Beyond Stress Testing: Modelling Liquidity and Interest Rate Risks for (real) Corporate Measures

Abstract

The financial crisis exploited the poorness of real liquidity risk perception in the banking system. The paper suggests a wiser uses of econometrics tools can be more effective in detecting banking risk in order to reduce bias in the decision processes. A methodology to better focus the real bank exposition to interest rate risk is proposed fixing several bugs related to the assessment of its connections with: (i) the credit risk embedded in loans; (ii) the concentration risk of assets and liabilities relating to specific customers; (iii) the volume risk, particularly for unexpected changes. The Veneto Banca experience and performance are used as gymnasium for a possible method development aiming to propose a standard for a more comprehensive corporate risk approach in banking, even for Regulators