Federal Reserve Bank of New York Economic Policy Review

Publication covering business, finance, and economic issues.

Articles from Vol. 4, No. 3, October

Assessing the Impact of Prompt Corrective Action on Bank Capital and Risk
In December 1991, the U.S. Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which emphasized the importance of capital ratios in addressing the problems that led to the large number of bank and thrift failures in the...
Building a Coherent Risk Measurement and Capital Optimisation Model for Financial Firms
I. INTRODUCTION Risk-based capital allocation methodologies and regulatory capital requirements have assumed a central importance in the management of banks and other financial firms since the introduction of the Basle Committee's Capital Accord...
Capital Allocation and Bank Management Based on the Quantification of Credit Risk
1. THE NEED FOR QUANTIFICATION OF CREDIT RISK Liberalization and deregulation have recently accelerated. It is therefore useful to keep risk within a certain level in relation to capital, considering that financial institutions must control their...
Capital from an Insurance Company Perspective
This morning, I would like to give a few practical comments on capital adequacy from an insurance company perspective. In doing so, I will present two views on capital adequacy and capital allocation in the insurance industry. The first view is the regulatory...
Capital from an Insurance Company Perspective
This morning, I would like to give a few practical comments on capital adequacy from an insurance company perspective. In doing so, I will present two views on capital adequacy and capital allocation in the insurance industry. The first view is the regulatory...
Capital Regulation: The Road Ahead
INTRODUCTION It is a great pleasure for me to be here and to participate in the discussion of the future of capital adequacy regulation. I would like to compliment the organizers of this conference on the programme they have set up, covering many...
Capital Regulation: The Road Ahead
INTRODUCTION It is a great pleasure for me to be here and to participate in the discussion of the future of capital adequacy regulation. I would like to compliment the organizers of this conference on the programme they have set up, covering many relevant...
Commentary
This session contains four interesting papers that are brought together by the following important question: What does it mean for a bank to be capital constrained? Put slightly differently, the papers by Ediz, Michael, and Perraudin; Aggarwal and Jacques;...
Commentary
I shall divide my comments into three parts: (i) general thoughts about credit risk modeling and the technical difficulties involved, (ii) remarks on the implementation of such models, with particular reference to the papers in this session by Wilson...
Commentary
I am very pleased to speak here today and to comment on these three very interesting and constructive papers dealing with value-at-risk modeling issues. In my view, each paper is an excellent example of what academic research has to tell practitioners...
Commentary
I appreciate the opportunity to participate in this discussion of the pre-commitment approach to achieving regulatory objectives relating to bank capital. The presenters might reasonably expect the discussant to take up each of their papers in turn,...
Commentary
In my understanding, the issue of internal capital allocation is usually referred to as the question of how to allocate the overall capital of a financial firm among individual business areas of the firm, taking into account the amount of risk incurred...
Commentary
In commenting on the three thought-provoking papers in this session, I would like to consider the first two papers together and then turn to the third. From the standpoint of methodology, the first two papers could not be more different. The Estrella...
Conference Overview: Major Themes and Direction for the Future
This special issue of the Economic Policy Review presents the proceedings of "Financial Services at the Crossroads: Capital Regulation in the Twenty-First Century," a conference hosted by the Federal Reserve Bank of New York in partnership with the Bank...
Conference Overview: Major Themes and Directions for the Future
This special issue of the Economic Policy Review presents the proceedings of "Financial Services at the Crossroads: Capital Regulation in the Twenty-First Century," a conference hosted by the Federal Reserve Bank of New York in partnership with the Bank...
Credit Risk in the Australian Banking Sector
This paper presents a brief overview of developments currently taking place in the Australian banking sector relating to the measurement and management of credit risk. Section I provides, as background, a sketch of the structure of banking in Australia....
Deposit Insurance, Bank Incentives, and the Design of Regulatory Policy
1. INTRODUCTION A large literature studies bank regulatory policies intended to control moral hazard problems associated with deposit insurance and optimal regulatory design. Much of the analysis has focused on uniform bank capital requirements,...
Deposit Insurance, Bank Incentives, and the Design of Regulatory Policy
1. INTRODUCTION A large literature studies bank regulatory policies intended to control moral hazard problems associated with deposit insurance and optimal regulatory design. Much of the analysis has focused on uniform bank capital requirements, risk-based...
Designing Incentive-Compatible Regulation in Banking: The Role of Penalty in the Precommitment Approach
1. INTRODUCTION The purpose of this paper is to present a framework for incentive-compatible regulation that would enable regulators to ensure that riskier banks maintain higher capital holdings. Under the precommitment approach, a bank announces...
Designing Incentive-Compatible Regulation in Banking: The Role of Penalty in the Precommitment Approach
1. INTRODUCTION The purpose of this paper is to present a framework for incentive-compatible regulation that would enable regulators to ensure that riskier banks maintain higher capital holdings. Under the precommitment approach, a bank announces the...
Fair Value Accounting and Regulatory Capital Requirements
