Measuring Integrated Market and Credit Risks in Bank Portfolios: An Application to a Set of Hypothetical Banks Operation in South Africa
IMF Working Papers, December 1, 2000
Source details
- Canonical URL
- Measuring Integrated Market and Credit Risks in Bank Portfolios: An Application to a Set of Hypothetical Banks Operation in South Africa
Other formats
Bibliographic details
- Authors: Panagiotis Papapanagiotou, Theodore M. Barnhill, Miss Liliana B Schumacher
- Published: December 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874884.001
Summary
- The banking crises of the 1990s emphasize the need to model the connections between volatility and the potential losses faced by financial institutions due to correlated market and credit risks.
- The authors present a simulation model that explicitly links changes in the financial environment and the distribution of future bank capital ratios.
- The methodology is forward-looking and quantitative, allowing banks and regulators to identify risks before they materialize and make appropriate adjustments to banks’ portfolios.
- The model was applied to the study of the risk profile of the largest South African banks in the context of the Financial System Stability Assessment (FSSA) (1999).
Model and Application
- Simulation model that explicitly links:
- changes in the financial environment, and
- the distribution of future bank capital ratios.
- Application context:
- Study of the risk profile of the largest South African banks.
- Context: Financial System Stability Assessment (FSSA) (1999).
Key Topics and Technical Focus
- Subject areas:
- Banking, Credit, Credit risk, Financial institutions, Financial regulation and supervision, Loans, Market risk, Money, Mortgages.
- Keywords preserved from source:
- Africa, bank assets, bank portfolio, bank portfolio risk, bank risk level, business loan, Credit, credit quality, credit rating, credit risk, hypothetical bank, Loans, market risk, Mortgages, quality distribution, risk level, term structure, VaR, WP.
Findings, Projections, and Implications
- The forward-looking quantitative risk assessment methodology:
- Identifies correlated market and credit risks affecting bank capital ratios.
- Enables preemptive adjustments to banks’ portfolios by banks and regulators.
- Implication drawn from application:
- Modeling interconnections between market volatility and credit losses improves understanding of potential future capital adequacy outcomes for banks.
Policy Recommendations and Use Cases
- Regulators and banks should:
- Use forward-looking simulation-based risk assessment to monitor correlated market and credit risks.
- Adjust portfolio composition proactively in response to simulated distributions of future bank capital ratios.