An Academic Response to Basel 3.5: Risk Aggregation, Diversification and Model Uncertainty

OMI Seminar Series

The recent financial crises have triggered a multitude of regulatory documents worldwide; some of these were more politically driven, others touched strongly on corporate governance within the banking world going forward, whereas a third category proposes specific guidelines for the calculation of risk capital. The latter, more methodologically oriented documents, very much question some of the rules and practices in the calculation of Risk Weighted Assets.

Based on the May 2012, October 2013 Consultative Documents "Fundamental Review of the Trading Book" by the Basel Committee on Banking Supervision, documents I like to refer to as Basel 3.5, I will address in particular the question: "What are the likely constraints with moving from Value-at-Risk to Expected Shortfall, including any challenges in delivering robust backtesting, and how may these be best overcome?"

An important issue in my talk will concern Model Uncertainty, and this mainly through the calculation of best-worst bounds for risk measures under incomplete model assumptions. Part of the talk is based on the recent papers:

Embrechts, P., Puccetti, G., Rueschendorf, L. (2013): Model uncertainty and VaR aggregation. Journal of Banking and Finance 37(8), 2750-2764.

Embrechts, P., Puccetti, G., Rueschendorf, L., Wang, R., Beleraj, A. (2013): An academic response to Basel 3.5. Preprint, ETH Zurich.


Paul Embrechts (ETH Zurich)

Tuesday, February 11, 2014 - 12:30
to 13:30