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Article

Bank Capital and New Regulatory Requirements for Risks in Trading Portfolios

Hulusi Inanoglu, Michael Jacobs and Ahmet K. Karagozoglu
The Journal of Fixed Income Spring 2014, 23 (4) 71-88; DOI: https://doi.org/10.3905/jfi.2014.23.4.071
Hulusi Inanoglu
is senior economist at the Federal Reserve System in Washington, DC.
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  • For correspondence: hulusi.inanoglu@frb.gov
Michael Jacobs
is senior manager at Deloitte & Touche, LLP, in New York, NY.
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  • For correspondence: mikjacobs@deloitte.com
Ahmet K. Karagozoglu
is professor of finance at the Zarb School of Business, Hofstra University, in Hempstead, NY.
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  • For correspondence: finakk@hofstra.edu
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Abstract

This article examines the impact of the new supervisory standards of Basel 2.5 and Basel III for bank trading portfolios with regards to the additional capital requirements developed to mitigate liquidity risk and credit risk. Using the incremental risk charge (IRC), the authors estimate risk measures in several alternate contexts. They find a potentially material increase in capital requirements above and beyond that concluded in the far-ranging impact studies conducted by the international supervisors. This effect is accentuated for financial or sovereign sectors as compared with industrial sectors, and regulatory capital is larger than economic capital. They compare credit risk models and find that the multivariate model reveals larger capital estimates for the financial and sovereign sectors by orders of magnitude versus the industrial sector or the Basel II model. Finally, in a Bayesian experiment, they find that the new requirements may introduce added uncertainty into risk measures as compared with existing approaches.

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The Journal of Fixed Income: 23 (4)
The Journal of Fixed Income
Vol. 23, Issue 4
Spring 2014
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Bank Capital and New Regulatory Requirements for Risks in Trading Portfolios
Hulusi Inanoglu, Michael Jacobs, Ahmet K. Karagozoglu
The Journal of Fixed Income Mar 2014, 23 (4) 71-88; DOI: 10.3905/jfi.2014.23.4.071

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Bank Capital and New Regulatory Requirements for Risks in Trading Portfolios
Hulusi Inanoglu, Michael Jacobs, Ahmet K. Karagozoglu
The Journal of Fixed Income Mar 2014, 23 (4) 71-88; DOI: 10.3905/jfi.2014.23.4.071
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