Bank capital standards for foreign exchange and other market risks
AbstractThe Basle Committee on Banking Supervision has proposed methods for incorporating consideration of market risks--exchange rate, interest rate, and equity price risks--into risk-based capital standards for banks. This paper shows that the separate and seemingly different proposed approaches to the three sources of risk are consistent with one another, reflecting a single unifying theme. That theme is the measurement of risk through a weighting of two different measures of portfolio size, the gross position and the net position. A simple theoretical model demonstrates that such an approach can be viewed as a simple (specifically, an affine) approximation to a portfolio variance calculation based on the full variance-covariance matrix of market returns, and thus provides a reasonable basis for a practical approach to capital standards. An empirical test of one part of the framework, the proposal for exchange rate risk, shows that the approximation may be very accurate: the proposed Basle approach captures over 95 percent of the variation in foreign exchange risk across a sample of banks from the Twelfth Federal Reserve District.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of San Francisco in its journal Economic Review.
Volume (Year): (1994)
Issue (Month): ()
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Sandra L. Chamberlain & John S. Howe & Helen Popper, 1996. "The Exchange Rate Exposure of U.S. and Japanese Banking Institutions," Center for Financial Institutions Working Papers 96-55, Wharton School Center for Financial Institutions, University of Pennsylvania.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.