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A comparison of the original and revised Basel market risk frameworks for regulating bank capital

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  • Alexander, Gordon J.
  • Baptista, Alexandre M.
  • Yan, Shu

Abstract

Recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis, the Basel Committee on Banking Supervision (2011) revised its regulatory framework for trading portfolios. In this paper, we compare: (1) the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk; and (2) the relative adequacy of these frameworks in setting minimum capital requirements. Our main findings are as follows. First, both systems allow the selection of portfolios with substantive tail risk, but one based on the revised framework tends to be less effective in controlling tail risk. Second, the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework. Hence, on balance, the revised framework improves upon the original framework. We also suggest further improvements for consideration by bank regulators.

Suggested Citation

  • Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2013. "A comparison of the original and revised Basel market risk frameworks for regulating bank capital," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 249-268.
  • Handle: RePEc:eee:jeborg:v:85:y:2013:i:c:p:249-268
    DOI: 10.1016/j.jebo.2012.04.007
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    Cited by:

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    3. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2021. "Regulation of bank proprietary trading post 2007–09 crisis: An examination of the Basel framework and Volcker rule," Journal of International Money and Finance, Elsevier, vol. 119(C).
    4. Gordon J. Alexander & Alexandre M. Baptista, 2017. "Bank Capital Regulation of Trading Portfolios: An Assessment of the Basel Framework," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(4), pages 603-634, June.
    5. Jianping Li & Lu Wei & Cheng-Few Lee & Xiaoqian Zhu & Dengsheng Wu, 2018. "Financial statements based bank risk aggregation," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 673-694, April.
    6. Silva, Thiago Christiano & Guerra, Solange Maria & da Silva, Michel Alexandre & Tabak, Benjamin Miranda, 2020. "Micro-level transmission of monetary policy shocks: The trading book channel," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 279-298.

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    More about this item

    Keywords

    Bank regulation; Risk management; Basel framework; Tail risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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