Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/227863 
Year of Publication: 
2019
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 145
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
This paper studies the relationship between the riskiness of banks' assets and their average risk weight. Banks' initial risk weights explain about half of the variation in projected credit losses in the 2018 European Banking Authority stress test. In contrast to related papers, this paper also shows a statistically and economically significant relationship between risk weights and estimates of banks' asset volatilities based on market data. However, I also find issues with risk weights as measures of risk. They do a worse job of explaining future credit losses than do asset volatilities, especially in the case of banks using internal models.
Subjects: 
Financial regulation
stress tests
credit risk
JEL: 
G20
G28
Document Type: 
Working Paper

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