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Basels Value-at-Risk Capital Requirement Regulation: an Efficiency Analysis
Year Of Publication: 2004
Month Of Publication: March
Pages: 39
Download Count: 954
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 11-25-2004
Publisher: Administrator
Summary
analyze the optimal portfolio policies of expected utility maximizing agents under VaR Capital Requirement (VaR-CR) regulation in comparison to the optimal policy under exogenously-imposed VaR Limit (VaR-L) and Limited-Expected-Loss (LEL) regulations. With VaR-CR regulation the agent strategy consists of simultaneous decisions on both the portfolio VaR and on the implied amount of required eligible capital. As a result, the performance of VaR-CR regulation depends on its design (the parameter n) and the agent preferences. We show that an optimal VaR-CR regulation allows the regulator on the one hand, to completely eliminate the exposure to the largest losses, which may jeopardize the existence of the institution, and on the other hand, to restrain the portfolio exposure to all other losses. These results rationalize the current Basel regulations. However, the analysis shows also that there is an optimal level of required eligible capital from the regulator standpoint. Counter-intuitively, any requirement above this optimal level is inefficient as it leads to a smaller amount of actually maintained eligible capital and thereby to a larger exposure to the most adverse states of the word. Unfortunately, the current Basel’s range of required levels (n = 3 -4) is within this inefficient range. Moreover, with an inefficient regulation the agent might employ an inefficient reporting and disclosure procedure
Author(s)
Kaplanski, Guy Sign in to follow this author
Levy, Haim Sign in to follow this author
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