A Value-at-Risk Approach to Banks' Capital Buffers: An Application to the New Basel Accord

Bank of Finland Discussion Paper No. 15/2001

26 Pages Posted: 29 Nov 2001

See all articles by Esa Jokivuolle

Esa Jokivuolle

Bank of Finland, Research Unit

Samu Peura

Sampo Bank

Date Written: August 9, 2001

Abstract

The rating-sensitive capital charges on credit risks under the new Basel Accord are likely to increase the volatility of minimum capital requirements, which may force banks to hold larger capital cushions in excess of minimum requirements. We analyse this claim on the basis of numerical simulations on hypothetical bank portfolios, in which the bank's choice of capital cushion is assumed to satisfy a value-at-risk-type constraint. The results suggest that the size of the cushion depends on the bank's credit portfolio risk and its chosen approach for calculating the minimum capital requirement. Although the more ratings-sensitive internal ratings based approach imposes lower minimum capital requirements on sufficiently high-quality credit portfolios than does the standardised approach, this capital relief is countered by the need for larger relative cushions under the former approach. The results imply that the cushions induced by greater rating sensitivity may influence both banks' choices between proposed approaches for calculating capital requirements as well as the aggregate level of post-reform bank capital. Hence these cushions should be given due consideration in the final calibration of the Basel risk weights.

Keywords: new Basel Capital Accord, credit risk, internal ratings, value-at-risk

JEL Classification: G21, G28

Suggested Citation

Jokivuolle, Esa and Peura, Samu, A Value-at-Risk Approach to Banks' Capital Buffers: An Application to the New Basel Accord (August 9, 2001). Bank of Finland Discussion Paper No. 15/2001, Available at SSRN: https://ssrn.com/abstract=292403 or http://dx.doi.org/10.2139/ssrn.292403

Esa Jokivuolle (Contact Author)

Bank of Finland, Research Unit ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2309 (Phone)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/jokivuolle_esa/

Samu Peura

Sampo Bank ( email )

Unioninkatu 22, Helsinki
P.O.Box 1026, FI-00075 SAMPO
Finland
+358 10 513 4325 (Phone)

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