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IAFE Student Competition on Capital Adequacy Won by UC Berkeley

New York, NY, May 1st, 2013

IAFE Student Competition on Capital Adequacy Won by UC Berkeley

The IAFE's student competition tackled the timely and important topic of sovereign credit risk. 

Commenting on the competition subject, IAFE Senior Fellow and Competition Honorary Chair Peter Carr said, "The sovereign credit crisis was chosen as the topic because of its timeliness and the IAFE's mission to help promote practical and timely research." 

The student teams were challenged to help improve the analysis and modeling of financial crises and sovereign risk. Issues in the European debt markets and the recent downgrade of US debt raise concerns about the rapidly-growing amount of sovereign credit risk in the global financial system - sovereign credit risk may be more systemic in nature than previously anticipated.

Specifically, the case required teams to:

1. Consider a fixed number of dollars= assets (A) to invest and many different projects, each of which is associated with a risk weight as well as return characteristics. If you were responsible for managing the firm, how would you allocate resources between business activities in the firm to maximize the return on A and still comply with the regulatory requirement of Basel III?

2. If you were the risk manager of the financial institution, how different could your optimal portfolio be from the portfolio found in 1?

3. If you were the regulator, how would you modify Basel III in the light of these results?

4. Now suppose you can borrow so that the overall leverage is endogenous. How does that change your answers to 1,2,3?

5. Discuss this problem from the perspective of the financial crisis of 2007-2009 and the European sovereign debt crisis of 2010-?  

The members of the winning team were Alfred Haohan Yuan (Captain), Arnab Chakrabarti, Shivesh Gupta, Lisa Yanfei Li, Allen Yan Wang, Yi Zhang.The team worked under the direction of Executive Director, Linda Kreitzman.

Congratulations again to the UC Berkeley Team!  

Academic Affiliate Paper Competition Winning Paper

1 - UC Berkeley - Impact of a Monetary Union on Sovereign Credit Ratings

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