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The pre-commitment approach: using incentives to set market risk capital requirements Author info | Abstract | Publisher info | Download info | Related research | Statistics Paul H. Kupiec
James M. O'Brien
This paper develops a model of bank behavior that focuses on the interaction between the incentives created by fixed-rate deposit insurance and a bank's choice of its loan portfolio and its market-traded financial instruments. The model is used to analyze the consequences of the Federal Reserve Board's proposed pre-commitment approach (PCA) for setting market risk capital requirements for bank trading portfolios. Under the PCA, a bank determines its own market risk capital requirement and is subject to a known regulatory penalty should its trading activities generate subsequent losses that exceed its market risk capital commitment.
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number
1997-14.
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Date of creation: 1997Date of revision:
Handle: RePEc:fip:fedgfe:1997-14Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551 Web page: http://www.federalreserve.gov/ More information through EDIRC
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Keywords: Capital market ; Risk ; References listed on IDEAS 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.:
Giammarino, Ronald M & Lewis, Tracy R & Sappington, David E M, 1993.
" An Incentive Approach to Banking Regulation ,"
Journal of Finance ,
American Finance Association, vol. 48(4), pages 1523-42, September.
[Downloadable!] (restricted)
Other versions: John, Kose & John, Teresa A. & Senbet, Lemma W., 1991.
"Risk-shifting incentives of depository institutions: A new perspective on federal deposit insurance reform ,"
Journal of Banking & Finance ,
Elsevier, vol. 15(4-5), pages 895-915, September.
[Downloadable!] (restricted)
Gennotte, Gerard & Pyle, David, 1991.
"Capital controls and bank risk ,"
Journal of Banking & Finance ,
Elsevier, vol. 15(4-5), pages 805-824, September.
[Downloadable!] (restricted)
Paul H. Kupiec & James M. O'Brien, 1995.
"A pre-commitment approach to capital requirements for market risk ,"
Proceedings ,
Federal Reserve Bank of Chicago, issue May, pages 552-562.
Dimson, Elroy & Marsh, Paul, 1995.
" Capital Requirements for Securities Firms ,"
Journal of Finance ,
American Finance Association, vol. 50(3), pages 821-51, July.
[Downloadable!] (restricted)
Johnson, Herb, 1987.
"Options on the Maximum or the Minimum of Several Assets ,"
Journal of Financial and Quantitative Analysis ,
Cambridge University Press, vol. 22(03), pages 277-283, September.
[Downloadable!]
Paul H. Kupiec & James M. O'Brien, 1995.
"A pre-commitment approach to capital requirements for market risk ,"
Finance and Economics Discussion Series
95-36, Board of Governors of the Federal Reserve System (U.S.).
Tim S. Campbell & Yuk-Shee Chan & Anthony M. Marino, 1990.
"An incentive based theory of bank regulation ,"
Proceedings ,
Federal Reserve Bank of San Francisco, issue Nov.
Other versions: Paul H. Kupiec, 1995.
"Techniques for verifying the accuracy of risk measurement models ,"
Finance and Economics Discussion Series
95-24, Board of Governors of the Federal Reserve System (U.S.).
Besanko, David & Kanatas, George, 1996.
"The Regulation of Bank Capital: Do Capital Standards Promote Bank Safety? ,"
Journal of Financial Intermediation ,
Elsevier, vol. 5(2), pages 160-183, April.
[Downloadable!] (restricted)
Jin-Chuan Duan & Jean-Guy Simonato, 1995.
"Empirical Martingale Simulation for Asset Prices ,"
CIRANO Working Papers
95s-43, CIRANO.
[Downloadable!]
Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992.
" Is Fairly Priced Deposit Insurance Possible? ,"
Journal of Finance ,
American Finance Association, vol. 47(1), pages 227-45, March.
[Downloadable!] (restricted)
Other versions:
Full
references 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.)
Arupratan Daripa & Simone Varotto, .
"Agency Incentives and Reputational Distortions: a Comparison of the Effectiveness of Value-at-Risk and Pre-commitment in Regulating Market Risk ,"
Bank of England working papers
69, Bank of England.
[Downloadable!]
Arupratan Daripa & Simone Varotto, 1998.
"Value at risk and precommitment: approaches to market risk regulation ,"
Economic Policy Review ,
Federal Reserve Bank of New York, issue Oct, pages 137-143.
[Downloadable!]
Arup Daripa & Simone Varotto, 2005.
"Ex Ante Versus Ex Post Regulation of Bank Capital ,"
Birkbeck Working Papers in Economics and Finance
0518, Birkbeck, Department of Economics, Mathematics & Statistics.
[Downloadable!]
Other versions: David T. Llewellyn, 2001.
"A Regulatory Regime for Financial Stability ,"
Working Papers
48, Oesterreichische Nationalbank (Austrian Central Bank).
[Downloadable!]
Xavier Freixas & Anthony M. Santomero, 2002.
"An overall perspective on banking regulation ,"
Working Papers
02-1, Federal Reserve Bank of Philadelphia.
[Downloadable!]
Nachane, D M & Narain, Aditya & Ghosh, Saibal & Sahoo, Satyananda, 2001.
"Regulating Market Risks in Banks: A Comparison of Alternate Regulatory Regimes ,"
MPRA Paper
17148, University Library of Munich, Germany.
[Downloadable!]
Lucas, Andr‚, 1998.
"Testing backtesting : an evaluation of the Basle guidelines for backtesting internal risk management models of banks ,"
Serie Research Memoranda
0001, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
[Downloadable!]
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