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Capital Requirements for Securities Firms

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  • Dimson, Elroy
  • Marsh, Paul

Abstract

Regulatory authorities set capital requirements to cover the position risk of securities firms and to protect against losses arising from fluctuations in the value of their holdings. The requirements may be set using the comprehensive approach required by the U.S. Securities and Exchange Commission, the building-block approach required by the European Community, or the portfolio approach required by the United Kingdom. We compare these three alternatives using a large sample of U.K. equity trading books. The portfolio approach systematically specifies larger requirements for riskier books, and vice versa. It is more efficient than the building-block approach, and far more efficient than the comprehensive approach. Copyright 1995 by American Finance Association.

Suggested Citation

  • Dimson, Elroy & Marsh, Paul, 1995. "Capital Requirements for Securities Firms," Journal of Finance, American Finance Association, vol. 50(3), pages 821-851, July.
    • Handle: RePEc:bla:jfinan:v:50:y:1995:i:3:p:821-51
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    Citations

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    Cited by:

    1. Jose A. Lopez, 1996. "Regulatory Evaluation of Value-at-Risk Models," Center for Financial Institutions Working Papers 96-51, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Jeremy Berkowitz & James M. O'Brien, 2001. "How accurate are Value-at-Risk models at commercial banks?," Finance and Economics Discussion Series 2001-31, Board of Governors of the Federal Reserve System (U.S.).
    3. Chevallier, Claire Océane & El Joueidi, Sarah, 2019. "Capital regulation and banking bubbles," Journal of Mathematical Economics, Elsevier, vol. 84(C), pages 117-129.
    4. Patricia Jackson & David Maude & William Perraudin, 1998. "Bank Capital and Value at Risk," Bank of England working papers 79, Bank of England.
    5. Arup Daripa & Simone Varotto, 2010. "Ex-Ante Versus Ex-Post Regulation Of Bank Capital," World Scientific Book Chapters, in: Lloyd P Blenman & Harold A Black & Edward J Kane (ed.), Banking And Capital Markets New International Perspectives, chapter 2, pages 29-58, World Scientific Publishing Co. Pte. Ltd..
    6. Ahmet KARAKAŞ & Melek ACAR, 2022. "Determinants of liquidity in commercial banks: evidence from the Turkish banking sector," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 14(3), pages 236-268, December.
    7. Hentschel, Ludger & Smith, Clifford Jr., 1997. "Derivatives regulation: Implications for central banks," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 305-346, October.
    8. George McKenzie & Simon Wolfe, 2004. "The impact of environmental risk on the UK banking sector," Applied Financial Economics, Taylor & Francis Journals, vol. 14(14), pages 1005-1016.
    9. Paul H. Kupiec & James M. O'Brien, 1997. "The pre-commitment approach: using incentives to set market risk capital requirements," Finance and Economics Discussion Series 1997-14, Board of Governors of the Federal Reserve System (U.S.).
    10. Dimson, Elroy & Marsh, Paul, 1997. "Stress tests of capital requirements," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1515-1546, December.
    11. Vlaar, Peter J. G., 2000. "Value at risk models for Dutch bond portfolios," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1131-1154, July.
    12. Andrew Kuritzkes & Til Schuermann & Scott M. Weiner, 2002. "Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates," Center for Financial Institutions Working Papers 03-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    13. William Fallon, 1996. "Calculating Value-at-Risk," Center for Financial Institutions Working Papers 96-49, Wharton School Center for Financial Institutions, University of Pennsylvania.
    14. Paul H. Kupiec & A. Patricia White, 1996. "Regulatory competition and the efficiency of alternative derivative product margining systems," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 943-968, December.
    15. Cabedo Semper, J. David & Moya Clemente, Ismael, 2003. "Value at risk calculation through ARCH factor methodology: Proposal and comparative analysis," European Journal of Operational Research, Elsevier, vol. 150(3), pages 516-528, November.
    16. Arupratan Daripa & Simone Varotto, 1997. "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.
    17. Mondher Bellalah & Marc Lavielle, 2002. "A Decomposition of Empirical Distributions with Applications to the Valuation of Derivative Assets," Multinational Finance Journal, Multinational Finance Journal, vol. 6(2), pages 99-130, June.
    18. Coskun, Yener, 2010. "Aracı Kurumların Risk Haritası (Risk Maps of Securities Firms) [Risk Maps of Securities Firms]," MPRA Paper 28368, University Library of Munich, Germany.
    19. Glyn A. Holton, 2002. "History of Value-at-Risk: 1922-1998," Method and Hist of Econ Thought 0207001, University Library of Munich, Germany.
    20. Dangl, Thomas & Lehar, Alfred, 2004. "Value-at-risk vs. building block regulation in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 96-131, April.
    21. Christoffersen, Peter & Hahn, Jinyong & Inoue, Atsushi, 2001. "Testing and comparing Value-at-Risk measures," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 325-342, July.
    22. Brooks, C. & Clare, A. D. & Persand, G., 2000. "A word of caution on calculating market-based minimum capital risk requirements," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1557-1574, October.

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