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Integrating Credit and Interest Rate Risk: A Theoretical Framework and an Application to Banks Balan
Company: Bank of England
Company Url: Click here to open
Year Of Publication: 2007
Month Of Publication: February
Pages: 34
Download Count: 366
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 4-26-2007
Publisher: Administrator
Summary
Credit and interest rate risk in the banking book are the two most important risks faced by commercial banks. In this paper we derive a consistent and general framework to measure the riskiness of a bank which is subject to correlated interest rate and credit risk. The framework accounts for all sources of credit risk, interest rate risk and their combined impact. As we model the whole balance sheet of a bank the framework not only enables us to assess the impact of credit and interest rate risk on the bank’s economic value but also on its future earnings and capital adequacy. We apply our framework to a hypothetical bank in normal and stressed conditions. The simulation highlights that it is fundamental to measure the impact of correlated interest rate and credit risk jointly as well as on the whole portfolio of banks, including assets, liabilities and off-balance sheet items. This paper was previously titled, "Integrating Credit and Interest Rate Risk: A Theoretical Framework and an Application to Banks' Balance Sheets
Author(s)
Drehmann, Mathias Sign in to follow this author
Sorensen, Steffen Sign in to follow this author
Stringa, Marco Sign in to follow this author
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