Press Releases
Could banks survive a crisis as severe as the Great Depression?
Release Date : 18 March 2010
New research from the Henley Business School at the University of Reading suggests that banks could survive an event such as the Great Depression in the 1930s.
Dr Simone Varotto, from the International Capital Market Association Centre (ICMA) investigated whether banks complying with current and proposed bank capital regulation would set aside enough capital reserves to withstand a Depression-like event.
The analysis of banks' loan portfolios found that regulatory capital in most cases offers enough protection against extreme crises. The only exceptions are portfolios with average maturity beyond 10 years.
However, the study says that within banks' trading portfolios current minimum capital requirements will have to increase dramatically and, depending on the maturity and rating characteristics of the portfolio, by more than five times the current levels to cover for credit risk and market risk in stressed conditions.
Dr Varotto added: "We also found that the increase is mostly due to market risk capital charges which can be more than 20 times larger than the newly introduced "incremental risk charge" for credit risk.
"We believe there is a need for further research to understand the potentially large impact of the new regulation on banks' investment decisions and lending practices."
ENDS
For more information please contact Rona Cheeseman, press officer, on 0118 378 7388 or email r.cheeseman@reading.ac.uk
Notes to editors
Dr Varotto's paper "Stress testing credit risk: The Great Depression Scenario" is available on the ICMA Centre website at:
http://www.icmacentre.ac.uk/files/dp201003.pdf
The ICMA Centre at Henley Business School, University of Reading has an international reputation for undergraduate, postgraduate and executive education for the financial markets.
Established in 1991 with funding provided by the International Capital Market Association (ICMA) in Zurich, the Centre is housed in a purpose-built modernist building with state-of-the-art facilities including three dealing rooms running Thomson Reuters , Bloomberg and Datastream products, where students learn how markets really function and apply theory through simulations.
The Centre recently celebrated the opening of its new extended facilities funded by a £5m donation from ICMA which includes an additional flagship 40-seat dealing room sponsored by Thomson Reuters.
The University of Reading is rated as one of the top 200 universities in the world (THE-QS World Rankings 2009).
The University of Reading is one of the UK's top research-intensive universities. The University is ranked in the top 20 UK higher education institutions in securing research council grants worth nearly £10 million from EPSRC, ESRC, MRC, NERC, AHRC and BBSRC. In the RAE 2008, over 87% of the university's research was deemed to be of international standing. Areas of particular research strength recognised include meteorology and climate change, typography and graphic design, archaeology, philosophy, food biosciences, construction management, real estate and planning, as well as law.
Standards of teaching are excellent - the University scored highly in the National Student Survey 2009. 87% of Reading students responding to the survey stated they were satisfied with the quality of their course.
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