Abstract
This study examines theimpact of the new supervisory standards of Basel 2.5 and Basel III for banktrading portfolios with regards to the additional capital requirements developedto mitigate liquidity risk and credit risk. Using the incremental risk charge(IRC), we estimate risk measures in several alternate contexts. We find apotentially material increase in capital requirements above and beyond thatconcluded in the far-ranging impact studies conducted by the internationalsupervisors. This effect is accentuated for financial or sovereign sectors ascompared to industrial sectors, and regulatory capital is larger than economiccapital. We compare credit risk models and find the multivariate model revealslarger capital estimates for the financial and sovereign sectors by orders ofmagnitude versus the industrial sector or the Basel II model. Finally, in aBayesian experiment we find that the new requirements may introduce addeduncertainty into risk measures as compared to existing approaches.
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