On Regulatory Responses to the Recent Crisis: An Assessment of the Basel Market Risk Framework and the Volcker Rule

39 Pages Posted: 7 Apr 2015

See all articles by Gordon J. Alexander

Gordon J. Alexander

University of Minnesota - Twin Cities - Carlson School of Management

Alexandre M. Baptista

George Washington University - School of Business

Shu Yan

Oklahoma State University - Stillwater - Department of Finance

Date Written: May/August 2015

Abstract

Banks around the world suffered huge trading losses in the recent crisis. In response, the Basel Committee on Banking Supervision (2011a) provides a revised framework to determine the minimum capital requirements for their trading portfolios. Moreover, the Dodd‐Frank Wall Street Reform and Consumer Protection Act (2010) imposes certain restrictions on the composition of the trading portfolios of U.S. banks through the ‘Volcker Rule.’ Our paper assesses the effectiveness of the Basel framework and the Volcker Rule in preventing banks from taking substantive tail risk in their trading portfolios without capital requirement penalties. We find that the Basel framework is ineffective in preventing banks from doing so, but that the Volcker Rule is beneficial in that it partially mitigates this ineffectiveness. We also suggest two alternatives to the Basel framework and discuss the impact of the Volcker Rule if either one of them is adopted.

Keywords: Basel framework, financial crisis, Volcker Rule, systemic risk, financial stability, tail risk

Suggested Citation

Alexander, Gordon J. and Baptista, Alexandre M. and Yan, Shu, On Regulatory Responses to the Recent Crisis: An Assessment of the Basel Market Risk Framework and the Volcker Rule (May/August 2015). Financial Markets, Institutions & Instruments, Vol. 24, Issue 2-3, pp. 87-125, 2015, Available at SSRN: https://ssrn.com/abstract=2591149 or http://dx.doi.org/10.1111/fmii.12025

Gordon J. Alexander (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8598 (Phone)
612-624-1335 (Fax)

Alexandre M. Baptista

George Washington University - School of Business ( email )

School of Business, Funger Hall, Suite 501
2201 G Street, NW
Washington, DC 20052
United States
202-994-3309 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://home.gwu.edu/~alexbapt/

Shu Yan

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

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