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Mathias Drehmann - One of the best experts on this subject based on the ideXlab platform.
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an economic capital model integrating credit and Interest Rate Risk in the banking book
Journal of Banking and Finance, 2010Co-Authors: Piergiorgio Alessandri, Mathias DrehmannAbstract:Banks often measure credit and Interest Rate Risk in the banking book sepaRately and then add the Risk measures to determine economic capital. This approach misses complex interactions between the two Risk types. We develop a framework where these Risks are analysed jointly. Since banking book positions are generally not marked to market, our model is based on book value accounting. Our simulations show that interactions matter, and that ignoring them leads to Risk overstatement. The magnitude of the errors depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities.
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an economic capital model integrating credit and Interest Rate Risk in the banking book
Research Papers in Economics, 2010Co-Authors: Piergiorgio Alessandri, Mathias DrehmannAbstract:Banks often measure credit and Interest Rate Risk sepaRately and then add the two Risk measures to determine their overall economic capital. This approach misses complex interactions between the two Risks. We develop a framework where credit and Interest Rate Risks are analysed jointly. We focus on a traditional banking book where all positions are held to maturity and subject to book value accounting. Our simulations show that interactions between Risks matter, and that their implications depend on the structure of the balance sheet and on the repricing characteristics of assets and liabilities. The analysis suggests that a joint analysis of Risks can deliver substantially different results relative to a piece-wise approach: Risk integration is challenging but feasible and worthwhile.
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the integRated impact of credit and Interest Rate Risk on banks a dynamic framework and stress testing application
Journal of Banking and Finance, 2010Co-Authors: Mathias Drehmann, Steffen Sorensen, Marco StringaAbstract:Credit and Interest Rate Risk are the two most important Risks faced by commercial banks in their banking book. In this paper we derive a consistent and comprehensive framework to measure the integRated impact of both Risks. By taking account of the repricing characteristics of assets, liabilities and off balance sheet items, we assess the integRated impact of credit and Interest Rate Risk on banks’ economic value and capital adequacy. We then stress test a hypothetical but realistic bank using our framework and show that it is fundamental to measure the impact of credit and Interest Rate Risk jointly.
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an economic capital model integrating credit and Interest Rate Risk in the banking book
Social Science Research Network, 2009Co-Authors: Piergiorgio Alessandri, Mathias DrehmannAbstract:Banks typically determine their capital levels by sepaRately analysing credit and Interest Rate Risk, but the interaction between the two is significant and potentially complex. We develop an integRated economic capital model for a banking book where all exposures are held to maturity. Our simulations show that capital is mismeasured if Risk interdependencies are ignored: adding up economic capital against credit and Interest Rate Risk derived sepaRately provides an upper bound relative to the integRated capital level. The magnitude of the difference depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities.
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the integRated impact of credit and Interest Rate Risk on banks an economic value and capital adequacy perspective
Research Papers in Economics, 2008Co-Authors: Mathias Drehmann, Steffen Sorensen, Marco StringaAbstract:Credit and Interest Rate Risk in the banking book are the two most important Risks faced by commercial banks. In this paper we derive a consistent and general framework to measure the integRated impact of both Risks on banks' portfolios. The framework accounts for all sources of credit Risk and Interest Rate Risk. By modelling the whole portfolio of a bank and by taking account of the repricing characteristics of all exposures, we can assess the impact of credit and Interest Rate Risk not only on the bank's economic value but also on its future earnings and capital adequacy. We apply our framework to a hypothetical bank in normal and stressed conditions. The simulation highlights that it is fundamental to measure the impact of Interest Rate and credit Risk jointly. We also show that it is crucial to model the whole portfolio, including the repricing and maturity characteristics of assets, liabilities and off balance sheet items.
Marco Wilkens - One of the best experts on this subject based on the ideXlab platform.
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Interest Rate Risk of German financial institutions: the impact of level, slope, and curvature of the term structure
Review of Quantitative Finance and Accounting, 2009Co-Authors: Marc-gregor Czaja, Hendrik Scholz, Marco WilkensAbstract:We investigate here the sensitivity of the equity values of a large sample of German financial institutions to movements in the term structure of Interest Rates. While similar approaches rely on a single Interest Rate factor only, we quantify the exposure to changes in level, slope, and curvature, which are the driving factors of term structure changes. Our main findings are: (i) banks and insurances are exposed to level and curvature changes but only marginally to slope movements; (ii) the Interest Rate Risk exposure depends on the banking sector investigated; (iii) level and curvature changes are priced in the cross-section of stock returns.
