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Banks often measure credit and interest rate risk separately and then add the two risk measures to determine their overall economic capital. This approach misses complex interactions between the two risks. We develop a framework where credit and interest rate risks are analysed jointly. We focus...
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Traditionally, regulation of banks has focused on the riskentailed in bank loans. Loans are typically nontradedassets …. In recent years, another component of bank assetshas become increasingly important: assets actively tradedin the … financial markets.1 These assets form the “tradingbook” of a bank, in contrast to the “banking book,” whichincludes the …
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