Financial Risk Manager Part 2
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A risk analyst at a credit ratings agency is evaluating the economic capital for credit risk of two competing regional banks, Bank ABC and Bank XYZ. The two banks have the same credit asset exposure, duration of credit exposure, credit rating, and expected loss. Assuming the average pairwise default correlation between credit assets of Bank ABC is lower than that of Bank XYZ, and the two banks assess their risk appetite at the same predetermined confidence level, which of the following statements would be correct?
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.