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On Regulatory Responses to the Recent Crisis: An Assessment of the Basel Market Risk Framework and the Volcker Rule
Author(s) -
Alexander Gordon J.,
Baptista Alexandre M.,
Yan Shu
Publication year - 2015
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/fmii.12025
Subject(s) - capital requirement , basel iii , risk weighted asset , basel i , economics , risk adjusted return on capital , basel ii , capital (architecture) , capital adequacy ratio , bank regulation , operational risk , business , monetary economics , financial system , finance , risk management , capital formation , financial capital , market economy , human capital , incentive , archaeology , history
Banks around the world suffered huge trading losses in the recent crisis. In response, the Basel Committee on Banking Supervision ([, 2011a]) provides a revised framework to determine the minimum capital requirements for their trading portfolios. Moreover, the Dodd‐Frank Wall Street Reform and Consumer Protection Act ([, 2010]) imposes certain restrictions on the composition of the trading portfolios of U.S. banks through the ‘Volcker Rule.’ Our paper assesses the effectiveness of the Basel framework and the Volcker Rule in preventing banks from taking substantive tail risk in their trading portfolios without capital requirement penalties. We find that the Basel framework is ineffective in preventing banks from doing so, but that the Volcker Rule is beneficial in that it partially mitigates this ineffectiveness. We also suggest two alternatives to the Basel framework and discuss the impact of the Volcker Rule if either one of them is adopted.