Regulating Market Risks in Banks: A Comparison of Alternate Regulatory Regimes
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.
|Date of creation:||Jun 2001|
|Date of revision:|
|Publication status:||Published in ICRA Bulletin on Money and Finance 1.5(2001): pp. 125-142|
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- 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.).
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