TY - JOUR
T1 - A comparison of the original and revised Basel market risk frameworks for regulating bank capital
AU - Alexander, Gordon J.
AU - Baptista, Alexandre M.
AU - Yan, Shu
PY - 2013/1/1
Y1 - 2013/1/1
N2 - Recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis, the Basel Committee on Banking Supervision (2011) revised its regulatory framework for trading portfolios. In this paper, we compare: (1) the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk; and (2) the relative adequacy of these frameworks in setting minimum capital requirements. Our main findings are as follows. First, both systems allow the selection of portfolios with substantive tail risk, but one based on the revised framework tends to be less effective in controlling tail risk. Second, the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework. Hence, on balance, the revised framework improves upon the original framework. We also suggest further improvements for consideration by bank regulators.
AB - Recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis, the Basel Committee on Banking Supervision (2011) revised its regulatory framework for trading portfolios. In this paper, we compare: (1) the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk; and (2) the relative adequacy of these frameworks in setting minimum capital requirements. Our main findings are as follows. First, both systems allow the selection of portfolios with substantive tail risk, but one based on the revised framework tends to be less effective in controlling tail risk. Second, the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework. Hence, on balance, the revised framework improves upon the original framework. We also suggest further improvements for consideration by bank regulators.
KW - Bank regulation
KW - Basel framework
KW - Risk management
KW - Tail risk
UR - http://www.scopus.com/inward/record.url?scp=84871993891&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84871993891&partnerID=8YFLogxK
U2 - 10.1016/j.jebo.2012.04.007
DO - 10.1016/j.jebo.2012.04.007
M3 - Article
AN - SCOPUS:84871993891
SN - 0167-2681
VL - 85
SP - 249
EP - 268
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
IS - 1
ER -