This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic and idiosyncratic risks and the nature of firm heterogeneity. The theoretical results obtained indicate that if firm-specific risk...

Identifying the relevant risk factors and their interdependence is central to understanding the risk exposures and vulnerabilities of a financial institution. It is needed for risk management, solvency assessment and stress testing. We assemble a unique dataset of risk factors relevant for...

This year, 2015, marks the six-year anniversary of US regulatory stress testing. We observe three key trends: 1) Increasingly aggressive capital management: Banks initially responded to CCAR by maintaining wide capital cushions vs. regulatory minimums. However, as CCAR processes stabilize and...

Stress testing served us well as a crisis management tool, and we see it applied increasingly to peacetime oversight of banks and banking systems. Stress testing is rapidly become the dominant supervisory tool on both sides of the Atlantic. Yet the objectives and certainly the conditions are...

Banks as financial intermediaries are broadly exposed to a wide range of economic and financial risk factors. We parse climate risk into its two main types: physical risk such as sea level rise and transition risk such as climate related policy changes (e.g., efficiency requirements or carbon...