Basel Committee issues working paper on the interaction of market and credit risk
May 15, 2009: The Basel Committee on Banking Supervision today issued a working paper on Findings on the interaction of market and credit risk. The paper summarises the findings of a working group under the Committee’s Research Task Force.
The distinction between market and credit risk has been blurred by the development of credit risk transfer markets and the broad move to mark-to-market accounting for a wide variety of financial instruments. This has raised questions regarding approaches that treat the two types of risks separately. The financial crisis has illustrated how the two risks may reinforce each other and that in such stress situations illiquidity can exacerbate losses.
The working paper discusses the conceptual distinctions and empirical relationships between market and credit risk. It reviews issues related to aggregation and diversification benefits and discusses how market liquidity affects the relationship between market and credit risk.
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