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Gleeson on the International Regulation of Banking, 3rd Edition by Gleeson, Simon (30th August 2018)

Part III Investment Banking, 13 Trading Book—Standardized Approaches

From: Gleeson on the International Regulation of Banking (3rd Edition)

Simon Gleeson

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.date: 20 September 2019

Subject(s):
Credit risk — Default and credit — Capital markets — Basel 2 — Basel 3 — Basel committee on Banking Supervision

This chapter discusses trading book models. Risk models come in a variety of types. However, for market risk purposes there have been a number of types which may be used within the framework. The simplest is the ‘CAD 1’ model — named after the first Capital Adequacy Directive, which permitted such models to be used in the calculation of regulatory capital. VaR models, permitted by Basel 2, were more complex, and this complexity was increased by Basel 2.5, which required the use of ‘stressed VAR’. In due course all of this will be replaced by the Basel 3 FRTB calculation, which rejects VAR and is based on the calculation of an expected shortfall (ES) market risk charge, a VaR based default risk charge (DRC) (for those exposures where the bank is exposed to the default of a third party), and a stressed ES-based capital add-on.

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