Assessing The Dispersion In Banks' Estimates Of Market Risk: The Results Of A Value-At-Risk Survey
Under the market-risk capital requirements introduced at the beginning of this year, Australian banks may choose between two alternatives when measuring their market-risk exposure: a standard regulatory model and their own internally-developed risk-measurement model. The extent to which different banks' models provide differing estimates of risk for given financial instruments impacts directly on the fairness of the capital adequacy regime.To assess the dispersion of banks' market-risk measurements, we conducted a survey asking banks to provide their estimate of the market risk residing in a number of pre-specified portfolios. We found the spread in risk estimates to be broad. However, most of the variation across banks is attributable to a small number of banks that use crude, but conservative, models. No bank was found to systematically underestimate risk. The survey results also suggest that there is no undue disparity between the banks' internal-model based capital charges and the capital charge that would be required if those banks were to use the standard regulatory model. No significant correlation was found between banks' risk estimates and their choice of market-risk modelling approach.
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