Thomas Breuer () (Vorarlberg University of Applied Sciences) Martin Jandacka () (Vorarlberg University of Applied Sciences) Klaus Rheinberger () (Vorarlberg University of Applied Sciences) Martin Summer () (Oesterreichische Nationalbank)
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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. JEL classification: G28, G32, G20, C15
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Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Financial Stability Report.
Order Information: Postal: Oesterreichische Nationalbank, Documentation Management and Communications Services, Otto-Wagner Platz 3, A-1090 Vienna, Austria Email:
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