THE NEW BASEL ACCORD AND THE NATURE OF RISK: A GAME THEORETIC PERSPECTIVE

Volker Bieta, Udo Broll (), Hellmuth Milde and Wilfried Siebe
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Volker Bieta: Trier University, Germany
Udo Broll: Faculty of Business Management and Economics, Dresden University of Technology, 01062 Dresden, Germany
Hellmuth Milde: Trier University, Germany
Wilfried Siebe: Rostock University, Germany

Annals of Financial Economics (AFE), 2008, vol. 04, issue 01, 1-22

Abstract: Basel II changes risk management in banks strongly. Internal rating procedures would lead one to expect that banks are changing over to active risk control. But, if risk management is no longer a simple "game against nature", if all agents involved are active players then a shift from a non-strategic model setting (measuring event risk stochastically) to a more general strategic model setting (measuring behavioral risk adequately) comes true. Knowing that a game is any situation in which the players make strategic decisions — i.e. decisions that take into account each other's actions and responses — game theory is a useful set of tools for better understanding different risk settings. Embedded in a short history of the Basel Accord in this article we introduce some basic ideas of game theory in the context of rating procedures in accordance with Basel II. As well, some insight is given how game theory works. Here, the primary value of game theory stems from its focus on behavioral risk: risk when all agents are presumed rational, each attempting to anticipate likely actions and reactions by its rivals.

Keywords: New basel accord; event risk; behavioral risk; rating; simple game; Nash equilibrium; game theory; A10; A22; C79 (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1142/S2010495208500036

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