Supervisory

This paper estimates the VaRs for marketable assets in order to examine the propriety of the risk weights set by the Basel Accord and compare the capital charges between the standardized and the internal model approaches using the actual positions of institutions. We find that the risk weights exhibit a risk-encouraging concave function of economic risk, and tend to favor the riskier assets more than the riskless assets. Such “supervisory discrimination ” in terms of risk weights gives rise to the moral hazard problem in that the regulator fails to reduce the risk-taking incentives of institutions. The internal model approach does not necessarily provide the capital savings to encourage the institutions to develop internal models. Since the capital savings will occur only in the case of low-risk institutions, the high-risk institutions, which need to introduce an internal model to improve their risk management, will choose the standardized method as their tool for calculating capital requirements. EFM codes: 52