KTH Matematik |

Economic Capital consists of internally defined capital the purpose of which is to protect shareholders from insolvency up to a given level and over a given time horizon. When calculating its Economic Capital, a bank is allowed to take diversification benefits into account, i.e., account for the correlation between risk types in its portfolio. The higher the correlation between risks, the lower are the diversification effects, hence a higher amount of Economic Capital is needed. While it is important for a bank to protect its shareholders from insolvency, a bank should also strive to maintain as little Economic Capital as possible as this enables them to invest capital at a higher rate of return. The aim of this thesis is to study the inter-risk correlation between Nordea’s risks within Economic Capital, i.e., credit, market, business, operational and life and insurance risk, and to investigate whether the current, externally developed, benchmark inter-risk correlation matrix needs to be modified. The correlation calculation is based on actual risk figures and historical simulations of risks. The historical simulations are based on relationships determined by a linear regression between macroeconomic and market risk drivers and the available actual risk figures. The full report (pdf) |

Sidansvarig: Harald Lang Uppdaterad: 25/02-2009 |