Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis?

33 Pages Posted: 30 Apr 2009 Last revised: 27 Jan 2010

See all articles by Michael McAleer

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales

Date Written: January 24, 2010

Abstract

The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how market risk management practices were encouraged by the Basel II Accord regulations during the financial crisis.

Keywords: Value-at-Risk (VaR), daily capital charges, exogenous and endogenous violations, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel II Accord, financial crisis

JEL Classification: G32, G11, G17, C53, C22

Suggested Citation

McAleer, Michael and Jiménez-Martin, Juan-Angel and Perez Amaral, Teodosio, Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? (January 24, 2010). Available at SSRN: https://ssrn.com/abstract=1397239 or http://dx.doi.org/10.2139/ssrn.1397239

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

Juan-Angel Jiménez-Martin (Contact Author)

Complutense University of Madrid ( email )

Complutense University of Madrid
Campus de somosaguas
Pozuelo de Alarcon, Madrid 28223
Spain
+34 91 3942355 (Phone)

HOME PAGE: http://www.ucm.es/fundamentos-analisis-economico2/jajm

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales ( email )

Madrid, 28223
Spain

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