An economic capital model integrating credit and interest rate risk in the banking book

Piergiorgio Alessandri and Mathias Drehmann

No 388, Bank of England working papers from Bank of England

Abstract: Banks often measure credit and interest rate risk separately and then add the two risk measures to determine their overall economic capital. This approach misses complex interactions between the two risks. We develop a framework where credit and interest rate risks are analysed jointly. We focus on a traditional banking book where all positions are held to maturity and subject to book value accounting. Our simulations show that interactions between risks matter, and that their implications depend on the structure of the balance sheet and on the repricing characteristics of assets and liabilities. The analysis suggests that a joint analysis of risks can deliver substantially different results relative to a piece-wise approach: risk integration is challenging but feasible and worthwhile.

Keywords: Economic capital; risk management; credit risk; interest rate risk; asset and liability management (search for similar items in EconPapers)
JEL-codes: C13 E47 G21 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2010-06-01
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (43)

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Related works:
Journal Article: An economic capital model integrating credit and interest rate risk in the banking book (2010)
Working Paper: An economic capital model integrating credit and interest rate risk in the banking book (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0388

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