The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis.

Additional Metadata
Keywords Basil II Accord, aggressive or conservative risk management strategies, daily capital charges, exogenous and endogenous violations, financial crisis, optimizing strategy, risk forecasts, value at risk (VAR), violation penalties
JEL Time-Series Models; Dynamic Quantile Regressions (jel C22), Forecasting and Other Model Applications (jel C53), Portfolio Choice; Investment Decisions (jel G11), Financial Forecasting (jel G17), Financing Policy; Capital and Ownership Structure (jel G32)
Publisher Tinbergen Institute
Persistent URL
Series Tinbergen Institute Discussion Paper Series
Journal Discussion paper / Tinbergen Institute
McAleer, M.J, Jiménez-Martín, J.A, & Pérez-Amaral, T. (2009). Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis? (No. TI-2009-039/4). Discussion paper / Tinbergen Institute. Tinbergen Institute. Retrieved from