We use a classic Merton credit risk framework to argue that Islamic Banking Institutions (IBIs) face less incentive to take on risks than Conventional Banking Institutions (CBI). IBIs have less incentive for risk shifting both in and outside of distress situations. We test and confirm this...

The determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. This paper seeks to study the determinants of bank asset quality and profitability using panel data techniques and robust data sets for the period between 1997 and 2009....

This paper deals with stress tests for credit risk and shows how exploiting the discretion when setting up and implementing a model can drive the results of a quantitative stress test for default probabilities. For this purpose, we employ several variations of a CreditPortfolioView-style model...

How does business complexity affect risk management in financial institutions? The commonly used risk measures rely on either balance-sheet or market-based information, both of which may suffer from identification problems when it comes to answering this question. Balance-sheet measures, such as...

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...

Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the costs of bank resolution when organizations fail, the effect of complexity on BHCs' broader...

The regulatory use of banks' internal models makes capital requirements more risk-sensitive but invites regulatory arbitrage. I develop a framework to study bank regulation with strategic selection of risk models. A bank supervisor can discourage arbitrage by auditing risk models, and implements...

We investigate financial intermediaries interest rate risk management as the simultaneous decision of on-balance-sheet exposure and interest rate swap use. Our findings show that both decisions are substitute risk management strategies. Hausman exogeneity tests indicate that both decisions are...