Research Discussion Papers, Bank of Finland
No 15/2001:
A value-at-risk approach to banks’ capital buffers: An application to the new Basel Accord
Esa Jokivuolle ()
and Samu Peura
Abstract: The rating-sensitive capital charges on credit risks under
the new Basel Accord are likely to increase the volatility of minimum
capital requirements, which may force banks to hold larger capital cushions
in excess of minimum requirements. We analyse this claim on the basis of
numerical simulations on hypothetical bank portfolios, in which the bank’s
choice of capital cushion is assumed to satisfy a value-at-risk-type
constraint. The results suggest that the size of the cushion depends on the
bank’s credit portfolio risk and its chosen approach for calculating the
minimum capital requirement. Although the more ratings-sensitive internal
ratings based approach imposes lower minimum capital requirements on
sufficiently high-quality credit portfolios than does the standardised
approach, this capital relief is countered by the need for larger relative
cushions under the former approach. The results imply that the cushions
induced by greater rating sensitivity may influence both banks’ choices
between proposed approaches for calculating capital requirements as well as
the aggregate level of post-reform bank capital. Hence these cushions
should be given due consideration in the final calibration of the Basel
risk weights.
Keywords: new Basel Capital Accord; credit risk; internal ratings; value-at-risk; (follow links to similar papers)
JEL-Codes: G21; G32; (follow links to similar papers)
26 pages, August 9, 2001
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