Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments December 1996 erstellt
Beschreibung:
Market risk is an increasingly important issue for banks and so for bank regulation. Stephanou compares three approaches to setting risk-based capital adequacy standards: The building-block approach, the internal models approach, and the precommitment approach. Regulators have traditionally used simple models to measure banks' capital adequacy. That is no longer possible as banks face increasing, and increasingly opaque, market risk.Stephanou evaluates three approaches to regulating market risk in banks on the basis of efficiency, competitive neutrality, and effectiveness in regulation. Each approach is judged on how well it fulfills the aims of regulation without overburdening the financial system with the cost of regulation. Ideally, all four types of risk - market, credit, legal, and operating risk - should be measured institution-wide before regulators set risk-based capital standards. That time has not yet come. In the meantime, piecemeal capital requirements remain the norm.Stephanou focuses on market risk - any market-related factor that affects the value of a position in a financial instrument or portfolio or instruments. He analyzes the three basic approaches to regulating market risk in banks: (1) The building bloc approach, which has been adopted in the European Union in the form of the Capital Adequacy Directive and also appears in the standardized version of the Basle Amendment to the Capital Accord to incorporate market risks; (2) The internal models approach, incorporated recently in the Basle Amendment; and (3) The precommitment approach, a promising, recently arrived approach that has not yet been officially discussed.The author concludes - given the current inability to develop measures that capture an institution's overall portfolio risks - that piecemeal regulatory capital requirements (such as the one for market risk) are necessary. Of the approaches he analyzes, the author considers the internal models approach to be, for the time being, the most reliable, market-friendly, and effective method for banks.This paper - a product of the Financial Sector Development Department - is part of a larger effort in the department to study bank regulatory issues