8.8 SUMMARY. In this chapter we analyzed the importance of measuring an FI’s
market risk exposure. This risk is likely to continue to grow in importance as more
and more loans and previously illiquid assets become marketable and as the tradi-
tional franchises of commercial banks, insurance companies, and investment banks
shrink. Given the risks involved, both private FI management and regulators are in-
vesting increasing resources in models to measure and track market risk exposures.
We analyzed in detail three different approaches FIs have used to measure market
risk: RiskMetrics, the historic (or back simulation) approach, and the Monte Carlo
simulation approach. The three different approaches were also compared in tems of
simplicity and accuracy. Market risk is also of concern to regulators. Beginning in
January 1998, banks in the United States have had to hold a capital requirement
against the risk of their trading positions. The novel feature of the regulation of mar-
ket risk is that the Federal Reserve and other central banks (subject to regulatory ap-
proval) have given large FIs the option to calculate capital requirements based on
their own internal models rather than based on the regulatory model.
8 • 26 MARKET RISKMarket Risk Capital Requirement
Name to Total Capital Requirement (%)
KeyCorp 0.19974%
Bank One 0.53955
Wells Fargo 0.60787
Mellon Financial 1.03772
Bank of New York 1.25022
First Union 1.52644
Bankmont Financial 1.56739
Chase Manhattan 1.57258
FleetBoston Financial 2.14923
HSBC North America 2.22723
State Street 2.94050
Taunus 3.47091
Bank of America 4.83992Exhibit 8.11. Ratio of Market Risk Capital Required to Total Capital Required for Bank
Holding Companies Using Internal Models, First Quarter 2000.