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Basel II: Capital requirements for equity investment portfolios.

  • Economics


Microsoft Word - sdhv_basel2_equityptf.doc - 1 - Basel II : Capital Requirements for Equity Investment Portfolios Fabian Suarez‡, Jan Dhaene§, Luc Henrard ר, Steven Vanduffel▼ ‡ Consultant at Fortis Central Risk Management, Montagne du Parc 2, 1000 Brussels, [email protected] § Professor at K.U.Leuven, Naamsestraat 69, 3000 Leuven, [email protected] ר Chief Risk Officer at Fortis, Professor at U.C.L. and Université Notre Dame de la Paix (Namur), Rue Royale 20, 1000 Brussels, [email protected] ▼ Researcher at K.U.Leuven and the University of Amsterdam, Consultant at Fortis Central Risk Management, Naamsestraat 69, 3000 Leuven, [email protected] 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: Basel II, Regulatory Capital, Value at Risk, Extreme Value Theory. 1 The Basel II Regulatory Capital Framework 1.1 Overview In June 2004, Central bank governors and the heads of bank supervisory authorities in the Group of Ten1 endorsed the publication of

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