#04-11
"Capital Regulation for Position Risk in Banks, Securities Firms and Insurance Companies"
Abstract: We examine why these regulatory differences exist and what they imply for differences in minimum capital requirements for position risk. We consider differences in the definition and measurement of regulatory capital and we quantify differences in the capital charges for position risk by reference to a model portfolio that contains a variety of financial instruments including equity, fixed income instruments, swaps, foreign exchange positions, and options—instruments that may appear in the portfolios of securities firms, banks or insurance companies. For most leading firms in the financial services industry, however, market forces, not minimum regulatory capital requirements, appear to play the dominant role in firms' capital decisions. Thus we conclude by considering measures to enhance market discipline.
Keywords: Risk management, Value-at-Risk, Capital Regulation, Market Risk
JEL Codes: G21, G28
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