1. INTRODUCTION Advocates of fair value accounting believe that fair values provide more relevant measures of assets, liabilities, and earnings than do historical costs. These advocates assert that fair value accounting better reflects underlying...
Formulas or Supervision? Remarks on the Future of Regulatory Capital
INTRODUCTION How much capital should a bank have? There was a time, not too long ago, when the answer to this question seemed simple, at least to some. Then came floating exchange rates, oil shocks, global inflation, swaps, inverse floaters, and...
Horizon Problems and Extreme Events in Financial Risk Management
I. INTRODUCTION There is no one "magic" relevant horizon for risk management. Instead, the relevant horizon will generally vary by asset class (for example, equity versus bonds), industry (banking versus insurance), position in the firm (trading...
Industry Practices in Credit Risk Modeling and Internal Capital Allocations: Implications for a Models-Based Regulatory Capital Standard
I. WHY SHOULD REGULATORS BE INTERESTED IN CREDIT RISK MODELS? Bank supervisors have long recognized two types of shortcomings in the Basle Accord's risk-based capital (RBC) framework. First, the regulatory measures of "capital" may not represent...
Issues in Financial Institution Capital in Emerging Market Economies
I. INTRODUCTORY REMARKS For the past twenty years, Asia has been regarded as an economic success story. The recent economic turmoil in the region, however, has prompted a reevaluation of the long-term sustainability of the dynamic economic performance....
Issues in Financial Institution Capital in Emerging Market Economies
I. INTRODUCTORY REMARKS For the past twenty years, Asia has been regarded as an economic success story. The recent economic turmoil in the region, however, has prompted a reevaluation of the longterm sustainability of the dynamic economic performance....
Methods for Evaluating Value-at-Risk Estimates
I. CURRENT REGULATORY FRAMEWORK In August 1996, the U.S. bank regulatory agencies adopted the market risk amendment (MRA) to the 1988 Basle Capital Accord. The MRA, which became effective in January 1998, requires that commercial banks with significant...
Methods for Evaluating Value-at-Risk Estimates
I. CURRENT REGULATORY FRAMEWORK In August 1996, the U.S. bank regulatory agencies adopted the market risk amendment (MRA) to the 1988 Basle Capital Accord. The MRA, which became effective in January 1998, requires that commercial banks with significant...
Opening Remarks
On behalf of the Federal Reserve Bank of New York, I would like to welcome all of you to New York City and to our conference "Financial Services at the Crossroads: Capital Regulation in the Twenty-First Century." Today's large and distinguished audience...
Pilot Exercise - Pre-Commitment Approach to Market Risk
An international group of ten banking organizations (the "Participating Institutions") participated in a pilot (the "Pilot") of the pre-commitment approach to capital requirements for market risks (the "Pre-Commitment Approach"). The Pre-Commitment Approach...
Pilot Exercise-Pre-Commitment Approach to Market Risk
An international group of ten banking organizations (the "Participating Institutions") participated in a pilot (the "Pilot") of the pre-commitment approach to capital requirements for market risks (the "Pre-Commitment Approach"). The Pre-Commitment Approach...
Portfolio Credit Risk
INTRODUCTION AND SUMMARY Financial institutions are increasingly measuring and managing the risk from credit exposures at the portfolio level, in addition to the transaction level. This change in perspective has occurred for a number of reasons....
Risk Management: One Institution Experience
I am very pleased to be part of this forward-looking conference on developments in capital regulation. Because the purpose of capital is to support risk, I decided to approach this session from the viewpoint of someone leading an institution that depends,...
Risk Management: One Institution's Experience
I am very pleased to be part of this forward-looking conference on developments in capital regulation. Because the purpose of capital is to support risk, I decided to approach this session from the viewpoint of someone leading an institution that depends,...
Supervisory Capital Standards: Modernise or Redesign?
I. I am delighted to have the opportunity to speak to such an eminent group at this important conference on capital regulation. "If you see a banker jump out of the window, jump after him there is sure to be profit in it," said the eighteenth-century...
The Impact of Capital Requirements on U.K Bank Behaviour
CAPITAL REQUIREMENTS AND THEIR POTENTIAL IMPACT ON BANK BEHAVIOUR The 1988 Basle Accord obliges banks to maintain equity and quasi-equity funding equal to a risk-weighted proportion of their asset base. Regulators' intentions in adopting the Accord were,...
The Impact of Capital Requirements on U.K. Bank Behaviour
CAPITAL REQUIREMENTS AND THEIR POTENTIAL IMPACT ON BANK BEHAVIOUR The 1988 Basle Accord obliges banks to maintain equity and quasi-equity funding equal to a risk-weighted proportion of their asset base. Regulators' intentions in adopting the Accord...
The Role of Capital in Optimal Banking Supervision and Regulation
It is my pleasure to join President McDonough and our colleagues from the Bank of Japan and the Bank of England in hosting this timely conference. Capital, of course, is a topic of never-ending importance to bankers and their counterparties, not to mention...
The Value of Value at Risk: Statistical, Financial, and Regulatory Considerations
Value at risk (VAR) has emerged as a major tool for measuring market risk, and it is used internally by banks for risk management and as a regulatory tool for ensuring the soundness of the financial system. A large amount of research work into VaR has...
Value at Risk and Precommitment: Approaches to Market Risk Regulation
1. INTRODUCTION Traditionally, regulation of banks has focused on the risk entailed in bank loans. Loans are typically nontraded assets. In recent years, another component of bank assets has become increasingly important: assets actively traded...
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