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Interest Rate Risk of german financial institutions the impact of level slope and curvature of the term structure
Social Science Research Network, 2008Co-Authors: Hendrik Scholz, Marc-gregor Czaja, Marco WilkensAbstract:We investigate here the sensitivity of the stock returns of German financial institutions to changes in the shape of the term structure of Interest Rates. The standard approach has been to measure the Interest Rate sensitivity of stock returns by focussing solely on changes in a single Interest Rate factor. We extend this approach to capture the sensitivity to changes in level, slope, and curvature of the term structure. More specifically, we use the parameters of the model by Nelson and Siegel (1987) to fit the term structure, which can be interpreted as the term structure's level, slope, and curvature. Applying multi-factor models, we find the level factor to be the single most important Interest Rate factor explaining stock returns. Nevertheless, neglecting the curvature factor would lead to a significant underestimation of the Interest Rate Risk of financial institutions. The slope factor, on the other hand, has only minor importance for financial institutions. Moreover, we document both time-varying and industry-specific exposure to changes in the shape of the term structure. Finally, in an APT context, we test whether changes in level, slope, and curvature of the term structure are priced factors in the German equity market. We find the level and the curvature factor to be rewarded in the cross-section of expected returns in the German equity market, suggesting that both represent systematic Risk factors.
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analyzing the Interest Rate Risk of banks using time series of accounting based data evidence from germany
2008Co-Authors: Marco Wilkens, Christoph Memmel, Oliver Entrop, Alexander ZeislerAbstract:This paper describes the first thorough analysis of the Interest Risk of German banks on an individual bank level. We develop a new method that is based on time series of accountingbased data to quantify the Interest Risk of banks and apply it to analyze the German banking system. We find evidence that our model yields a significantly better fit of banks' internally quantified Interest Rate Risk than a standard approach that relies on one-point-in-time data, and that the Interest Rate Risk differs between banks of different size and banking group. Additionally, we find structural differences between trading book and non-trading book institutions.
Jose Vicente - One of the best experts on this subject based on the ideXlab platform.
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are Interest Rate options important for the assessment of Interest Rate Risk
Research Papers in Economics, 2009Co-Authors: Caio Almeida, Jose VicenteAbstract:Fixed income options contain substantial information on the price of Interest Rate volatility Risk. In this paper, we ask if those options will provide information related to other moments of the objective distribution of Interest Rates. Based on a dynamic term structure model, we find that Interest Rate options are useful for the identification of Interest Rate quantiles. A three-factor model with stochastic volatility is adopted and its adequacy to estimate Value at Risk of zero coupon bonds is tested. We find significant difference on the quantitative assessment of Risk when options are (or not) included in the estimation process of the dynamic model. Statistical back tests indicate that bond estimated Risk is clearly more adequate when options are adopted, although not yet completely satisfactory.
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are Interest Rate options important for the assessment of Interest Rate Risk
Social Science Research Network, 2008Co-Authors: Caio Almeida, Jose VicenteAbstract:Fixed income options contain substantial information on the price of Interest Rate volatility Risk. In this paper, we ask if those options will also provide information related to other moments of the objective distribution of Interest Rates. Based on dynamic term structure models within the class of affine models, we find that Interest Rate options are useful for the identification of Interest Rate quantiles. Two three-factor models are adopted and their adequacy to estimate Value at Risk of zero coupon bonds is tested. We find significant difference on the quantitative assessment of Risk when options are (or not) included in the estimation process of each of these dynamic models. Statistical backtests indicate that bond estimated Risk is clearly more adequate when options are adopted, although not yet completely satisfactory.
Marc-gregor Czaja - One of the best experts on this subject based on the ideXlab platform.
