Abstract

Measuring the Cost of Banking While Taking Account of Related Risks

The present contribution aimed for a quantification of the consequences for bank earnings stemming from banking risks. To this end, the different types of risk were – as a first step – analyzed separately so as to allow the impact of success to be derived systematically. It was possible to quantify the loss risk as a function of the principal and the interest loss risks and the risk of interest rate changes by taking account of the elasticity imbalance and the expected changes in the interest rate level. The risk of parity changes was measured as well bearing in mind currency-related overhangs and parity adjustments. Such separate measurements are followed by an analysis of the combined risks. The point was to identify the consequences associated with different coinciding risks. It turned out that the sum total of the risks to success, separately quantified, was not identical with the real overall risk. Combined effects from coinciding risks rather posed a threat to success. With the loss and the parity-change risks, combined effects emerge from write-offs (in the event of upvaluations) that must not be recorded twice. With the interest-rate and the parity-changes risks, combined effects result from the parity risks involved in interest rate changes. Although it is possible – from a mere representational point of view – to attribute the combined effects to anyone type of risk, it becomes clear – not least – under risk-management aspects that the interdependencies associated with national-currency commitments ought – sensibly – to be ascribed to the interest rate changes-risk and the combined effect from foreign exchange transactions to the parity change-risk. Managing the risk of interest rate changes therefore presupposes orientation to effective interest rate elasticities and managing the risk of parity changes requires orientation to actual hedging amounts.