|
on Banking |
| By: | Robin Greenwood; Augustin Landier; David Thesmar |
| Abstract: | When a bank experiences a negative shock to its equity, one way to return to target leverage is to sell assets. If asset sales occur at depressed prices, then one bank’s sales may impact other banks with common exposures, resulting in contagion. We propose a simple framework that accounts for how this effect adds up across the banking sector. Our framework explains how the distribution of bank leverage and risk exposures contributes to a form of systemic risk. We compute bank exposures to system-wide deleveraging, as well as the spillover of a single bank’s deleveraging onto other banks. We show how our model can be used to evaluate a variety of crisis interventions, such as mergers of good and bad banks and equity injections. We apply the framework to European banks vulnerable to sovereign risk in 2010 and 2011. |
| JEL: | G01 G21 G38 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18537&r=ban |
| By: | Dirk Mevis |
| Abstract: | This paper attempts to empirically identify the determinants of Luxembourgish banks? reliance on short term funding. The emphasis lies on making the link to developments in the macroeconomic environment and the build up of systemic risk while institution-specific factors are being controlled for. The paper provides evidence for a close link between exuberant credit developments at the aggregate level and short term funding of banks. This finding supports the view that one possible channel for increasing vulnerabilities during a lending boom may run through increased reliance of banks on short term funding. When it comes to bank specific variables, bank size has an important effect on the tendency to contract short term funding. This result is in line with recent work on leverage procyclicality in the banking sector. The results also imply that currently discussed regulatory standards on the funding structure of banks could mitigate the build up of vulnerabilities. |
| Keywords: | Banks, short term funding, procyclicality |
| JEL: | C23 C26 G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp080&r=ban |
| By: | Gaston Giordana; Ingmar Schumacher |
| Abstract: | We study how the Basel III regulations, namely the Capital-to-assets ratio (CAR), the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR), are likely to impact the banks? profitabilities (i.e. ROA), capital levels and default. We estimate historical series of the new Basel III regulations for a panel of Luxembourgish banks for a period covering 2003q2 to 2011q3. We econometrically investigate whether historical LCR and NSFR components as well as CAR positions are able to explain the variation in a measure of a bank?s default risk (proxied by Z-Score), and how these effects make their way through banks? ROA and CAR. We find that the liquidity regulations induce a decrease in average probabilities of default. Conversely, while we find that the LCR has an insignificant impact on banks? profitability, those banks with higher NSFR (through lower required stable funding, the NSFR denominator) are found to be more profitable. Additionally, we use a model of bank behavior to simulate the banks? optimal adjustments of their balance sheets as if they had had to adhere to the regulations starting in 2003q2. Then we predict, using our preferred econometric model and based on the simulated data, the banks? Z-Score and ROA. The simulation exercise suggests that basically all banks would have seen a decrease in their default risk if they had previously adhered to Basel III. |
| Keywords: | Basel III, bank default, Z-Score, profitability, ROA, GMM estimator, simulation, Luxembourg |
| JEL: | G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp079&r=ban |
| By: | Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics); Guillaume Roussellet (CREST-ENSAE) |
| Abstract: | We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies of microeconomic data at the bank level. The second one relies on econometric estimations of the probability and the cost of a systemic banking crisis, based on historical data. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence, we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk. |
| Keywords: | Fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities. |
| JEL: | H21 H23 J41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12077&r=ban |
| By: | Viral V. Acharya (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper is an attempt to explain the changes to finance sector reforms under the Dodd-Frank Act in the United States and Basel III requirements globally; their unintended consequences; and lessons for currently fast-growing emerging markets concerning finance sector reforms, government involvement in the finance sector, possible macroprudential safeguards against spillover risks from the global economy, and, finally, management of government debt and fiscal conditions. The paper starts with a summary of reforms under the Dodd-Frank Act and highlights four of its primary shortcomings. It then focuses on the new capital and liquidity requirements under Basel III reforms, arguing that, like its predecessors, Basel III is fundamentally flawed as a way of designing macroprudential regulation of the finance sector. In contrast, the Dodd-Frank Act has several redeeming features, including requirements of stress-test-based macroprudential regulation and explicit investigation of systemic risk in designating some financial firms as systemically important. It argues that India should resist the call for blind adherence to Basel III and persist with its (Reserve Bank of India) asset-level leverage restrictions and dynamic sector risk-weight adjustment approach. It concludes with some important lessons for regulation of the finance sector in emerging markets based on the global financial crisis and proposed reforms that have followed in the aftermath. |
| Keywords: | The Dodd-Frank Act, Basel III, Emerging Markets, spillover risks, Macroprudential regulation, global financial crisis |
| JEL: | G2 G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23352&r=ban |
| By: | Tobias Adrian; Brian Begalle; Adam Copeland; Antoine Martin |
| Abstract: | We provide an overview of the data required to monitor repo and securities lending markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection would include, at a minimum, six characteristics of repo and securities lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty. |
