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An Economic Capital Model Integrating Credit and Interest Rate Risk
Year Of Publication: 2007
Month Of Publication: November
Pages: 39
Download Count: 158
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 2-16-2009
Publisher: Administrator
Summary
Banks typically determine their capital levels by separately analysing credit risk and interest raterisk in the banking book. However, the interaction between the two is significant and potentiallycomplex. In this paper we develop an economic capital framework that integrates both risksconsistently, and we present a numerical implementation of the framework for a stylised bank.We show that risk is miss-measured if interdependencies are ignored. In particular, there aresignificant diversification benefits between credit and interest rate risk, though their size dependson the pricing behaviour and the balance sheet structure of the bank.
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Alessandri, Piergiorgio Sign in to follow this author
Drehmann, Mathias Sign in to follow this author
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