Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153475
Authors: 
Alessandri, Piergiorgio
Drehmann, Mathias
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1041
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.
Subjects: 
asset and liability management
Credit risk
Economic capital
interest rate risk
risk management
JEL: 
G21
E47
C13
Document Type: 
Working Paper

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