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This study assesses the impact of the FRTB on bank’s regulatory capital requirements for market risk, considering the Internal Models Approach. To this end, the capital requirement based on the current approach is compared with the capital requirement required with the implementation of the FRTB, through the analysis of a stylized portfolio. In order to assess whether the asset structure of the portfolio affects this result, as sensitivity analysis was also carried out, by changing the relative weights of some asset classes on the portfolio in relation to the baseline scenario. The results of this investigation show that the overall Expected Shortfall, as a standalone measure, implies a higher market risk capital charge when compared to the sum of the Value at Risk and Stressed Value at Risk measures. Both the diversifiable and non-diversifiable components of the Expected Shortfall contribute to such increase, being the latter the main responsible. Regarding the market risk capital requirement considering the computation of all measures over the preceding 60 business days and the effect of the multiplication factor inherent to each regulation, the market risk capital requirement is higher under the current regulation for the baseline scenario and for the scenario with an increase in equity positions. For the scenario with an increase in bonds positions, the market risk capital requirement is higher under the FRTB, yet in a slight way. Este estudo avalia o impacto do FRTB nos requisitos de capital regulamentar dos bancos para risco de mercado, considerando a Abordagem de Modelos Internos. Para tal, o requisito de capital baseado na abordagem atual é comparado com o requisito de capital exigido com a implementação do FRTB, através da análise de uma carteira estilizada. De modo a avaliar se a estrutura de ativos da carteira afeta o resultado desta comparação, foi também efetuada uma análise de sensibilidade, através da alteração dos pesos relativos de algumas classes de ativos na carteira em relação ao cenário de base. Os resultados desta investigação evidenciam que o Expected Shortfall, por si só, implica um requisito de capital para risco de mercado mais elevado quando comparado com a soma das medidas Value at Risk e Stressed Value at Risk. Ambas as componentes diversificável e não diversificável do Expected Shortfall contribuem para tais aumentos, sendo esta última a principal responsável. Em relação ao requisito de capital para risco de mercado considerando o cálculo destas três medidas nos últimos 60 dias anteriores e o efeito do fator de multiplicação inerente a cada regulamentação, este é superior no âmbito da regulamentação atual para o cenário de base e para o cenário com um aumento nas posições de ações. Para o cenário com um aumento nas posições de obrigações, o requisito de capital é superior no âmbito do FRTB, embora de forma ligeira.

We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.

Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to pursue e.g. risk-shifting or liquidity hoarding. We identify the bank lending and risk-taking channels by exploiting – Italian’s unique – credit and security registers. In crisis times, with softer ECB’s monetary policy conditions, less capitalized banks increase securities over credit supply, with associated firm-level real effects. However, less capitalized banks buy securities with lower yield (haircuts), even within securities with identical regulatory risk weights, thus reaching-for-safety/liquidity. Results are only present in marked-to-market portfolios. The evidence suggests that liquidity and risk-bearing capacity – rather than riskshifting or regulatory arbitrage – are key drivers of banks’ behavior. Differently, in pre-crisis times, securities do not crowd-out loan application granting by less capitalized banks. Peydró acknowledges financial support from the Spanish Ministry of Science, Innovation and Universities (Grant No. ECO2015-68182-P and through the Severo Ochoa Programme for Centres of Excellence in R&D, SEV-2015-0563) and from the European Research Council Grant (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant No. 648398).

The regulatory market risk metric – Value at Risk – has remained virtually unchanged since its introduction by JP Morgan in 1996. Many prominent examples of market risk underestimation have undermined the credibility of VaR, prompting the search for better, more robust measures. Expected shortfall and procyclical capital buffers have been proposed by regulatory authorities, but neither is without problems. Bubble VaR – a coherent measure which avoids many of the pitfalls to which other measures have succumbed – was designed to be both forward-looking and countercyclical. Although tested on other markets, here it is applied to various South African prices and the results compared with both international observations and other market risk measures. Bubble VaR is found to perform consistently and reliably under all market conditions.

International audience; A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.

Regulatory capital for trading book positions includes two components that cover different risks but apply to the same portfolio, one for market risk and one for credit risk. Similar approaches are common in banks' internal models for economic capital. Although it is known that joint market and credit risk of certain investments can be larger than the sum of risks, the problematic cases identified so far have been relatively exotic. I show that very common investments - corporate bond holdings or CDS portfolios - are also affected. There are realistic conditions under which credit risk (represented by ratings and default) and spread risk (represented by rating specific spread indices) combine to a total value-at-risk (VaR) 50 percent larger than the sum of spread and credit VaR; this effect is even stronger for the expected shortfall. If migration risk is segregated from default risk and incorporated into spread risk, as recently put forward by the Basel Committee, total risk is no longer underestimated. Furthermore, I improve a theoretic result of Breuer et al. (2010) that defines a sufficient condition under which risk separation is harmless.

The aim of this diploma thesis is to analyse the development of the regulatory framework and its current state according to the latest Basel III framework. The new rules were created as a response to the financial crisis that started in 2007. The framework represents significant increase in quality, amount and transparency of the capital base in comparison with the pre-crisis situation. Basel III has both micro and macroprudential focus. The diploma thesis describes the development and shortcomings of regulatory framework that necessitated revisions of the regulatory rules over time. These rules evolve with the changes in the financial system and the way how financial risks are managed. Although the roots of financial crisis are related to the mortgage-backed securities market, the banking sector played an important role in spreading the problems. Therefore the diploma thesis will also concentrate on fundamental flaws that contributed to the financial crisis. Then the immediate corrective action taken as a response to the financial crisis are described. After that, the Basel III rules are presented in detail. The newest monitoring of the rules carried out by the Basel Committe and cost analysis carried out by IMF including evaluation based on various analyses of Basel III are presented. Basel III has addressed most of the flaws revealed in Basel II. However, some issues still remain unsolved, which can lead to future problems with the financial system stability.

The Basel II accord sets out detailed formulations (in its Internal Ratings Based approaches) for determining credit risk capital in the banking book, but until recently, credit risk in the trading book was largely ignored. The financial crisis in 2007/08 exposed this oversight: woefully inadequate trading book capital led to considerable losses which resulted in, inter alia, the imposition of severe capital requirements on credit riskprone securities in the trading book. Using empirical loss data, this article investigates whether these requirements are appropriate for the trading book and proposes a possible alternative which banks may use to determine economic capital.

The goal of this article is to point out some aspects of interest rate risk management, as from the banking book, so from the trading book perspective. Emphasis is on duration analysis, and specially on leverage adjusted and volatility adjusted duration. Formulas for theirs calculation are presented with list of advantages and disadvantages linked with this interest rate risk management instrument.