Basel III C: Internal Risk Models

Yale Program on Financial Stability Case Study 2014-1C-V1

11 Pages Posted: 14 Mar 2015

See all articles by Christian McNamara

Christian McNamara

Yale University - Yale Program on Financial Stability

Karen Braun-Munzinger

Bank of England

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: November 1, 2014

Abstract

For financial regulators seeking to use regulatory requirements to manage risk in a banking system, there can be a concern that such requirements crowd out efforts by banks to develop their own risk management systems. One way in which regulators have attempted to solve this problem is to enable banks to use internal risk models to satisfy regulatory requirements. Beginning with the 1996 Market Risk Amendment, the Basel framework has allowed banks to determine the capital charges associated with certain assets using their own internal risk models. But allowing the use of internal risk models has not been without controversy. Where some see an incentive for the development of internal risk management systems better able to address the unique risk profiles of particular banks, others see excessive complexity and uncertainty. And while some financial regulators are beginning to subject banks’ models to greater scrutiny, questions remain about the ability of financial regulators to provide effective oversight of such models.

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

McNamara, Christian and Braun-Munzinger, Karen and Metrick, Andrew, Basel III C: Internal Risk Models (November 1, 2014). Yale Program on Financial Stability Case Study 2014-1C-V1. Available at SSRN: https://ssrn.com/abstract=2576922 or http://dx.doi.org/10.2139/ssrn.2576922

Christian McNamara

Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Karen Braun-Munzinger

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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