The Integrated Impact Of Credit And Interest Rate Risk On Banks: An Economic Value And Capital Adequacy Perspective
Source: Bank of England
Credit and interest rate risk in the banking book are the two most important risks faced by commercial banks. In this paper the authors 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 modeling the whole portfolio of a bank and by taking account of the repricing characteristics of all exposures, they 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.