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Investigation of the Fundamental Review of the Trading Book

Zulfaj, Edi LU and Joelsson, Erik LU (2015) EXTM10 20151
Department of Economics
Abstract
As Basel III is being implemented a new regulation framework for capital requirement is being developed called the Fundamental Review of the Trading Book. The major change is the change of risk measure, going from Value at Risk to Expected Shortfall. The effect of the new regulations for general interest rate risk (GIRR) is investigated both on a total capital requirement level and decomposed onto key rates. The results for a portfolio consisting of zero-weight bonds are that the capital requirement under both the standardized and internal approach is reduced compared to the internal approach under the current regulations. The introduction of the new regulations will strike very differently on portfolios depending on where on the yield... (More)
As Basel III is being implemented a new regulation framework for capital requirement is being developed called the Fundamental Review of the Trading Book. The major change is the change of risk measure, going from Value at Risk to Expected Shortfall. The effect of the new regulations for general interest rate risk (GIRR) is investigated both on a total capital requirement level and decomposed onto key rates. The results for a portfolio consisting of zero-weight bonds are that the capital requirement under both the standardized and internal approach is reduced compared to the internal approach under the current regulations. The introduction of the new regulations will strike very differently on portfolios depending on where on the yield curve the risk is concentrated. This paper shows that the ratio between the new and current internal approach varies between 41.6% and 69.6% for the portfolios analyzed. The new standardized approach gives less capital requirement compared to the new internal approach independent of where the risk is concentrated. (Less)
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author
Zulfaj, Edi LU and Joelsson, Erik LU
supervisor
organization
course
EXTM10 20151
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Key rates, GIRR, Capital Requirement, Basel III, Basel II, Expected Shortfall, Value at Risk
language
English
id
7397811
date added to LUP
2015-06-26 08:58:12
date last changed
2015-06-26 08:58:12
@misc{7397811,
  abstract     = {As Basel III is being implemented a new regulation framework for capital requirement is being developed called the Fundamental Review of the Trading Book. The major change is the change of risk measure, going from Value at Risk to Expected Shortfall. The effect of the new regulations for general interest rate risk (GIRR) is investigated both on a total capital requirement level and decomposed onto key rates. The results for a portfolio consisting of zero-weight bonds are that the capital requirement under both the standardized and internal approach is reduced compared to the internal approach under the current regulations. The introduction of the new regulations will strike very differently on portfolios depending on where on the yield curve the risk is concentrated. This paper shows that the ratio between the new and current internal approach varies between 41.6% and 69.6% for the portfolios analyzed. The new standardized approach gives less capital requirement compared to the new internal approach independent of where the risk is concentrated.},
  author       = {Zulfaj, Edi and Joelsson, Erik},
  keyword      = {Key rates,GIRR,Capital Requirement,Basel III,Basel II,Expected Shortfall,Value at Risk},
  language     = {eng},
  note         = {Student Paper},
  title        = {Investigation of the Fundamental Review of the Trading Book},
  year         = {2015},
}