Original Research

Economic capital for credit risk in the trading book

Wynand Smit, Gary van Vuuren, Paul Styger
South African Journal of Economic and Management Sciences | Vol 14, No 2 | a70 | DOI: https://doi.org/10.4102/sajems.v14i2.70 | © 2011 Wynand Smit, Gary van Vuuren, Paul Styger | This work is licensed under CC Attribution 4.0
Submitted: 12 August 2010 | Published: 06 June 2011

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Wynand Smit, North West University, South Africa
Gary van Vuuren, North West University
Paul Styger, North West University, South Africa

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The Basel II accord sets out detailed formulations (in its Internal Ratings Based approaches) for determining credit risk capital in the banking book, but until recently, credit risk in the trading book was largely ignored. The financial crisis in 2007/08 exposed this oversight: woefully inadequate trading book capital led to considerable losses which resulted in, inter alia, the imposition of severe capital requirements on credit riskprone securities in the trading book.  Using empirical loss data, this article investigates whether these requirements are appropriate for the trading book and proposes a possible alternative which banks may use to determine economic capital.


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