Open AccessEconomic capital for credit risk in the trading book
Author(s) -
Wynand Smit,
Gary van Vuuren,
Paul Styger
Publication year - 2011
Publication title -
suid-afrikaanse tydskrif vir ekonomiese en bestuurswetenskappe/south african journal of economic and management sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.277
H-Index - 17
eISSN - 2222-3436
pISSN - 1015-8812
DOI - 10.4102/sajems.v14i2.70
Subject(s) - risk adjusted return on capital , capital requirement , economic capital , business , capital adequacy ratio , credit risk , capital (architecture) , basel iii , financial system , financial capital , cost of capital , economics , finance , capital formation , market economy , human capital , archaeology , history , incentive
The Basel II accord sets out detailed formulations (in its Internal Ratings Based approaches) for determining credit risk capital in the banking book, but until recently, credit risk in the trading book was largely ignored. The financial crisis in 2007/08 exposed this oversight: woefully inadequate trading book capital led to considerable losses which resulted in, inter alia, the imposition of severe capital requirements on credit riskprone securities in the trading book. Using empirical loss data, this article investigates whether these requirements are appropriate for the trading book and proposes a possible alternative which banks may use to determine economic capital