The 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 Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. 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.
Publisher Info
Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)