This paper studies the implications of cross-border financial integration for financialstability when banks’ loan portfolios adjust endogenously. Banks can be subjectto sectoral and aggregate domestic shocks. After integration they can share theserisks in a complete interbank market. When...

In the work of the Basel Committee there has been a tradition ofdistinguishing market from credit risk and to treat both categories independentlyin the calculation of risk capital. In practice positionsin a portfolio depend simultaneously on both market and credit riskfactors. In this case, an...

In this paper we investigate the interaction between a credit portfolio and another risktype, which can be thought of as market risk. Combining Merton-like factor models forcredit risk with linear factor models for market risk, we analytically calculate their interriskcorrelation and show how...