Regulatory arbitrage: back to basics

The increasing tradability of credit risk is creating complications for the Basel capital Accord that were never envisioned when the market risk amendment was first formulated. David Rowe argues that the problem is a basic inconsistency between Basel's assumptions regarding the treatment of risk in the banking and trading books

Since the market risk amendment to the Basel capital Accord was introduced in the mid-1990s, there has been recurring discussion about the multiplier applied to internal value-at-risk estimates in arriving at the associated minimum regulatory capital requirement. As far as I can tell, this is best characterised as a 'regulatory comfort factor'. Apparently, a multiplier of between three and four represented a consensus among national banking supervisors as a level of capital that