Theoretical model of macroprudential add-ons to risk-weights for foreign-currency denominated loans

H. I. Penikas ()

Voprosy Ekonomiki, 2024, issue 12

Abstract: We offer a Merton-Vasicek model extension to account for the presence of foreign-currency denominated loans in the portfolio and to derive the value of the macroprudential add-ons to risk-weights in the capital adequacy ratio. We show how the add-ons depend upon the foreign-currency exchange rate volatility, and upon the ratio of foreign-currency denominated assets and liabilities of typical borrowers within such a loan portfolio. In addition, we explain why it is worth accounting for the exchange rate in the additive, and not multiplicative form in the theoretical model.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:nos:voprec:y:2024:id:4961

DOI: 10.32609/0042-8736-2024-12-69-85

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