central Bank (ECB) argues.
In The limits of model-based regulation, Markus Behn, Rainer Haselmann and Vikrant Vig note it was meant to enhance financial stability "by making capital charges more sensitive to risk".
The authors examine the effect of the introduction of Basel II measures on German banks from 2007, using "the high granularity of our loan-level data set
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