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Decoupling VaR and regulatory capital: an examination of practitioners’ experience of market risk regulation

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  • Orla McCullagh

    (University of Limerick)

  • Mark Cummins

    (Dublin City University)

  • Sheila Killian

    (University of Limerick)

Abstract

The central role of Value-at-Risk (VaR) within bank market risk regulation received significant criticism from financial media and government investigations into the events of the 2007–2009 financial crisis. Impending reform of bank market risk regulation under the Fundamental Review of the Trading Book (FRTB) demotes VaR, replacing it with a layered framework centred on expected shortfall (ES). However, many of these criticisms assume full integration of internal and regulatory market risk models and further, a linear relationship between risk models and regulatory capital. We examine bank practitioners’ perspectives and experienced realities to better understand the operational relationship between internal and regulatory market risk models, and between risk models and capital. This has important policy implications for the efficacy of the reforms to banking regulation, financial stability and navigating the dichotomy of private and public interests.

Suggested Citation

  • Orla McCullagh & Mark Cummins & Sheila Killian, 2023. "Decoupling VaR and regulatory capital: an examination of practitioners’ experience of market risk regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 321-336, September.
    • Handle: RePEc:pal:jbkreg:v:24:y:2023:i:3:d:10.1057_s41261-022-00199-z
    DOI: 10.1057/s41261-022-00199-z
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