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Funding Liquidity Risk from A Regulatory Perspective

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Author Info

  • Christian Gouriéroux

    ()
    (CREST, University of Toronto)

  • Jean-Cyprien Heam

    ()
    (CREST, Banque de France)

Abstract

In the Basel regulation the required capital of a financial institution is based on conditional measures of the risk of its future equity value such as Value-at-Risk, or Expected Shortfall. In Basel 2 the uncertainty on this equity value is captured by means of changes in asset prices (market risk) and default of borrowers (credit risk), and concerns mainly the asset component of the balance-sheet. Our paper extends this analysis by taking also into account the funding and market liquidity risks. These latter risks are consequences of changes in customers or investors’ behaviors and usually concern the liability component of the balance sheet. In this respect our analysis is in the spirit of the most recent Basel 3 and Solvency 2 regulations. Our analysis highlights the role of the different types of risks in the total required capital. Our analysis leads to clearly distinguish defaults due to liquidity shortage and defaults due to a lack of solvency and, in a regulatory perspective, to introduce two reserve accounts, one for liquidity risk, another one for solvency risk. We explain how to fix the associated required capitals

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Bibliographic Info

Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2013-20.

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Length: 44
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:crs:wpaper:2013-20

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Keywords: Regulation; Funding Liquidity Risk; Liquidity Shortage; Solvency 2; Value-at-Risk; Asset/Liability Management;

References

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