The Var at Risk
Abstract
I show that the structure of the firm is not neutral with respect to regulatory capital
budgeted under rules which are based on the Value-at-Risk. Indeed, when a holding
company has the liberty to divide its risk into as many subsidiaries as needed, and
when the subsidiaries are subject to capital requirements according to the Value-at-Risk
budgeting rule, then there is an optimal way to divide risk which is such that the total
amount of capital to be budgeted by the shareholder is zero. This result may lead to
regulatory arbitrage by some firms.