In the work of the Basel Committee there has been a tradition ofdistinguishing market from credit risk and to treat both categories independentlyin the calculation of risk capital. In practice positionsin a portfolio depend simultaneously on both market and credit riskfactors. In this case, an...

This paper analyzes the impact of capital adequacy regulation on bank insolvency and aggregate investment.

Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery...

Network models of interbank exposures allow the mapping of the complex web of financial linkages among many institutions and address issues of system stability and contagion risk. Although existing models cover a fair amount of ground in explaining how network structure can lead to default...

We introduce the technique of worst case search to macro stress testing. Among the macroeconomic scenarios satisfying some plausibility constraint we determine the worst case scenario which causes the most harmful loss in loan portfolios. This method has three advantages over traditional macro...

We propose a new method for the analysis of systemic stability of a banking system relying mostly on market data. We model both asset correlations and interlinkages from interbank borrowing so that our analysis gauges two major sources of systemic risk: Correlated exposures and mutual credit...

We propose a new approach to assess the financial stability of an entire banking system using standard tools from modern risk management in combination with a network model of inter-bank loans. Rather than looking at banks individually, we analyze risk at the level of the banking system as a...

This paper contributes to the literature on default in general equilibrium. Borrowing and lending takes place via a clearing house (bank) which monitors agents and enforces contracts. Our model develops a concept of bankruptcy equilibrium that is a direct generalization of the standard general...