Risk or Regulatory Capital? Bringing Distributions Back in the Foreground

42 Pages Posted: 25 Jun 2015

See all articles by Dominique Guegan

Dominique Guegan

Université Paris I Panthéon-Sorbonne

Bertrand Hassani

Université Paris I Panthéon-Sorbonne; University College London - Department of Computer Science

Date Written: June 18, 2015

Abstract

This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper makes some recommendations to the supervisor and proposes alternative procedures to measure the risks.

Keywords: Risk measures, Sub-additivity, Level of confidence, Extreme value distributions, Financial regulation, aggregation

JEL Classification: C1, C6

Suggested Citation

Guegan, Dominique and Hassani, Bertrand, Risk or Regulatory Capital? Bringing Distributions Back in the Foreground (June 18, 2015). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 18/WP/2015, Available at SSRN: https://ssrn.com/abstract=2622392 or http://dx.doi.org/10.2139/ssrn.2622392

Dominique Guegan (Contact Author)

Université Paris I Panthéon-Sorbonne ( email )

106 avenue de lhopital
75634 Paris Cedex 13
Paris, IL
France

Bertrand Hassani

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

University College London - Department of Computer Science ( email )

United Kingdom

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