The banking literature and practice have devoted a considerable
amount of work to study bank risk. From the standard probit/logit
analysis to the more sophisticated VaR models, most of the effort
has been addressed to the identification of the sources of
vulnerability, to the assessment of the probability of scenarios of
financial distress and, more recently, to the measurement of market
risk. The banking crises that developed in the late 90's in many
emerging markets have brought a new emphasis to the issue and have
reminded us of the importance of credit risk. They also created a
need to examine the connections between the financial environment
and the potential losses faced by financial institutions due to
client defaults or downgradings. For example, Federal Reserve Board
Chairman Alan Greenspan recently noted that ..".the present
practice of modeling market risk separately from credit risk, a
simplification made for expediency, is certainly questionable in
times of extraordinary market stress. Under extreme conditions,
discontinuous jumps in market valuations raise the specter of
insolvency, and market risk becomes indistinct from credit
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