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Value-at-Risk Capital Requirement Regulation, Risk Taking and Asset Allocation: A Mean-Variance Anal
Year Of Publication: 2009
Month Of Publication: June
Pages: 45
Download Count: 22
View Count: 2250
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 3-18-2010
Publisher: Administrator
Nowadays, facing the financial crises and in particular the collapse of many banks, the issue of optimal banking regulation arises again with many contrarian views. It is shown in this study that with the Basel's market risk regulation the institution faces a new Regulated Capital Market Line (RCML) which induces resource allocation distortion in the economy.
Surprisingly, only when a riskless asset is available, VaR regulation induces the institution to reduce risk. Otherwise, the regulation may induce a risk increase accompanied by an asset
allocation distortion. Thus, the existing market risk regulation may induce banks to take more risk which contradicts one of the purposes of this regulation. On the positive side, the
regulation implies an upper bound on the risk the institution takes.
This document is published in European Journal of Finance.
Kaplanski, Guy Sign in to follow this author
Levy, Haim Sign in to follow this author
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