Arbeitspapier

Risk and risk weights

This paper studies the relationship between the riskiness of banks' assets and their average risk weight. Banks' initial risk weights explain about half of the variation in projected credit losses in the 2018 European Banking Authority stress test. In contrast to related papers, this paper also shows a statistically and economically significant relationship between risk weights and estimates of banks' asset volatilities based on market data. However, I also find issues with risk weights as measures of risk. They do a worse job of explaining future credit losses than do asset volatilities, especially in the case of banks using internal models.

Language
Englisch

Bibliographic citation
Series: Danmarks Nationalbank Working Papers ; No. 145

Classification
Wirtschaft
Financial Institutions and Services: General
Financial Institutions and Services: Government Policy and Regulation
Subject
Financial regulation
stress tests
credit risk

Event
Geistige Schöpfung
(who)
Korsgaard, Søren
Event
Veröffentlichung
(who)
Danmarks Nationalbank
(where)
Copenhagen
(when)
2019

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Korsgaard, Søren
  • Danmarks Nationalbank

Time of origin

  • 2019

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