Value at Risk Essay Example | Topics and Well Written Essays - 3250 words

Value at Risk - Essay ExampleRisk management methods and constitution varies from industry to industry like it cant be same for project management, industrial process and financial portfolios. From a management view point, take a chance of exposure management is an historic tool which is used in decision making because it is systematic and well structured. For better utilization of risk management in managements decisions, risk analysts reports must be based on the latest and best available information. The cause behind the mentioning of the Chinese proverb above is that risk management is the only tool which differentiates a good management with a bad one. From a banks standpoint the term is usually used synonymously with specific uncertainty because the usage of statistics allows us to measure out the uncertainty which is called the measure of dispersion (Shirref, 2004).We know that every country have mostly two regulators on their heads, one for the banks and one for the comp anies. Usually Securities and Exchange counsel (SEC) regulates the companies while the Reserve bank regulates the financial institutions. Bank of International Settlement is the regulator of the regulators. From the same fancy there is another regulator which regulates the financial institutions risk management department regarding the capital indispensability and capital adequacy ratio. The name of the regulator is Basel Accord. Lets see in detail, what Basel accord has in its regulation.FROM ORIGIN OF BASEL TILL executionBasel was an attempt to reduce the quantity of bank failures in a country, due to the insufficient capital which ties a banks Capital Adequacy Ratio (CAR) to the risk of the impart Banks makes. In 1988, The Basel Committee for Banking Supervision (BCBS) did the premier(prenominal) attempt to implement such methods worldwide, which enhance the risk absorption power of the banks. Basel I was the initial or first set of capital requirement for all actively inte rnational banks because it sets charges for the credit risk which is known as crude capital charges. It instituted for the first time the requirement of minimum capital which must be held by the international banks to avoid the financial risk. In 1980, credit risk was the dominant receiveer in risk class for banks but by the early 1990s, banks became more anxious to be a part of the capital market and for those markets which are larger and more liquid, and to play their role, and they did that. The significance and importance of risk then arose in the banks, but the Basel I merely emphasized on the credit risk. To overcome the risk of all traits, a new framework was desperately required to make the risk calculation and reporting more sophisticated. The BCBS agreed upon the market risk amendments in 1996 from there the concept of Basel II was born (Reuvid, 2008). Initially, the capital charges were based on definite standards, defined by the BCBS,