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The purpose of this paper is to study connections between interest rate risk and credit risk and investigate the inter-risk diversification benefit due to the joint consideration of these risks in the banking book containing sovereign debt.

The paper develops the historical derivative-based value at risk (VaR) for assessing the downside risk of a sovereign debt portfolio through the integrated treatment of interest rate and credit risks. The credit default swaps spreads and the fixed-leg rates of interest rate swap are used as proxies for credit risk and interest rate risk, respectively.

The proposed methodology is applied to the decade-long history of emerging markets sovereign debt. The empirical analysis demonstrates that the diversified VaR benefits from imperfect correlation between the risk factors. Sovereign risks of non-core emu states and oil producing countries are discussed through the prism of VaR metrics.

The proposed approach offers a clue for improving risk management in regards to banking books containing government bonds. It could be applied to access the riskiness of investment portfolios containing the wider spectrum of assets beyond the sovereign debt. The approach represents a useful tool for investigating interest rate and credit risk interrelation.

The proposed enhancement of the traditional historical VaR is twofold: usage of derivative instruments’ quotes and simultaneous consideration of the interest rate and credit risk factors to construct the hypothetical liquidity-free bond yield, which allows to distil liquidity premium.

This study aims to render a fundamental assessment of the Basel II internal ratings-based (IRB) approach by taking readings of the Australian banking sector since the implementation of Basel II and comparing them with signals from macroeconomic indicators, financial statistics and external credit ratings. The IRB approach to capital adequacy for credit risk, which implements an asymptotic single risk factor (ASRF) model, plays an important role in protecting the Australian banking sector against insolvency.

Realisations of the single systematic risk factor, interpreted as describing the prevailing state of the Australian economy, are recovered from the ASRF model and compared with macroeconomic indicators. Similarly, estimates of distance-to-default, reflecting the capacity of the Australian banking sector to absorb credit losses, are recovered from the ASRF model and compared with financial statistics and external credit ratings. With the implementation of Basel II preceding the time when the effect of the financial crisis of 2007-2009 was most acutely felt, the authors measure the impact of the crisis on the Australian banking sector.

Measurements from the ASRF model find general agreement with signals from macroeconomic indicators, financial statistics and external credit ratings. This leads to a favourable assessment of the ASRF model for the purposes of capital allocation, performance attribution and risk monitoring. The empirical analysis used in this paper reveals that the recent crisis imparted a mild stress on the Australian banking sector.

Given the range of economic conditions, from mild contraction to moderate expansion, experienced in Australia since the implementation of Basel II, the authors cannot attest to the validity of the model specification of the IRB approach for its intended purpose of solvency assessment.

Access to internal bank data collected by the prudential regulator distinguishes this paper from other empirical studies on the IRB approach and financial crisis of 2007-2009. The authors are not the first to attempt to measure the effects of the recent crisis, but they believe that they are the first to do so using regulatory data.

The purpose of this paper is to investigate the effects of macroeconomic factors on secured and unsecured household loans from UK banks.

The approach uses Vector auto‐regression models to test the relationship between macroeconomic factors such as interest rates, house prices, unemployment rates, disposable income and bank write‐offs to discern the main factors which could impact on banks' losses.

This paper identifies several macroeconomic factors that influence loan losses. The influence however depends on the type of arrears. Changes in house prices, interest rates and unemployment rates have a significant impact on secured loans. There is however, minimal impact on unsecured loans. Unemployment stands out as the major factor that influences both mortgage and credit card arrears. The estimated results show that the main factors impacting on credit cards are disposable income and unemployment rates, while changes in interest rates have no impact on credit card write‐offs.

This paper's value lies in providing methods by which commercial banks could manage household loans better by reducing the effects of macroeconomic factors.

Demonstrates complete overview of risk‐adjusted performance measurement (RAPM) and how it can be a key management tool – particularly when combined with an economic capital allocation framework. Discusses RAPM and how it would enable senior management to allocate economic capital more effectively to help to maximize overall risk‐adjusted returns on the whole of the firm’s economic capital. Summarizes with correct risk management methodology institutions should see greater profits and the rest of the benefits to develop strong, risk control structure.

