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on Banking |
| By: | Marianna Lyra; Johannes Paha; Sandra Paterlini; Peter Winker |
| Abstract: | Basel II imposes regulatory capital on banks related to the de- fault risk of their credit portfolio. Banks using an internal rating approach compute the regulatory capital from pooled probabilities of default. These pooled probabilities can be calculated by clustering credit borrowers into di®erent buckets and computing the mean PD for each bucket. The clustering problem can become very complex when Basel II regulations and real-world constraints are taken into account. Search heuristics have already proven remarkable performance in tackling this problem. A Threshold Accepting algorithm is proposed, which exploits the inherent discrete nature of the clustering problem. This algorithm is found to outperform alternative methodologies already proposed in the literature, such as standard k-means and Di®erential Evolution. Besides considering several clustering objectives for a given number of buckets, we extend the analysis further by introducing new methods to determine the optimal number of buckets in which to cluster banks' clients. |
| Keywords: | : credit risk; probability of default; clustering; Threshold Accepting; Differential Evolution |
| JEL: | C61 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:09031&r=ban |
| By: | Elias Karakitsos |
| Abstract: | All of the various schemes that have been put forward to resolve the current credit crisis follow either the "business as usual" or the "good bank" model. The "business as usual" model takes different forms--insurance or guarantee of the assets or liabilities of the financial institutions, creation of a "bad bank" to buy toxic assets, temporary nationalization--and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s. The "good bank" solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression. In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified "good bank" approach, with the government either guaranteeing a large proportion of the personal sector's assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:09-3&r=ban |
| By: | Andrea Cipollini; Franco Fiordelisi |
| Abstract: | This paper examines the impact of bank concentration on bank financial distress using a balanced panel of commercial banks belonging to EU 25 over the sample period running from 2003 to 2007. Financial distress is proxied by the observations falling below a given threshold of the empirical distribution of a risk adjusted indicator of bank performance: the Shareholder Value ratio. We employ a panel probit regression estimated by GMM in order to obtain consistent and efficient estimates following the suggestion of Bertschek and Lechner (1998). Our findings suggest, after controlling for a number of enviroment variables, a positive effect of bank concentration on financial distress. |
| Keywords: | EVA; Banking; Panel Probit; GMM |
| JEL: | C33 C35 G21 G32 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:09021&r=ban |
| By: | James K. Galbraith |
| Abstract: | In 1930, John Maynard Keynes wrote: "The world has been slow to realise that we are living this year in the shadow of one of the greatest economic catastrophes of modern history." The same holds true today: we are in the shadow of a global catastrophe, and we need to come to grips with the crisis--fast. According to Senior Scholar James K. Galbraith, two ingrained habits are leading to our failure to do so. The first is the assumption that economies will eventually return to normal on their own--an overly hopeful view that doesn't take into account the massive pay-down of household debt resulting from the collapse of the banks. The second bad habit is the belief that recovery runs through the banks rather than around them. But credit cannot flow when there are no creditworthy borrowers or profitable projects; banks have failed, and the failure to recognize this is a recipe for wild speculation and control fraud, compounding taxpayer losses. Galbraith outlines a number of measures that are needed now, including realistic economic forecasts, more honest bank auditing, effective financial regulation, measures to forestall evictions and keep people in their homes, and increased public retirement benefits. We are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business as usual, says Galbraith. Rather, we are at the beginning of a long, painful, profound, and irreversible process of change--and we need to start thinking and acting accordingly. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levysa:sa_apr_09&r=ban |
| By: | Francis A. Longstaff; Brett Myers |
| Abstract: | How does the market value complex structured-credit securities? This issue is central to understanding the current financial crisis and identifying effective policy measures. We study this issue from a novel perspective by contrasting the valuation of CDO equity with that of bank stocks. This is possible because both CDO equity and bank stock represent levered first-loss residual claims on an underlying portfolio of debt. There are strong similarities in the two types of equity investments. Using an extensive data set of CDX index tranche prices, we find that the discount rates applied by the market to bank and CDO equity are very comparable. In addition, a single factor explains more than 64 percent of the variation in bank and CDO equity returns. Although banks are presumably active credit-portfolio managers, we find that bank alphas are significantly negative during the sample period and comparable in magnitude to those of more-passively-managed CDO equity. Both banks and CDO equity display significant sensitivity to "shadow banking'' factors such as counterparty credit risk, the availability of collateralized financing for debt securities, and the liquidity of the derivatives market. A key implication is that we may be able to value "toxic'' assets using readily-available stock market information. |
| JEL: | G12 G13 G21 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14871&r=ban |