IDEAS home Printed from https://ideas.repec.org/a/onb/oenbfs/y2008i15b3.html
   My bibliography  Save this article

Is Current Capital Regulation Based on Conservative Risk Assessment?

Author

Listed:
  • Thomas Breuer

    (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.)

  • Martin Jandacka

    (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.)

  • Klaus Rheinberger

    (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.)

  • Martin Summer

    (Oesterreichische Nationalbank, Economic Studies Division)

Abstract

We criticize the popular view that separately calculating regulatory capital for market and credit risk yields a conservative aggregate risk assessment. We show that this view depends on a flawed intuition about diversification effects that arise between subportfolios. If a bank’s portfolio cannot be neatly divided into two subportfolios along the lines of market and credit risk, simply adding up the respective results may cause the true portfolio risk to be underestimated. Using the example of foreign currency loan portfolios, we show that this underestimation can be quantitatively significant.

Suggested Citation

  • Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2008. "Is Current Capital Regulation Based on Conservative Risk Assessment?," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 15, pages 112-118.
    • Handle: RePEc:onb:oenbfs:y:2008:i:15:b:3
    as

    Download full text from publisher

    File URL: https://www.oenb.at/dam/jcr:403fc863-2a6b-4a08-a00a-1906c01e7cd7/fsr_15_special_topics_03_tcm16-87341.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sokolov, Yuri, 2009. "Interaction between market and credit risk: Focus on the endogeneity of aggregate risk," MPRA Paper 18245, University Library of Munich, Germany.
    2. Miloš Božović & Branko Urošević & Boško Živković, 2009. "On The Spillover Of Exchangerate Risk Into Default Risk," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 54(183), pages 32-55, October -.
    3. Edson Bastos e Santos & Neil Esho & Marc Farag & Christopher Zuin, 2020. "Variability in risk-weighted assets: what does the market think?," BIS Working Papers 844, Bank for International Settlements.
    4. Sokolov, Yuri, 2012. "Modeling risk in a dynamically changing world: from association to causation," MPRA Paper 40096, University Library of Munich, Germany.

    More about this item

    Keywords

    Integrated analysis of market and credit risk; risk management; foreign currency loans; banking regulation.;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:onb:oenbfs:y:2008:i:15:b:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Stefan W. Schmitz (email available below). General contact details of provider: https://edirc.repec.org/data/oenbbat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.