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Calculating Concentration-Sensitive Capital Charges with Conditional Value-at-Risk

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  • Dirk Tasche
  • Ursula Theiler

Abstract

By mid 2004, the Basel Committee on Banking Supervision (BCBS) is epected to launch its final recommendations on minimum capital requirements in the banking industry. Although there is the intention to arrive at capital charges which concur with economic intuition, the risk weight formulas proposed by the committee will lack an adequate treatment of concentration risks in credit portfolios. The question arises whether this problem can be solved without recourse to fully-fledged portfolio models. Since recent practical experience shows that the risk measure Conditional Value-at-Risk (CVaR) is particularly well suited for detecting concentrations, we develop the semi-asymptotic approach by Emmer and Tasche in the CVaR context and compare it with the capital charges recently suggested by the Basel Committee. Both approaches are based on the same Vasicek one-factor model.

Suggested Citation

  • Dirk Tasche & Ursula Theiler, 2003. "Calculating Concentration-Sensitive Capital Charges with Conditional Value-at-Risk," Papers cond-mat/0309003, arXiv.org, revised Feb 2004.
    • Handle: RePEc:arx:papers:cond-mat/0309003
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    References listed on IDEAS

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    1. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    2. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
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    Cited by:

    1. International Association of Deposit Insurers, 2011. "Evaluation of Deposit Insurance Fund Sufficiency on the Basis of Risk Analysis," IADI Research Papers 11-11, International Association of Deposit Insurers.

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