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

Piergiorgio Alessandri and Mathias Drehmann ()

Journal of Banking & Finance, 2010, vol. 34, issue 4, 730-742

Abstract: Banks often measure credit and interest rate risk in the banking book separately and then add the risk measures to determine economic capital. This approach misses complex interactions between the two risk types. We develop a framework where these risks are analysed jointly. Since banking book positions are generally not marked to market, our model is based on book value accounting. Our simulations show that interactions matter, and that ignoring them leads to risk overstatement. The magnitude of the errors depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities.

Keywords: Economic; capital; Risk; management; Credit; risk; Interest; rate; risk; Asset; and; liability; management (search for similar items in EconPapers)
Date: 2010
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Working Paper: An economic capital model integrating credit and interest rate risk in the banking book (2010) Downloads
Working Paper: An economic capital model integrating credit and interest rate risk in the banking book (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:4:p:730-742

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