The pre-commitment approach: using incentives to set market risk capital requirements

Paul Kupiec and James M. O'Brien

No 1997-14, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper develops a model of bank behavior that focuses on the interaction between the incentives created by fixed-rate deposit insurance and a bank's choice of its loan portfolio and its market-traded financial instruments. The model is used to analyze the consequences of the Federal Reserve Board's proposed pre-commitment approach (PCA) for setting market risk capital requirements for bank trading portfolios. Under the PCA, a bank determines its own market risk capital requirement and is subject to a known regulatory penalty should its trading activities generate subsequent losses that exceed its market risk capital commitment.

Keywords: Capital market; Risk (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (23)

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