The Basel II framework allows the calculation of the capital requirements for market risk with Value-at-Risk models. Since no special model is prescribed in the framework, banks may use simple models with questionable assumptions concerning their underlying distributions. Our numerical analysis...

One of the controversies of diversification is that it may not be beneficial to banks, as it tends to increase systemic risk. Recent theoretical and empirical work have addressed this problem. We argue, from a theoretical perspective, that this controversy ultimately depends on how risk is...