Regulatory capital for market and credit risk interaction: is current regulation always conservative?

Thomas Breuer, Martin Jandacka, Klaus Rheinberger () and Martin Summer

No 2008,14, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: In the work of the Basel Committee there has been a tradition of distinguishing market from credit risk and to treat both categories independently in the calculation of risk capital. In practice positions in a portfolio depend simultaneously on both market and credit risk factors. In this case, an approximation of the portfolio value function splitting value changes into a pure market risk plus pure credit risk component can lead to underestimation of risk. It can therefore not be argued that the current regulatory approach would always be conservative from a risk assessment perspective. We discuss this fact in the context of foreign currency loans and argue that under the traditional regulatory approach the true risk of a portfolio of foreign currency loans would be significantly underestimated.

Keywords: integrated analysis of market and credit risk; risk management; foreign currency loans; banking regulation (search for similar items in EconPapers)
JEL-codes: C15 G20 G28 G32 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ban and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:7324

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