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Regulating Market Risks in Banks: A Comparison of Alternate Regulatory Regimes

Listed author(s):
  • Nachane, D M
  • Narain, Aditya
  • Ghosh, Saibal
  • Sahoo, Satyananda

Regulators have traditionally used simple models to measure the capital adequacy of banks. The growing internationalisation and universalisation of banking operations have meant that the same is no longer possible, as banks face increasing, and increasingly opaque, market risk. The significance of market risk has also been acknowledged in the New Capital Accord enunciated by the Basel Committee in 1999. The focus of the paper is on market risk, that is, any market related factor that affects the value of a position in the financial instrument or a portfolio of instruments. As it stands at present, the three commonly used approaches to regulating market risks in banks include the building block approach, internal model approach and precommitment approach. The paper evaluates the pros and cons of the various approaches and concludes with a discussion of the applicability of these models in the Indian context.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17148.

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Date of creation: Jun 2001
Publication status: Published in ICRA Bulletin on Money and Finance 1.5(2001): pp. 125-142
Handle: RePEc:pra:mprapa:17148
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  1. 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.).
  2. Constantinos Stephanou, 1996. "Regulating Market Risk in Banks : The Options," World Bank Other Operational Studies 11602, The World Bank.
  3. Rochet, Jean-Charles, 1999. "Solvency regulations and the management of banking risks," European Economic Review, Elsevier, vol. 43(4-6), pages 981-990, April.
  4. Jill Considine, 1998. "Pilot exercise - pre-commitment approach to market risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 131-136.
  5. Okina, Kunio & Shirakawa, Masaaki & Shiratsuka, Shigenori, 1999. "Financial Market Globalization: Present and Future," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 1-40, December.
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