The new capital accord, otherwise known as Basel II, from the Basel Committee on Banking Supervision, addresses the issue of financial risk. Within the latest version of the new accord and numerous consultation papers, the committee has reinforced its emphasis on risk management, encouraging banks to improve their risk assessment capabilities. Basel II attempts to accomplish this by closely aligning capital with modern risk management best practices, and by ensuring that the emphasis on risk makes its way onto supervisory practices and market discipline. Thus, regulatory pressure is, and will remain over the near future, a key driver of risk management systems development across market, credit and operational risk.

As the end of the 2006 deadline to implement regulatory changes being proposed by the Basel Committee on Banking Supervision looms closer, banks are battling to make their credit risk management systems compliant. But the majority are looking beyond the demands of the regulator. Some are realizing that Basel II provides them with an opportunity to improve their overall risk management strategy, improve business decision‐making, and increase shareholder value.

The purpose of the paper is to study the relevance of macroprudential policies (MPPs) in influencing bank lending in small open economies with dual banking systems.

In the analysis, the author employed the dynamic panel data methodology as compared to alternate techniques since it is able to address potential endogeneity challenges.

Using quarterly data from the period 2002–2020, the author finds that MPPs are highly effective in containing the growth of public credit, whereas its impact on private credit is much less effective. The disaggregated findings reveal that macroprudential measures are less effective in containing the growth of private credit by Islamic banks.

The majority of studies on MPPs are focused on emerging and advanced economies, limiting their policy appeal from the standpoint of small open economies. In this connection, this paper contributes to the literature on the relevance of such policies for a small open economy with a dual banking system and significant hydrocarbon exports. The paper's analysis therefore holds relevance for similar economies, both in the region and elsewhere, on the role and relevance of MPPs with emphasis on Islamic banks.

The IRB capital requirements of Basel II define the minimum level of capital that the bank has to retain to cover the current risks of its portfolio. The major risk that many banks are facing is credit risk and Basel II provides an approach to calculate its capital requirement. It is well known that Pillar I Basel II approach for credit risk capital requirements does not include concentration risk. The paper aims to propose a model modifying Basel II methodology (IRB) to include name concentration risk.

The model is developed on data based on a portfolio of Greek companies that are financed by Greek commercial banks. Based on the initial portfolio, new portfolios were simulated having a range of different credit risk parameters. Subsequently, the credit VaR of various portfolios was regressed against the credit risk indicators such as Basel II capital requirements, modified Herfindahl Index and a non-linear model was developed. This model modifies the Pillar I IRB capital requirements model of Basel II to include name concentration risk.

As the Pillar I IRB capital requirements model of Basel II does not include concentration risk, the credit VaR calculations performed in the present work appeared to have gaps with the Basel II capital requirements. These gaps were more apparent when there was high concentration risk in the credit portfolios. The new model bridges this gap providing with a correction coefficient.

The credit VaR of a loan portfolio could be calculated from the bank easily, without the use of additional complicated algorithms and systems.

The model is constructed in such a way as to provide an approximation of credit VaR satisfactory for business loan portfolios whose risk parameters lie within the range of those in a realistic bank credit portfolio and without the application of Monte Carlo simulations.

Quantile‐based measures of risk, e.g., value at risk (VaR), are widely used in portfolio risk applications. Increasing attention is being directed toward managing risk, which involves identifying sources of risk and assessing the economic impact of potential trades. This article compares the performance of two quantile‐based VaR estimators commonly applied to assess the market risk of option portfolios and the credit risk of bond portfolios.

Risk capital is an important input for management functions. Capital structure decisions, capital budgeting, and ex post performance measurement require different measures of risk capital. While it has become common to estimate risk capital using VaR models, it is not clear that VaR‐based capital estimates are optimal for applications to management functions (e.g. risk management, capital budgeting, performance measurement, or regulation). This article considers three typical problems that require an estimate of credit risk capital: an optimal equity capital allocation; an optimal capital allocation for capital budgeting decisions; and an optimal capital allocation to remove moral hazard incentives from a compensation contract based on ex post performance. The optimal credit risk capital allocation is different for each problem and is never consistent with a credit VaR estimate of unexpected loss. The results demonstrate that the optimal risk capital allocation depends on the objective.