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Interest Rate Risk of German financial institutions: the impact of level, slope, and curvature of the term structure
Review of Quantitative Finance and Accounting, 2009Co-Authors: Marc-gregor Czaja, Hendrik Scholz, Marco WilkensAbstract:We investigate here the sensitivity of the equity values of a large sample of German financial institutions to movements in the term structure of Interest Rates. While similar approaches rely on a single Interest Rate factor only, we quantify the exposure to changes in level, slope, and curvature, which are the driving factors of term structure changes. Our main findings are: (i) banks and insurances are exposed to level and curvature changes but only marginally to slope movements; (ii) the Interest Rate Risk exposure depends on the banking sector investigated; (iii) level and curvature changes are priced in the cross-section of stock returns.
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Interest Rate Risk of german financial institutions the impact of level slope and curvature of the term structure
Social Science Research Network, 2008Co-Authors: Hendrik Scholz, Marc-gregor Czaja, Marco WilkensAbstract:We investigate here the sensitivity of the stock returns of German financial institutions to changes in the shape of the term structure of Interest Rates. The standard approach has been to measure the Interest Rate sensitivity of stock returns by focussing solely on changes in a single Interest Rate factor. We extend this approach to capture the sensitivity to changes in level, slope, and curvature of the term structure. More specifically, we use the parameters of the model by Nelson and Siegel (1987) to fit the term structure, which can be interpreted as the term structure's level, slope, and curvature. Applying multi-factor models, we find the level factor to be the single most important Interest Rate factor explaining stock returns. Nevertheless, neglecting the curvature factor would lead to a significant underestimation of the Interest Rate Risk of financial institutions. The slope factor, on the other hand, has only minor importance for financial institutions. Moreover, we document both time-varying and industry-specific exposure to changes in the shape of the term structure. Finally, in an APT context, we test whether changes in level, slope, and curvature of the term structure are priced factors in the German equity market. We find the level and the curvature factor to be rewarded in the cross-section of expected returns in the German equity market, suggesting that both represent systematic Risk factors.
Enzo Scannella - One of the best experts on this subject based on the ideXlab platform.
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measurement of banks exposure to Interest Rate Risk a financial and managerial perspective la misurazione dell esposizione al rischio di tasso di interesse negli intermediari bancari una prospettiva economico aziendale
2006Co-Authors: Enzo ScannellaAbstract:The Interest Rate Risk is the degree of exposure of a bank’s financial condition to adverse movements in Interest Rates. Changes in Interest Rates affect a bank’s earnings by changing its net Interest income and the level of other Interest-sensitive income and operating expenses. Changes in Interest Rates also affect the underlying value of the bank’s assets, liabilities and off-balance sheet instruments. Changes in banks’ competitive environment, products, and services have heightened the importance of prudent Interest Rate Risk management. More recently, Interest Rates have become more volatile, and banks have arguably become more exposed to such volatility. The first section of this paper describes the primary forms of Interest Rate Risk to which banks are typically exposed. These include repricing Risk, yield curve Risk, basis Risk and option Risk. The second section aims to review the different Interest Rate Risk measurement models proposed by the Literature, through the two perspectives for assessing a bank’s Interest Rate Risk exposure: the earnings perspective and the economic value perspective.
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bank regulation and Interest Rate Risk a managerial perspective la regolamentazione del rischio di tasso di interesse nelle banche una prospettiva economico aziendale
2005Co-Authors: Enzo ScannellaAbstract:The paper aims to investigate some significant critical issues of the national and international regulation of bank Interest Rate Risk. Particularly, the paper examines the link between internal models and standardized models used by banks to provide financial information to banking authorities and stakeholders.
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Interest Rate Risk and banking intermediation an asset and liability management perspective il rischio di tasso di interesse nell economia degli intermediari bancari una prospettiva di asset liability management
2005Co-Authors: Enzo ScannellaAbstract:Interest Rate Risk is the exposure of a bank's financial condition to adverse movements in Interest Rates. Changes in Interest Rates affect a bank's earnings by changing its net Interest income and also affect the underlying value of the bank's assets, liabilities and off-balance sheet instruments. This has given rise to two sepaRate, but complementary, perspectives for assessing a bank's Interest Rate Risk exposure: earnings perspective and economic value perspective. Changes in banks’ competitive environment, products, and services have heightened the importance of prudent Interest Rate Risk management. The paper aims to review the different Interest Rate Risk management models proposed by the Literature, through the perspective of asset and liability management.