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Does The Application Of Innovative Internal Models Diminish Regulatory Capital?

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  • LAMPROS KALYVAS

    (Bank of Greece, Department for the Supervision of Credit and Financial Institutions, Risk Analysis and Supervisory Techniques Division, 3, Amerikis Str., 10564, Athens, Greece)

  • ATHANASIOS SFETSOS

    (EREL, INT-RP, NCSR Demokritos, Patr. Grigoriou & Neapoleos, 15310, Agia Paraskevi, Greece)

Abstract

The broad spectrum and the increased complexity of financial products that compose modern portfolios have forced credit and financial institutions to focus on innovative and more effective ways of estimating market risks. These new approaches, very often, prove to be more conservative compared to traditional approaches in terms of market risk quantification. On the other hand, according to the Basel Committee evaluation framework, this conservatism is rewarded with lower multiplication factors when calculations of capital requirements take place. The present study elaborates on the comparison of several Value-at-Risk (VaR) methodologies based on the capital requirements they provide according to the Basel Committee regulatory framework.

Suggested Citation

  • Lampros Kalyvas & Athanasios Sfetsos, 2006. "Does The Application Of Innovative Internal Models Diminish Regulatory Capital?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 217-226.
    • Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:02:n:s0219024906003548
    DOI: 10.1142/S0219024906003548
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    References listed on IDEAS

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    1. Mittnik, Stefan & Paolella, Marc S., 2003. "Prediction of Financial Downside-Risk with Heavy-Tailed Conditional Distributions," CFS Working Paper Series 2003/04, Center for Financial Studies (CFS).
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    3. Evis Këllezi & Manfred Gilli, 2000. "Extreme Value Theory for Tail-Related Risk Measures," FAME Research Paper Series rp18, International Center for Financial Asset Management and Engineering.
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