Capital Regulation for Position Risk in Banks, Securities Firms and Insurance Companies

Wharton Financial Institutions Working Paper No. 04-11

108 Pages Posted: 26 Jul 2004

See all articles by Richard J. Herring

Richard J. Herring

University of Pennsylvania - Finance Department

Til Schuermann

Oliver Wyman

Date Written: October 2003

Abstract

We examine why these regulatory differences exist and what they imply for differences in minimum capital requirements for position risk. We consider differences in the definition and measurement of regulatory capital and we quantify differences in the capital charges for position risk by reference to a model portfolio that contains a variety of financial instruments including equity, fixed income instruments, swaps, foreign exchange positions, and options - instruments that may appear in the portfolios of securities firms, banks or insurance companies. For most leading firms in the financial services industry, however, market forces, not minimum regulatory capital requirements, appear to play the dominant role in firms' capital decisions. Thus we conclude by considering measures to enhance market discipline.

Keywords: Risk management, Value-at-Risk, Capital Regulation, Market Risk

JEL Classification: G21, G28

Suggested Citation

Herring, Richard J. and Schuermann, Til, Capital Regulation for Position Risk in Banks, Securities Firms and Insurance Companies (October 2003). Wharton Financial Institutions Working Paper No. 04-11. Available at SSRN: https://ssrn.com/abstract=568208 or http://dx.doi.org/10.2139/ssrn.568208

Richard J. Herring

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-5613 (Phone)
215-898-2067 (Fax)

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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