Bank regulation and stability: An examination of the Basel market risk framework

Gordon Alexander, Alexandre Baptista () and Shu Yan

No 09/2012, Discussion Papers from Deutsche Bundesbank

Abstract: In attempting to promote bank stability, the Basel Committee on Banking Supervision (2006) provides a framework that seeks to control the amount of tail risk that large banks take in their trading books. However, banks around the world suffered sizeable trading losses during the recent crisis. Due to the size and prevalence of losses, a formal examination of whether the Basel framework allows banks to take substantive tail risk in their trading books without a capital requirement penalty is of particular interest. In this paper, we provide such an examination and show that the Basel framework indeed allows banks to do so. Hence, our paper supports the view that the Basel framework leaves room for considerable improvements regarding the treatment of tail risk.

Keywords: Bank regulation; bank stability; Basel framework; crisis; tail risk (search for similar items in EconPapers)
JEL-codes: D81 G11 G21 G28 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:092012

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