TY - JOUR
T1 - Does the Basle Capital Accord reduce bank fragility? An assessment of the value-at-risk approach
AU - Alexander, Gordon J.
AU - Baptista, Alexandre M.
PY - 2006/10/1
Y1 - 2006/10/1
N2 - We examine the economic implications arising from a bank using a VaR-constrained mean-variance model for the selection of its trading portfolio as a consequence of the Basle Capital Accord. Surprisingly, we show that when a VaR constraint is imposed, it is plausible that certain banks will end up selecting 'riskier' portfolios than they would have chosen in the absence of the constraint. Accordingly, regulators such as the Basle Committee on Banking Supervision should be aware that allowing a bank to use VaR to determine its minimum regulatory capital may increase its fragility. Alternatives to VaR-based bank capital regulation that mitigate or even preclude its perverse implications are presented.
AB - We examine the economic implications arising from a bank using a VaR-constrained mean-variance model for the selection of its trading portfolio as a consequence of the Basle Capital Accord. Surprisingly, we show that when a VaR constraint is imposed, it is plausible that certain banks will end up selecting 'riskier' portfolios than they would have chosen in the absence of the constraint. Accordingly, regulators such as the Basle Committee on Banking Supervision should be aware that allowing a bank to use VaR to determine its minimum regulatory capital may increase its fragility. Alternatives to VaR-based bank capital regulation that mitigate or even preclude its perverse implications are presented.
KW - Bank regulation
KW - Portfolio choice
KW - Risk management
KW - VaR
UR - http://www.scopus.com/inward/record.url?scp=33748926438&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=33748926438&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2005.05.013
DO - 10.1016/j.jmoneco.2005.05.013
M3 - Article
AN - SCOPUS:33748926438
SN - 0304-3932
VL - 53
SP - 1631
EP - 1660
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 7
ER -