Abstract

http://ssrn.com/abstract=1746915
 
 

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Liquidity Risk, Credit Risk, Market Risk and Bank Capital


Simone Varotto


ICMA Centre - Henley Business School, University of Reading

January 23, 2011


Abstract:     
With a sample of twelve US bond indices spanning different maturities, credit ratings and industry sectors, we investigate the impact of new bank capital regulation for trading portfolios introduced by Basel III. Specifically, we estimate the new capital requirements for (a) liquidity risk and credit risk through the so called Incremental Risk Charge, and (b) the risk of extreme market movements, which we measure with stress tests based on the 2007-2009 financial crisis. We find that capital requirements should increase substantially more than suggested by extensive impact studies conducted by the regulators with the participation of a large sample of banks. We suggest that the lower impact on capital reported by the banks may be due to the assumed risk reduction stemming from their hedging strategies. However, their effectiveness in crisis scenarios remains an open question.

Number of Pages in PDF File: 28

Keywords: Liquidity Risk, Credit Risk, Market Risk, Financial Crisis, Basel III

JEL Classification: G11, G21, G22, G28, G32

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Date posted: January 26, 2011  

Suggested Citation

Varotto, Simone, Liquidity Risk, Credit Risk, Market Risk and Bank Capital (January 23, 2011). Available at SSRN: http://ssrn.com/abstract=1746915 or http://dx.doi.org/10.2139/ssrn.1746915

Contact Information

Simone Varotto (Contact Author)
ICMA Centre - Henley Business School, University of Reading ( email )
Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
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