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Possible Unintended Consequences of Basel III on Emerging Markets and Developing Economies: Assessment of Stressed VaR and Effects on Banks’ Investment Decisions

Risk Management in Emerging Markets

ISBN: 978-1-78635-452-5, eISBN: 978-1-78635-451-8

Publication date: 29 December 2016

Abstract

The recent 2008–2009 financial crisis has led international financial authorities to review the existing regulation; the Basel Committee on Banking Supervision has been thus induced to review the pillars of the Basel Accord (Basel II) in order to strengthen the risk coverage of capital framework (Basel 2.5 and III). These reforms will help to raise capital requirements for the trading book, which represents a major source of losses for internationally financial institutions, especially during crisis periods. In particular, the Committee has introduced a Stressed Value-at-Risk (SVaR) capital requirement, as a new methodology to evaluate market risk.

This chapter aims to shed some lights on the issues major banks have to face when calculating SVaR in the context of emerging markets, pointing out the differences in adopting an estimation model with respect to another one. Our results show a considerable increase in capital requirements especially when new rules are applied to financial markets with high-risk parameters, such as emerging markets are. The increased cost due to higher capital requirements could be a disincentive to investment in markets with higher risk profiles than the developed markets, taking also into account that diversification benefits deriving from investing in emerging economies have shown a decrease over time. The reduction of institutional investors can thus represent a brake on the process of innovation and evolution of emerging markets.

Keywords

Citation

Burchi, A. and Martelli, D. (2016), "Possible Unintended Consequences of Basel III on Emerging Markets and Developing Economies: Assessment of Stressed VaR and Effects on Banks’ Investment Decisions", Boubaker, S., Buchanan, B. and Nguyen, D.K. (Ed.) Risk Management in Emerging Markets, Emerald Group Publishing Limited, Leeds, pp. 645-682. https://doi.org/10.1108/978-1-78635-452-520161032

Publisher

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Emerald Group Publishing Limited

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