The Pre-Commitment Approach: Using Incentives to Set Market Risk Capital Requirements
Preprint
- 1 March 1997
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
This paper develops a model of bank behavior that focuses on the interaction between the incentives created by fixed rate deposit insurance and a bank's choice of its loan portfolio and its portfolio of market-traded financial assets. The model is used to analyze the consequences of adopting the Federal Reserve Board's proposed Pre-Commitment Approach (PCA) for setting capital requirements for the market risks of a bank's trading portfolio. Under the PCA, a bank sets its own market risk capital requirement with the knowledge that it will face regulatory penalties should its trading activities generate subsequent losses that exceed its market risk capital pre-commitment.Keywords
All Related Versions
This publication has 13 references indexed in Scilit:
- Empirical Martingale Simulation for Asset PricesManagement Science, 1998
- The Regulation of Bank Capital: Do Capital Standards Promote Bank Safety?Journal of Financial Intermediation, 1996
- Techniques for Verifying the Accuracy of Risk Measurement ModelsThe Journal of Derivatives, 1995
- Capital Requirements for Securities FirmsThe Journal of Finance, 1995
- An Incentive Approach to Banking RegulationThe Journal of Finance, 1993
- An incentive-based theory of bank regulationJournal of Financial Intermediation, 1992
- Is Fairly Priced Deposit Insurance Possible?The Journal of Finance, 1992
- Risk-shifting incentives of depository institutions: A new perspective on federal deposit insurance reformJournal of Banking & Finance, 1991
- Capital controls and bank riskJournal of Banking & Finance, 1991
- Options on the Maximum or the Minimum of Several AssetsJournal of Financial and Quantitative Analysis, 1987