Capital Adequacy Requirements for Banks and Value at Risk Models

With all risk management activities at their proper place, the risk exposures a banking organization assumes in its activities should be fully supported by an adequate capital position. Banks with significant trading activities should have reasonable methods to measure the risks of their activities and allocate capital against the economic substance of those risks. The Capital Adequacy Framework of the Basel Committee on Banking Supervision (BCBS) 1998 and the revised Capital Adequacy Framework of 1999 is one of the most widely appreciated attempts towards brining international standards in banking with respect to capital adequacy thereby enabling cross country assessments and comparisons of internationally active banks. The new accord is widely discussed and debated on various issues one of them relating to internal risk management models used by banks for determination of capital requirements. This paper discusses various aspects of Value at Risk model(s) used by banks to determine capital adequacy requirements.