Some of the nation's largest banks are embarking this month on a project that regulators hope will help gauge how portfolios respond to market shifts.
In an experimental program organized by the New York Clearing House, each of these banks will set its own quarterly capital requirement for market risk, using its own methods to estimate the worst losses its portfolio could suffer from trading during the quarter.
The Clearing House, a consortium of big banks, calls the project the precommitment program because each participating bank must precommit to using the figure its methods indicate.
This month eight of the largest banks, including Chase Manhattan, NationsBank, and Citibank, are starting a pilot test of the program. The test is scheduled to continue until the spring of 1998; after that, precommitment may become the industry standard.
"It's a great idea because it solves several regulatory and management problems at the same time," said Tanya Styblo Beder of Capital Market Risk Advisors, a New York consultancy.
Regulators have had difficulty accurately measuring banks' value-at- risk, she said, because different companies use different forecasting models. And different models may provide different results.
Allowing banks to come up with value-at-risk estimates spares regulators from having to pick one risk management model for everyone and still gives them capital requirements to which they can hold banks accountable.
The new approach differs significantly from one approved last January by the Basel Committee on Banking Supervision. The Basel model, with which the largest U.S. banks are to begin complying next year, requires banks to estimate market risk for an entire quarter on the basis of portfolio contents on a single day.
But critics point out that bank portfolios can change daily, so a one- day snapshot might be a misleading picture of market risk for the next three months.
"Basel represents a very big step forward," said Paul Kupiec, senior economist at the Federal Reserve Board, "but there are a number of shortcomings, and there may be ways to improve it."
Under the precommitment approach, a bank could be fined or its trading activity limited if its trading losses exceeded the worst-case estimate submitted to regulators. Penalties have not been determined.
"Banks are in the business of managing risk, so why not let them do that?" Mr. Kupiec reasoned. "If they are unable to successfully, maybe there's something wrong with their business."