Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book

Mabelle Sayah ()
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Mabelle Sayah: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, Faculte des Sciences - Universite Saint Joseph - USJ - Université Saint-Joseph de Beyrouth

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Abstract: A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.

Keywords: Sensitivity Based approach; Capital charge; GARCH; PCA; Basel III; bonds portfolio; Dynamic Nelson Siegel; ICA; interest rate risk; trading book (search for similar items in EconPapers)
Date: 2016-02-01
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-01217928v1
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Published in Applied Finance and Accounting, 2016, 2 (1), pp.89-100

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