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

Mathias Drehmann and Piergiorgio Alessandri

No 1041, Working Paper Series from European Central Bank

Abstract: Banks typically determine their capital levels by separately analysing credit and interest rate risk, but the interaction between the two is significant and potentially complex. We develop an integrated economic capital model for a banking book where all exposures are held to maturity. Our simulations show that capital is mismeasured if risk interdependencies are ignored: adding up economic capital against credit and interest rate risk derived separately provides an upper bound relative to the integrated capital level. The magnitude of the difference depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities. JEL Classification: G21, E47, C13

Keywords: asset and liability management; credit risk; Economic capital; Interest Rate Risk; risk management (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (6)

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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 (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091041

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