Journal of Risk

Rating targeting and dynamic economic capital

Esa Jokivuolle, Samu Peura


The standard one-period economic capital model for credit risk has been shown to fall short of explaining the capital levels of large banks, given the usual AA confidence level for banks' solvency. Missing risk factors have been the commonly accepted explanation for this puzzle. We study an alternative explanation that complements the missing risk factor theory; a more dynamic capitalization model motivated by banks' rating targeting behavior, as evidenced in Jackson et al (2002), among others. Our model can be seen as a bottom-up alternative to Nocco and Stulz (2006)'s approach to the modeling of rating targeting. In the light of empirical evidence our model better calibrates to actual bank capital levels than the standard one-period economic capital model.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here