MEASUREMENT OF INTERNAL MODEL OF VALUE AT RISK IN INDONESIAN BANK INDUSTRY UNDER BASEL III

Abstract

It is well known that in investment the existence of the relationship between risk and return is very strong. Bank as a financial institution that serves to collect funds from the public in the form of demand deposits, time deposits, and other deposits and channeled back in the form of credit, also has to consider the risks very well, especially the credit risks. The global financial crisis in 2008 brought a significant influence on credit risk and also credit valuation adjustment (CVA) risk framework. Since then The Basel II was improved by The Basel III which was first published in December 2009. Introducing new adjustment for capital adequate ratio (CAR) and model of capital cost risk against the volatility model for CVA, as for the improvement of The Basel II risk framework.

The purpose of this study was to measure how well the risk model that has been used by the government bank in Indonesia compare to the new CVA Internal Model based on The Basel III. In this study VaR as the measurement tool for risk framework can be applied into the new regulation of The Basel III. This study is using the purposive sampling technique, and using the data of the banks that go public on the Indonesian Stock Exchange in 2013-2015. To make the calculation of risk volatility more precisely, ARMA and GARCH model will be applied into the Internal Model based on The Basel III.