Most banks employ historical simulation for Value-at-Risk (VaR) calculations, where VaR is computed from a lower quantile of a forecast distribution for the portfolio’s profit and loss (P&L) that is constructed from a single, multivariate historical sample on the portfolio’s risk factors....

By using Moody's historical corporate default histories we explore the implications of scenarios based on the Great Depression for banks' economic capital and for existing and proposed regulatory capital requirements. By assuming different degrees of portfolio illiquidity, we then investigate...

Basel II rules allow qualified banks to assess the risk in their portfolio of credit exposures with a methodology based on the informational content of credit ratings and two crucial assumptions: (1) the credit risk of individual exposures is driven by one systematic risk factor only and (2) the...

The new bank capital regulation commonly known as Basel II includes a internal rating based approach (IRB) to measuring credit risk in bank portfolios. The IRB relies on the assumptions that the portfolio is fully diversified and that systematic risk is driven by one common factor. In this work...

The current debate on the new Basel Accord gives rise to a natural question about the appropriate form of capital regulation. We construct a general framework to study this issue. We show that ex ante regulation wastes the expertise of a bank in measuring its risk exposure, while an ex post...