Richard Herring and Til Schuermann
- Published in print:
- 2005
- Published Online:
- January 2007
- ISBN:
- 9780195169713
- eISBN:
- 9780199783717
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195169713.003.0001
- Subject:
- Economics and Finance, Financial Economics
Currently, banks, securities firms, and insurance companies conduct trading businesses that involve many of the same financial instruments and several of the same counterparties but that are subject ...
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Currently, banks, securities firms, and insurance companies conduct trading businesses that involve many of the same financial instruments and several of the same counterparties but that are subject to very different capital regulations. This chapter examines why these regulatory differences exist and what they imply for differences in minimum capital requirements for position risk. It considers differences in the definition and measurement of regulatory capital, and quantifies differences in the capital charges for position risk by reference to a model portfolio that contains a variety of financial instruments, including equity, fixed income instruments, swaps, foreign exchange positions, and options — instruments that may appear in the portfolios of securities firms, banks, or insurance companies. For most leading firms in the financial services industry, however, market forces, not minimum regulatory capital requirements, appear to play the dominant role in firms' capital decisions. The chapter concludes by considering measures to enhance market discipline.Less
Currently, banks, securities firms, and insurance companies conduct trading businesses that involve many of the same financial instruments and several of the same counterparties but that are subject to very different capital regulations. This chapter examines why these regulatory differences exist and what they imply for differences in minimum capital requirements for position risk. It considers differences in the definition and measurement of regulatory capital, and quantifies differences in the capital charges for position risk by reference to a model portfolio that contains a variety of financial instruments, including equity, fixed income instruments, swaps, foreign exchange positions, and options — instruments that may appear in the portfolios of securities firms, banks, or insurance companies. For most leading firms in the financial services industry, however, market forces, not minimum regulatory capital requirements, appear to play the dominant role in firms' capital decisions. The chapter concludes by considering measures to enhance market discipline.
