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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00146-0
Full text for ScienceDirect subscribers only

Related works:
Working Paper: 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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:4:p:730-742

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().