Economics, Econometrics and Finance
4 years ago

Integrated model reveals banks' capital mismeasurement, impacting financial stability.

SSRN Electronic Journal
An Economic Capital Model Integrating Credit and Interest Rate Risk in the Banking Book
Piergiorgio Alessandri, Mathias Drehmann

Paper Summary

Banks need to consider both credit and interest rate risks together when determining their capital levels. A new model shows that ignoring the interaction between these risks can lead to mismeasurement of capital. By integrating credit and interest rate risk in their analysis, banks can better understand the true level of capital needed to cover potential losses.

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