The lack of portfolio granularity in terms of exposure has been shown to have important implications for the amount of a financial institution's economic capital. Based on a numerical simulation model, we provide concrete examples of how granularity affects capital levels. We achieve this by...

Choosing a proper external risk measure is of great regulatory importance, as exemplified in the Basel II and Basel III Accord which use Value-at-Risk (VaR) with scenario analysis as the risk measures for setting capital requirements. We argue a good external risk measure should be robust with...

Regulatory capital for trading book positions includes two components that cover different risks but apply to the same portfolio, one for market risk and one for credit risk. Similar approaches are common in banks’ internal models for economic capital. Although it is known that joint market...

Recent literature suggests that regulatory risk measures do not adequately capture the actual economic risk of bank portfolios. We shed new light on this issue by analyzing both unexpected and expected losses and their assessment according to regulatory and accounting standards. Examining a...

Keeping in view that the roles of portfolio risk and the relationship between different risky lending assets in loan valuation have not been studied empirically, this study examines the relationship between undiversiable portfolio risk and portfolio lending with an attempt to fill the gap...

The author's study analyzes, loan valuation methods using discrete time model of contingent claims analysis. In the empirical test, the undiversifiable risk was measured by the correlation coefficient of one borrower with the average return of all borrowers. The results of the test supported the...

The paper examines whether bank diversification in multiple dimensions can protect bank lending from uncertainty shocks. We use a panel of Vietnamese commercial banks during 2007 - 2019 for empirical analysis and measure uncertainty in banking by the dispersion of bank-level shocks. Our results...

This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed...

A model is presented that shows when (Basel Accord) capital standards and (FDIC) insurance premiums primarily reflect a bank's physical expected default losses, a bank can increase its shareholder value by making loans and investing in bonds that have relatively high systematic risk. Such an...

Using supervisory data for US banks, we evaluate the alignment of Basel II/III AIRB (Advanced Internal Ratings Based) risk estimates with portfolio risk. We use loan performance as a direct measure of portfolio risk as well as less direct market-based measures. Our results document that loan...