Bank Capital Requirements for Market Risk: The Internal Models Approach

12 Pages Posted: 24 Sep 2007

See all articles by Darryll Hendricks

Darryll Hendricks

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Abstract

The increases prominence of trading activities at many large banking companies has highlighted bank exposure to market risk-the risk of loss from adverse movements in financial market rates and prices. In response, bank supervisors in the United States and abroad have developed a new set of capital requirements to ensure that banks have adequate capital resources to address market risk. This paper offers an overview of the new requirements, giving particular attention to their most innovative feature: a capital charge calculated for each bank using the output of that bank's internal risk measurement model. The authors contend that the use of internal models should lead to regulatory capital charges that conform more closely to banks' true risk exposures. In addition, the information generated by the models should allow supervisors and market participants to compare risk exposures over time and across institutions.

Keywords: bank capital requirements, market risk

JEL Classification: G21, G28

Suggested Citation

Hendricks, Darryll and Hirtle, Beverly, Bank Capital Requirements for Market Risk: The Internal Models Approach. Economic Policy Review, Vol. 3, No. 4, December 1997. Available at SSRN: https://ssrn.com/abstract=1016133

Darryll Hendricks

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Beverly Hirtle (Contact Author)

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

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