expected losses, as reflected in loan loss allowances, we establish a theoretical link to asset volatility. We document a … sensitivity regarding loan loss allowances has been insufficient, at least since the financial crisis …

regardless of the size of potential losses. We allow for a range of confidence levels that depend on the loss magnitude. The key … ingredient is a benchmark loss distribution (BLD), i.e.~a function that associates to each potential loss a maximal acceptable … probability of occurrence. The corresponding risk measure, called Loss VaR (LVaR), determines the minimal capital injection that …

a two-state world, implies that haircuts will adjust to render all lending riskless, and that a loss of risk capital on …