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The Fundamental Review of the Trading Book and its impact on banks’ Capital Charges

Gritti, Luca LU (2020) NEKN02 20201
Department of Economics
Abstract
This study analyzes the impact that the upcoming Basel III regulations will have on the equity related capital charge faced by banks with respect to their equity portfolio holdings.
Two research objectives underpin this research; the first one relates to the effective impact that a switch from VaR0.99 to ES0.975 might have for the capital charge related to market risk of three representative equity portfolios. The second aim is rooted in the need to understand how much of the bank’s total capital will be affected by this modification. The results seems to suggest that the liquidity horizon is the main driver of the increase in the equity-related capital charge faced by banks not the switch from one Value at Risk measurement to another.
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This study analyzes the impact that the upcoming Basel III regulations will have on the equity related capital charge faced by banks with respect to their equity portfolio holdings.
Two research objectives underpin this research; the first one relates to the effective impact that a switch from VaR0.99 to ES0.975 might have for the capital charge related to market risk of three representative equity portfolios. The second aim is rooted in the need to understand how much of the bank’s total capital will be affected by this modification. The results seems to suggest that the liquidity horizon is the main driver of the increase in the equity-related capital charge faced by banks not the switch from one Value at Risk measurement to another.
The increase in capital requirements faced by banks thus can be mitigated by switching to more liquid positions. Since the impact of the regulations affecting the equity related capital charge has been estimated to lay in a range up to 50% it is likely that the implementation of such measures will prompt banks to reevaluate the holdings of their portfolios. (Less)
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author
Gritti, Luca LU
supervisor
organization
course
NEKN02 20201
year
type
H1 - Master's Degree (One Year)
subject
keywords
Basel III, Fundamental Review Trading Book, VaR, ES, Market Risk
language
English
id
9028624
date added to LUP
2021-03-16 15:10:54
date last changed
2021-03-16 15:10:54
@misc{9028624,
  abstract     = {{This study analyzes the impact that the upcoming Basel III regulations will have on the equity related capital charge faced by banks with respect to their equity portfolio holdings.
Two research objectives underpin this research; the first one relates to the effective impact that a switch from VaR0.99 to ES0.975 might have for the capital charge related to market risk of three representative equity portfolios. The second aim is rooted in the need to understand how much of the bank’s total capital will be affected by this modification. The results seems to suggest that the liquidity horizon is the main driver of the increase in the equity-related capital charge faced by banks not the switch from one Value at Risk measurement to another.
The increase in capital requirements faced by banks thus can be mitigated by switching to more liquid positions. Since the impact of the regulations affecting the equity related capital charge has been estimated to lay in a range up to 50% it is likely that the implementation of such measures will prompt banks to reevaluate the holdings of their portfolios.}},
  author       = {{Gritti, Luca}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The Fundamental Review of the Trading Book and its impact on banks’ Capital Charges}},
  year         = {{2020}},
}