scholarly journals The Pre-Commitment Approach: Using Incentives to Set Market Risk Capital Requirements

1997 ◽  
Author(s):  
Paul H. Kupiec ◽  
James M. O'Brien
Keyword(s):  
Market Risk ◽  
Capital Requirements ◽  
Risk Capital

Comparison of market risk models with respect to suggested changes of Basel Accord

2014 ◽  
Vol 64 (Supplement-2) ◽  
pp. 257-274
Author(s):  
Eliška Stiborová ◽  
Barbora Sznapková ◽  
Tomáš Tichý
Keyword(s):  
At Risk ◽  
Value At Risk ◽  
Risk Estimation ◽  
Market Risk ◽  
Capital Requirements ◽  
Internal Models ◽  
Conditional Value At Risk ◽  
Risk Capital ◽  
Basel Accord ◽  
Capital Charge

The market risk capital charge of financial institutions has been mostly calculated by internal models based on integrated Value at Risk (VaR) approach, since the introduction of the Amendment to Basel Accord in 1996. The internal models should fulfil several quantitative and qualitative criteria. Besides others, it is the so called backtesting procedure, which was one of the main reasons why the alternative approach to market risk estimation — conditional Value at Risk or Expected Shortfall (ES) — were not applicable for the purpose of capital charge calculation. However, it is supposed that this approach will be incorporated into Basel III. In this paper we provide an extensive simulation study using various sets of market data to show potential impact of ES on capital requirements.

Banks' Backtesting Exceptions during the COVID-19 Crash: Causes and Consequences

FEDS Notes ◽  
2021 ◽  
Vol 2021 (2942) ◽  
Author(s):  
Alice Abboud ◽  
◽  
Chris Anderson ◽  
Aaron Game ◽  
Diana Iercosan ◽  
...  
Keyword(s):  
Market Risk ◽  
Capital Requirements ◽  
Risk Capital ◽  
Large Spike ◽  
Regulatory Intervention

Banks' numerous and simultaneous backtesting exceptions in March 2020, during the COVID-19-related market crash, would have amplified their already-large spike in market risk capital requirements in the absence of regulatory intervention. This note provides background on how backtesting exceptions affect capital requirements generally, the source of those exceptions during the COVID-19 crash, and how regulators exercised discretion to mitigate the unintended capital increase.

Market risk-based capital requirements, trading activity, and bank risk

2020 ◽  
Vol 112 ◽  
pp. 105202 ◽  
Author(s):  
Dmytro Holod ◽  
Yuriy Kitsul ◽  
Gökhan Torna
Keyword(s):  
Market Risk ◽  
Capital Requirements ◽  
Bank Risk ◽  
Trading Activity

scholarly journals TONUITY: A NOVEL INDIVIDUAL-ORIENTED RETIREMENT PLAN

2018 ◽  
Vol 49 (1) ◽  
pp. 5-30 ◽  
Author(s):  
An Chen ◽  
Peter Hieber ◽  
Jakob K. Klein
Keyword(s):  
Risk Aversion ◽  
Switching Time ◽  
Extreme Case ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Longevity Risk ◽  
Insurance Company ◽  
Risk Capital ◽  
Medium Risk

AbstractFor insurance companies in Europe, the introduction of Solvency II leads to a tightening of rules for solvency capital provision. In life insurance, this especially affects retirement products that contain a significant portion of longevity risk (e.g., conventional annuities). Insurance companies might react by price increases for those products, and, at the same time, might think of alternatives that shift longevity risk (at least partially) to policyholders. In the extreme case, this leads to so-called tontine products where the insurance company’s role is merely administrative and longevity risk is shared within a pool of policyholders. From the policyholder’s viewpoint, such products are, however, not desirable as they lead to a high uncertainty of retirement income at old ages. In this article, we alternatively suggest a so-called tonuity that combines the appealing features of tontine and conventional annuity. Until some fixed age (the switching time), a tonuity’s payoff is tontine-like, afterwards the policyholder receives a secure payment of a (deferred) annuity. A tonuity is attractive for both the retiree (who benefits from a secure income at old ages) and the insurance company (whose capital requirements are reduced compared to conventional annuities). The tonuity is a possibility to offer tailor-made retirement products: using risk capital charges linked to Solvency II, we show that retirees with very low or very high risk aversion prefer a tontine or conventional annuity, respectively. Retirees with medium risk aversion, however, prefer a tonuity. In a utility-based framework, we therefore determine the optimal tonuity characterized by the critical switching time that maximizes the policyholder’s lifetime utility.

Foreign exchange positions and risks of czech banks

1997 ◽  
Vol 6 (1) ◽  
Author(s):  
Josef Jílek ◽  
Jiřina Jílková
Keyword(s):  
Foreign Exchange ◽  
Banking System ◽  
Market Risk ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Minimum Capital ◽  
Market Risks ◽  
Current State ◽  
National Bank ◽  
Foreign Exchange Trading

Almost every bank has some degree of foreign exchange exposure. A bank, which holds net open positions in foreign currencies is exposed to the risk that exchange rates may move against it. Net open positions are due to foreign exchange trading positions or because of exposures caused by firm's overall assets and liabilities. Czech National Bank has imposed limits of FX risks and is thus limiting maximum potential loss of the Czech banking system. The paper describes the way how to calculate a bank's open FX positions and the current state of FX positions in selected Czech commercial hanks. The FX risk is a part of market risk. The Capital Adequacy Directive (CAD) and Basle Committee on Banking Supervision in its document Amendment to the Capital Accord to Incorporate Market Risks set out the minimum capital requirements for credit institutions and investment firms with respect to market risk.

scholarly journals Market Risk Measurement

2020 ◽  
Author(s):  
Emese Lazar ◽  
Ning Zhang
Keyword(s):  
At Risk ◽  
Value At Risk ◽  
Preliminary Analysis ◽  
Risk Measures ◽  
Market Risk ◽  
Capital Requirements ◽  
Risk Measurement ◽  
Regulatory Framework ◽  
Bank Capital ◽  
Bank Capital Requirements

This chapter presents a preliminary analysis on how some market risk measures dramatically increased during the COVID-19 pandemic, with measures computed over longer horizons experiencing more pronounced effects. We provide examples when regulatory market risk measurement proved to be suboptimal, overestimating risk. A further issue was the large number of Value-at-Risk ‘exceptions’ during the first few months of the crisis, which normally leads to overinflated bank capital requirements. The current regulatory framework should address these problems by suggesting improvements to the calculation of risk measures and/or by modifying the rules which determine capital requirements to make them appropriate and realistic in crisis situations.

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