Basel violations, volatility model variants and value at risk: Optimization of performance deviations in banks

Authors

  • Shahid Anjum

DOI:

https://doi.org/10.17811/ebl.10.3.2021.240-248

Abstract

Basel penalties originate from VaR violations where a bank may end up either holding more capital or will risk to be reverted to standardized approach. Regulatory capital charge can have a huge impact on banks’ profitability which depends on the estimation of VaR thresholds which  is evaluated by the approaches like hypothesis tests, back-testing procedures and Basel Accord regulatory calculations for penalty zones are used. A multi-criteria performance measure has been introduced in this study in order to select the optimal internal model based on performance evaluation techniques which could possibly help in reduction in the VaR violations and thus may leave more capital with banks.

References

Ahmed, Aejaz. 2014. How to Benefit from Basel III Recommendations to develop Risk Management Practices? Deloitte & Touche. Middle East. April

Al-Harbi, K. and M. Al-Subhi (2001), “Application of the AHP in project management,” Intl. Journal of Project Management, vol. 19, pp. 19-27

McAleer, M. and da Veiga, B. (2006), “Single Index and Portfolio Models for Forecasting Value-at-Risk Thresholds”, School of Economics and Commerce University of Western Australia, available online

Anjum, Shahid. 2013a. Risk Adjusted Business Intelligence Architecture for Cloud Computing for Banking Industry. In Proceedings of International Conference on Information & Social Science (ISS2013). Nagoya. Japan, Sept. 2013

Anjum, Shahid. 2013b. Algorithms for Predictive Classification in Data Mining: A Comparison of Evaluation Methodologies. Journal of Industrial and Intelligent Information (JIII). 1, 2 (June 2013).

Anjum, Shahid. 2014a. Backtesting VaR Violations, Be-ALAM Regression and Internal Models of Portfolio Variance Forecasting. Journal of Money Investment and Banking. issue 29. Sept.

Anjum, Shahid. 2014b. Composite Indicators for Data Mining: A New Framework for Assessment of Prediction Classifiers. Jour. of Economics, Business & Management. 2, 1 (Feb. 2014)

Anjum, S. 2014c. Systematic Risk Outliers and Beta Reliability in Emerging Economies: Estimation-Risk Reduction with AZAM Regression. Review of Integrative Business and Economics Research (RIBER). 3, 1 (2014)

Anjum, S. 2014d. Quantification of Fiduciary Risks: Islamic Sources of Funds, Neo-Institutionalism and SARWAR Bank. Journal of Islamic Banking and Finance. 2, 1 (March 2014)

Anjum, Shahid. 2014e. Statistical Software and Regression Diagnostics Reporting with Fuzzy AHP Intelligent Zax (FAIZ). Lecture Notes in Software Engineering. 1, 2 (2014)

Anjum, Shahid. 2015a. Balance Sheet Structure, Asset Side Products and Shariah Financial Engineering: Risk Ranking of Banks. Proceedings of 2015 International Conference on Advanced Research in Business and Social Sciences (ICARBSS). 1. Kuala Lumpur, Malaysia.

Anjum, Shahid. 2015b. Market Orientation, Balance Sheets and Risk Profile of Islamic Banks. International Journal of Economic Policy in Emerging Economies. Indersciences. 8, 4 (Oct, 2015)

Anjum, Shahid. 2016a. Banking Automation with Sustainable Hedging for Information Risks: BASHIR Framework for Clouds Computing. Accepted in ICCSE 2016. K.K. Malaysia, Also forthcoming in Advanced Science Letters, ASP, USA

Anjum, Shahid. 2016b. Bank’s Middle Office Analytics, Risk Modeling and Comparative Basel Regimes. Accepted in SIBR-UniKL 2017 Kuala Lumpur Conference On Interdisciplinary Business & Economics Research. February 3rd - 4th. Kuala Lumpur

Bhandari, K. G. (2010), “Market Risk – Internal Model Approach,” Indian Banks’ Association, 4th Annual summit, India

Bonissone, Piero P. 1988. Analytical Hirarechy Process. Available at: http://www.rpi.edu/~bonisp/

Chaudhary, M. Aslam and Anjum, S. 1996. Macroeconomic Policies and Management of Debt, Deficit, and Inflation in Pakistan. Pakistan Development Review. 35, 4, Part II (winter 1996). 773-786

Dardac, Nicolae. and Grigore A. 2011. Modeling the Market Risk in the Context of the Basel III Accord. Theoretical and Applied Economics. XVIII.11. 564. 5-20

IBM. 2011. Banking Data Warehouse Support for the Basel II and Basel III Framework: Including Support for the Capital Adequacy Framework and Federal Financial Institutions Examination Council, BDW Release 8.4. Whitepaper

Kou, S. Peng, X. and Heyde, Chris C. 2012. External Risk Measures and Basel Accords. Mathematics of Operations Research, INFORM

Kramer, B. Kronbichler, D. van Welie, T. and Putman, J. 2008. Comparing (Social) Objectives for Decision-Making in Housing Corporations. Applied Working Paper No. 2008-02 May. Ortec Finance Research Center (OFRC). Rotterdam

McAleer, M. and Veiga, Bernardo da. 2006. Single Index and Portfolio Models for Forecasting Value-at-Risk Thresholds. Research paper, School of Economics and Commerce. University of Western Australia.

Mehta, Amit, Max Neukirchen, Sonja Pfetsch and Thomas Poppensieker. 2012. Managing market risk: Today and tomorrow. Working Papers on Risk, Number 32. McKinsey & Co

Picoult, Evan. 2013. Lessons Learned from the Financial Crisis. Columbia Business School. NY. September

Pwc. 2012. A Closer look at US Basel III Regulatory Capital Regime and Market Risk Final Rule. Price Waterhouse Coopers (pwc), USA

Rowe, D. M. and Holt, G. A. 2011. Modeling and Analyzing Market Risk Capital Requirements Under the Basel III Internal Models Approach With Kamakura Risk Manager. Kamakura Corporation. USA. February

Shamim, F. and Anjum, S. 2013. Technology Diffusion in Japanese Finance Industry: An Exploration. International Research Journal of Applied Finance. VI , 12. (Dec. 2013)

Shamim, F., Anjum S. and Wakil, A. B. 2015. Banking Risk and Operating Efficiency Measures in the Era of IT. Accounting and Finance Research. Sciedu Press. 4 (1)

Sharma, Meera. 2012. Evaluation of Basel III revision of quantitative standards for implementation of internal models for market risk. IIMB Management Review. Indian Institute of Management Bangalore. 24. 234 – 244

Stretton, Catherine. 2011. Basel III – Market Risk. The Trading Book Series, Deloittee, January, Accessed in May, 2014 from: www.deloitte.com/assets/Dcom-SouthAfrica

Downloads

Published

02-08-2021

How to Cite

Anjum, S. (2021). Basel violations, volatility model variants and value at risk: Optimization of performance deviations in banks. Economics and Business Letters, 10(3), 240–248. https://doi.org/10.17811/ebl.10.3.2021.240-248