Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book

Mabelle Sayah (1, 2)

1 SAF - Laboratoire de Sciences Actuarielle et Financière
2 Faculte des Sciences - Universite Saint Joseph

A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.

Mots clés: Sensitivity Based approach; Capital charge; GARCH; PCA; Basel III; bonds portfolio; Dynamic Nelson Siegel; ICA; interest rate risk; trading book

Domaines: Gestion des risques [q-fin.RM]; Econométrie de la finance [q-fin.ST]

Mabelle Sayah. Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book. Applied Finance and Accounting, 2016, 2 (1), pp.89-100. ⟨hal-01217928⟩