Value at Risk and Precommitment: Approaches to Market Risk Regulation

Traditionally, regulation of banks has focused on the riskentailed in bank loans. Loans are typically nontradedassets. In recent years, another component of bank assetshas become increasingly important: assets actively tradedin the financial markets.1 These assets form the “tradingbook” of a bank, in contrast to the “banking book,” whichincludes the nontraded assets such as loans. Though formost large banks the trading book is still relatively smallcompared with the banking book, its rising importancemakes the market risk of banks an important regulatoryconcern.[...]