Financial Risk Manager Part 2
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A credit risk analyst at a credit assessment firm is evaluating the economic capital for credit risk for two competing regional banks, Bank ABC and Bank XYZ. Both banks have the same credit asset exposure, duration of credit exposure, credit ratings, and expected losses. It is known that the average pairwise default correlation among the credit assets of Bank ABC is lower than that of Bank XYZ. Additionally, both banks maintain an identical predetermined confidence level for risk tolerance. Which of the following statements would be correct in this context?
A
If the confidence level for both banks is increased, the level of economic capital needed for Bank ABC and for Bank XYZ will both increase.
B
If the confidence level for both banks is decreased, the level of economic capital needed will increase for Bank ABC but will decrease for Bank XYZ.
C
If the confidence level for both banks is increased, the level of economic capital needed will decrease for Bank ABC but will increase for Bank XYZ.
D
If the confidence level for both banks is kept unchanged, the level of economic capital needed for Bank ABC and for Bank XYZ will be equal.