We propose a new approach that reconciles traditional working capital management with risk management principles. By extending the traditional working capital approach, we develop a risk-adjusted working capital model. We examine the determinants of working capital for Australian firms over the...

Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversified away. The impact of undiversified idiosyncratic risk on portfolio Value-at-Risk can be quantified via a granularity adjustment (GA). We provide an analytic formula for...

We show that the saddle-point approximation method to quantify the impact of undiversified idiosyncratic risk in a credit portfolio is inappropriate in the presence of double default effects. Specifically, we prove that there does not exist an equivalent formula to the granularity adjustment,...

In 2005 the Internal Ratings Based (IRB) approach of "Basel II" was enhanced by a "treatment of double default effects" to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several severe problems of this approach and presents a...

The net income of a company in a given year is an arbitrary number which depends on several decisions on the accounting of expenses and revenues. By contrast, each cash flow (money going out of the cash of the company into someone's pocket: shareholders, debt owners...) is a single number not...

This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms' different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue...

Advocates for internal model-based capital regulation argue that this approach will reduce costs and remove distortions that are created by rules-based capital regulations. These claims are examined using a Merton-style model of deposit insurance. Analysis shows that internal model-based capital...

We model the evolution of stylised bank loan portfolios to assess the impact of IFRS 9 and US GAAP expected loss model (ECL) on the cyclicality of loan write-off losses, loan loss provisions (LLPs) and capital ratios of banks, relative to the incurred loss model of IAS 39. We focus on the...