Do Banks hold enough capital to survive the next crisis? What about concentration and systemic risk in credit portfolios? Thomas Ribarits (EIB) presents the conclusions of a paper co-written with Axel Clement, Heikki Seppälä, Hua Bai and Ser-Huang Poon in research cooperation between the EIB / EIB Institute and Manchester University in the framework of the FP7 Marie Curie ITN on Risk Management and Risk Reporting.

They take into account the complex specificities of a financial institution´s business profile by using an “economic capital framework” rather than a simplistic one-size-fits-all formula. Starting from a specific, sometimes complex, economic capital model, the paper is devoted to practical tractability: pricing decisions often need to be taken on a real time basis and do not allow for timely simulation runs which can be computationally expensive and unstable.

To manage the trade-off between complexity and practical tractability, a closed form approximation is introduced giving rise to a formula which provides accurate, consistent and quick answers to allow for e.g. informed pricing decisions.

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