The Basel framework has gone through substantial transformation during the last couple of years amidst a political, regulatory and societal environment that has pushed for stricter and more prudential supervisory activity.
This has been a natural development as it became clear that the regulatory framework proved to be inappropriate to cope with the latest developments in the financial services industry. The Basel Committee itself recognized that the pre-crisis regime and overall design of the framework showed material weaknesses in ensuring adequate capital requirements that could absorb the magnitude of losses that the banking industry experienced in 2007/2008.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Why has market liquidity become an issue in recent regulatory development?
- Steps to the incorporation of market illiquidity into the new standards on minimum capital requirements for market risk
- Revisions to the Basel II market risk framework
- Consultative Document I: Fundamental review of the trading book
- Consultative Document II: Fundamental review of the trading book - A revised market risk framework
- Consultative Document III: Fundamental review of the trading book – Outstanding Issues
- Standard: Minimum Capital Requirements for Market Risk - Final Standard
- Academia on illiquidity risk and reference to Basel III
- Conclusion
- References
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper analyzes how the Basel Committee incorporated market illiquidity risk into the new framework for the internal models approach of market risk. It examines the specific steps leading to this integration and clarifies why the Committee deemed it essential for the new standard. The paper aims to provide a clear and concise explanation of the process that led to a more efficient and balanced regulatory framework by comparing the Basel Committee’s approach to relevant academic literature on market liquidity.
- The incorporation of market illiquidity risk in the Basel framework
- The evolution of the Basel framework in response to the financial crisis
- The impact of market illiquidity on financial institutions and regulatory frameworks
- The role of the Basel Committee in addressing market liquidity concerns
- The relationship between market illiquidity and regulatory frameworks
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: The paper introduces the background of the Basel framework, emphasizing its transformation in response to the 2007/2008 financial crisis. It outlines the need for stricter regulations to address weaknesses in the pre-crisis framework, particularly regarding market risk and trading book losses. The main research question is presented, focusing on the incorporation of market illiquidity risk into the new Basel framework.
- Why has market liquidity become an issue in recent regulatory development?: This chapter analyzes the reasons why market liquidity gained significance in regulatory development after the financial crisis. It discusses the inadequacies of the pre-crisis framework in addressing market illiquidity and how the Basel Committee acknowledged the need for a more robust regulatory framework. The chapter emphasizes the reliance on bank-determined risk drivers and the subsequent need for more specific and quantitative provisions.
- Revisions to the Basel II market risk framework: This chapter examines the initial response of the Basel Committee to the challenges posed by market illiquidity. It discusses the “Revisions to the Basel II market risk framework” (Basel 2.5) and its limitations in incorporating market illiquidity. The chapter focuses on the refinements to the prudent valuation guideline for illiquid positions and the introduction of stressed VaR calculation, while acknowledging the continued reliance on the 10-day horizon for exiting risk positions.
- Consultative Document I: Fundamental review of the trading book: This chapter delves into the further development of the concept of liquidity horizons, highlighting the importance of the first Consultative Document. It discusses the Committee's recognition that the incorporation of market liquidity risk was still incomplete and the need for a more comprehensive approach. The chapter emphasizes the further development of the liquidity horizons concept as a key step in addressing market illiquidity concerns.
Schlüsselwörter (Keywords)
The key terms and concepts explored in this paper include market liquidity, market risk, Basel framework, Basel II, Basel III, illiquidity risk, trading book, regulatory development, financial crisis, risk management, capital requirements, internal models approach, liquidity horizons, and prudential valuation.
- Quote paper
- Mark Matern (Author), 2017, Minimum Capital Requirements for Market Risk, Munich, GRIN Verlag, https://www.grin.com/document/372142
