Download From Basel 1 to Basel 3: The Integration of State-of-the-Art by Laurent Balthazar PDF
By Laurent Balthazar
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We can see that, at least, an international regulation answers to a growing need for both a more secure ﬁnancial system and some standards to develop a level playing ﬁeld for international competition. 2 show that the use of capital ratios to establish minimum regulatory requirements has been tested for more than a century. But only after the numerous banking crises of the 1980s was it imposed as an international benchmark. Until then, even the banking sector was in favor of a more subjective system where the regulators could decide which capital requirements were suited for a particular bank as a function of its risk proﬁle.
The risks concerned were: The interest rate risk and equities risk in the trading book (see below). The foreign exchange risk and commodities risk throughout the bank. The trading book is the set of positions in ﬁnancial instruments (including derivatives and off-balance sheet items) held for the purpose of: Making short-term proﬁts due to the variation in prices. Making short-term proﬁts from brokering and/or market-making activities (the bid–ask spread). Hedging other positions of the trading book.
The result is that when a bank estimates that its economic capital is above the regulatory capital level, there is no problem. But if the regulatory capital level is higher than economic capital, it means that the bank has to maintain a capital level in excess of what it estimates as an adequate level, thereby destroying shareholder value. ” This means making an arbitrage between regulatory and economic capital to align them more closely – it can be done by engaging in new operations that consume more economic than regulatory capital.