Tid: 1 juni 2017 kl 9.15-9.50.

Föredragshållare: Henrik Ribom

Title: Consolidating multi-factor models of systematic risk with regulatory capital

Abstract: To maintain solvency in times of severe economic downturns banks and financial institutions keep capital cushions that reflect the risks in the balance sheet. Broadly, how much capital that is being held is a combination of external requirements from regulators and internal assessments of credit risk. We discuss alternatives to the Basel Pillar II capital add-on based on multi-factor models for held capital and how these can be applied so that only concentration (or sector) risk affects the outcome, even in a portfolio with prominent idiosyncratic risk. Further, the stability and reliability of these models are evaluated. We found that this idiosyncratic risk can efficiently be removed both on a sector and a portfolio level and that the multi-factor models tested converge. We introduce two new indices based on Risk Weighted Assets (RI) and Economic Capital (EI). Both show the desired effect of an intuitive dependence on the PD and LGD. Moreover, EI shows a dependence on the inter-sector correlation. In the sample portfolio, we show that the high concentration in one sector could be (better) justified by these methods when the low average LGD and PD of this sector were taken into consideration.

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