Basel Ii: Capital Requirements for Equity Investment Portfolios

Abstract

The Basel Accords represent landmark financial agreements for the regulation of commercial banks. The main purpose of the accords was to strengthen the soundness and stability of the international banking system by providing a minimum standard for capital requirements. In 2004, the Basel Committee proposed new guidelines, which have become known as Basel II. We give a short overview of the Basel II framework and present the different approaches which can be used to determine the amount of regulatory capital needed for equity exposures. These methods vary from simple, rather rule of thumb methods, to more sophisticated and economic-oriented approaches. We compare the regulatory capital consumption of two equity portfolios using the different Basel II-compliant methods. We provide evidence that, as far as regulatory capital consumption for equity exposures is concerned, there is no real incentive for banks to use the more sophisticated and economic-oriented models such as VaR or EVT models.

Keywords: Capital allocation, Research, Requirements, Investment, Investment portfolio, Portfolio, Agreements, Regulation, Stability, International, Framework, Methods, Consumption, Models, Model