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Changing Regulatory Capital to Include Liquidity and Management Intervention

Changing Regulatory Capital to Include Liquidity and Management Intervention Since 1996, the Bank for International Setdements BIS has set the capital level that banks must hold against market risks by a specific formula. This article presents a practical approach for incorporating the effects of asset illiquidity and management response lags in setting regulatory capital levels to account for market risk. According to the BIS guidelines, capital should be a function of the effectiveness of limit management and market liquidity, because actively managing limits and positions can significantly reduce the risk of a trading operation. Although this approach represents an improvement over previous methods of setting capital, significant limitations still remain, namely, liquidity constraints and response lags in management intervention, which increase portfolio risk. The authors suggest specific amendments to the regulatory capital guidelines that may mitigate both of these limitations http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Changing Regulatory Capital to Include Liquidity and Management Intervention

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References (1)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/eb043455
Publisher site
See Article on Publisher Site

Abstract

Since 1996, the Bank for International Setdements BIS has set the capital level that banks must hold against market risks by a specific formula. This article presents a practical approach for incorporating the effects of asset illiquidity and management response lags in setting regulatory capital levels to account for market risk. According to the BIS guidelines, capital should be a function of the effectiveness of limit management and market liquidity, because actively managing limits and positions can significantly reduce the risk of a trading operation. Although this approach represents an improvement over previous methods of setting capital, significant limitations still remain, namely, liquidity constraints and response lags in management intervention, which increase portfolio risk. The authors suggest specific amendments to the regulatory capital guidelines that may mitigate both of these limitations

Journal

The Journal of Risk Finance – Emerald Publishing

Published: Mar 1, 2000

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