This paper discusses the determination of a capital charge to cover default risk on a netted derivatives portfolio. Different methods of setting a capital charge are investigated. Their ability to track a more sophisticated measure of credit risk is tested for Australian banks’ portfolios. The...

This paper examines the overall variability of Australian banks’ credit risk during the 1990s. It assesses the extent to which this overall variability can be explained by variability in the level of banks’ aggregate credit risk over time, or alternatively, by variation in the average credit...

The stability of the banking sector has long been a matter of concern for public policy. The likelihood of bank failure depends on two factors: (i) the variability of bank income (which primarily reflects the variability of the rate of return on bank assets), and (ii) the capacity of a bank to...

This paper surveys the history of last-resort lending and other support provided to financial institutions in Australia and compares the practical implementation of lender-of-last-resort policy with policy prescriptions derived from the theoretical literature. Last-resort support serves to...

The likelihood of a bank failing, within a given period of time, is a function of the variability in its income and its ability to withstand losses. These determinants depend, in turn, on the volatility of the return on bank assets and the bank’s level of capital. Although accounting measures...

The paper explores the lending behaviour of financial intermediaries over the business cycle in the light of new theories emphasising agency costs. During a “credit crunch” loans from financial intermediaries are unobtainable at any price, so that credit may have a “causal” role in...

Over the past decade value at risk (VaR) has become the most widely used technique for the quantification of market-risk exposure. VaR is a measure of the potential loss that may occur from adverse moves in market prices (interest rates, exchange rates, equity prices and so forth). The capacity...