The integrated impact of credit and interest rate risk on banks: A dynamic framework and stress testing application |
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Authors: | Mathias Drehmann Steffen Sorensen Marco Stringa |
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Institution: | 1. Research and Policy Analysis, Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland;2. Financial Economic Research, Barrie and Hibbert Ltd., 41 Lothbury, London EC2R 7HG, UK;3. Monetary Instruments and Markets Division, Bank of England, Threadneedle Street, London EC2R 8AH, UK |
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Abstract: | Credit and interest rate risk are the two most important risks faced by commercial banks in their banking book. In this paper we derive a consistent and comprehensive framework to measure the integrated impact of both risks. By taking account of the repricing characteristics of assets, liabilities and off balance sheet items, we assess the integrated impact of credit and interest rate risk on banks’ economic value and capital adequacy. We then stress test a hypothetical but realistic bank using our framework and show that it is fundamental to measure the impact of credit and interest rate risk jointly. |
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Keywords: | G21 E47 C13 |
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