Bank Capital Regulation of Trading Portfolios: An Assessment of the Basel Framework

Citation data:

Journal of Money, Credit and Banking, ISSN: 0022-2879, Vol: 49, Issue: 4, Page: 603-634

Publication Year:
2017
Usage 102
Abstract Views 80
Link-outs 22
Captures 2
Exports-Saves 2
DOI:
10.1111/jmcb.12392
Author(s):
GORDON J. ALEXANDER, ALEXANDRE M. BAPTISTA
Publisher(s):
Wiley-Blackwell
Tags:
Business, Management and Accounting, Economics, Econometrics and Finance
article description
In setting minimum capital requirements for trading portfolios, the Basel Committee on Banking Supervision (1996, 2011a, 2013) initially used Value-at-Risk (VaR), then both VaR and stressed VaR (SVaR), and most recently, stressed Conditional VaR (SCVaR). Accordingly, we examine the use of SCVaR to measure risk and set these requirements. Assuming elliptically distributed asset returns, we show that portfolios on the mean-SCVaR frontier generally lie away from the mean-variance (M-V) frontier. In a plausible numerical example, we find that such portfolios tend to have considerably higher ratios of risk (measured by, e.g., standard deviation) to minimum capital requirement than those of portfolios on the M-V frontier. Also, we find that requirements based on SCVaR are smaller than those based on both VaR and SVaR but exceed those based on just VaR. Finally, we find that requirements based on SCVaR are less procyclical than those based on either VaR or both VaR and SVaR. Overall, our paper suggests that the use of SCVaR to measure risk and set requirements is not a panacea.

This article has 0 Wikipedia mention.