A Comprehensive View on Risk Reporting: Evidence from Supervisory Data

37 Pages Posted: 11 Aug 2017 Last revised: 18 Aug 2017

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Michael Schmidt

Deutsche Bundesbank; Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2017

Abstract

We examine how banks that use internal ratings-based (IRB) approaches assign credit risk in the credit portfolio depending on their market risk exposure in the trading book. We find that banks with higher market risk exposure in the trading book report lower credit risk ratings to the same borrower at the same time, especially when the bank has more binding regulatory capital limits. We relate this behaviour to the discretion inherent to the models used under the IRB approach and find that it is more pronounced for non-transparent borrowers, when market discipline is low, and regulatory supervision is less stringent. These results suggest incentive spill-overs across different risk categories and imply that supervision requires a comprehensive view on risk dimensions.

Keywords: internal ratings-based regulation, credit risk, market risk, cross-subsidization, capital regulation, comprehensive risk assessment

JEL Classification: G01, G21, G28

Suggested Citation

Abbassi, Puriya and Schmidt, Michael, A Comprehensive View on Risk Reporting: Evidence from Supervisory Data (August 9, 2017). Available at SSRN: https://ssrn.com/abstract=3015743 or http://dx.doi.org/10.2139/ssrn.3015743

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Michael Schmidt

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 4
Hauspostfach 64
Frankfurt, 60629
Germany

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