| JEL: | G18 G23 G28 G38 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18549&r=ban |
| By: | Jacob Bikker |
| Abstract: | A well-performing life insurance industry benefits consumers, producers and insurance firm stockholders alike. Unfavourable market conditions stress the need for life insurers to perform well in order to remain solvent. Using a unique supervisory data set, this paper investigates competition and efficiency in the Dutch life insurance market by estimating unused scale economies and measuring efficiency-market share dynamics during 1995-2010. Large unused scale economies exist for small and medium-sized life insurers, indicating that further consolidation would reduce costs. Over time average scale economies decrease but substantial differences between small and large insurers remain. A direct measure of competition confirms that competitive pressures are at a lower level than in other markets. We do not observe any impact of increased competition from banks, the so-called investment policy crisis or the credit crisis, apart from lower returns in 2008. Investigation of product submarkets reveals that competition is higher on the collective policy market, while the opposite is true for the unit-linked market, where the role of intermediary agents is largest. |
| Keywords: | Life insurance; competition; efficiency; Performance-Conduct-Structure model; Boone indicator; concentration; economies of scale |
| JEL: | G22 L1 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:357&r=ban |
| By: | Simon Gilchrist; Jae W. Sim; Egon Zakrajšek |
| Abstract: | Financial frictions distort the allocation of resources among productive units—all else equal, firms whose financing choices are affected by such frictions face higher borrowing costs than firms with ready access to capital markets. As a result, input choices may differ systematically across firms in ways that are unrelated to their productive efficiency. We propose an accounting framework that allows us to assess empirically the magnitude of the loss in aggregate resources due to such misallocation. To a second-order approximation, the framework requires only information on the dispersion in borrowing costs across firms, which we measure—for a subset of U.S. manufacturing firms—directly from the interest rate spreads on their outstanding publicly-traded debt. Given the observed dispersion in borrowing costs, our approximation method implies a relatively modest loss in efficiency due to resource misallocation—on the order of 1 to 2 percent of measured total factor productivity (TFP). In our framework, the correlation between firm size and borrowing costs has no bearing on TFP losses under the assumption that financial distortions and firm-level efficiency are jointly log-normally distributed. To take into account the effect of covariation between firm size and borrowing costs, we consider a more general framework, which dispenses with the assumption of log-normality and which implies somewhat higher estimates of the resource losses—about 3.5 percent of measured TFP. Counterfactual experiments indicate that dispersion in borrowing costs must be an order of magnitude higher than that observed in the U.S. financial data, in order for misallocation—arising from financial distortions—to account for a significant fraction of measured TFP differentials across countries. |
| JEL: | D92 O16 O40 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18550&r=ban |
| By: | Varvara Isyuk (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne) |
| Abstract: | The U.S. Federal Reserve responded to liquidity shortage through compulsory loan guarantee scheme and bank recapitalisations mainly under Capital Purchase Program (CPP) for commercial banks. The bailout packages provided under CPP seem to be efficient in responding to the liquidity crisis subject to large banks that contributed the most to systemic risk. However, smaller banks that were actually exposed to the mortgage market and non-performing loans were denied the financial aid or received CPP funds of a relatively smaller size. Such CPP funds allocation was efficient from the point of view of taxpayer as the probability of bailout non-repayments was minimised. However, it did not support real estate loan recapitalisations that could become a reason of large welfare loses for the homeowners. |
| Keywords: | Bailouts; bank recapitalisation; CPP funds; systemic risk. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00755570&r=ban |
| By: | Inklaar, Robert; Koetter, Michael; Noth, Felix |
| Abstract: | We test how bank market power influences technical change and resource allocation of informationally opaque firms. We use a dataset with approximately 700,000 firm-year observations of German small and medium-sized enterprises (SME) to identify the effect of bank market power using the dependence on external finance per industry and the regional demarcation of the German banking market. Market power generally spurs aggregate SME growth. Banks need to realize sufficient margins to generate useful private information. Bank market power spurs both technical change and reallocation of resources, but it reduces SME growth in industries that depend heavily on external finance. -- |
| Keywords: | growth decomposition,reallocation,banking,market power |
| JEL: | E22 G21 O16 O41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:197&r=ban |
| By: | Mariano Graziano (Banca d'Italia) |
| Abstract: | This paper studies the characteristics of the Italian nonfinancial firms using derivatives and the purpose of the derivatives use according to the most important literature in financial risk management. By using the Italian credit register and balance sheet data this study extends for the first time the derivatives analysis to small and medium firms. The paper finds that derivatives are used frequently among nonfinancial firms. Firms using derivatives are the most exposed to financial risks and have different economic and financial characteristics with respect to non-using ones. By examining some financial risk indicators the analysis finds a relation between high derivative exposure and financial distress. In the use of derivatives bank-firm relationship is more concentrated than in the loan relationship. |
| Keywords: | derivatives, banks, risk management |
| JEL: | G32 G21 G30 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_139_12&r=ban |
| By: | Gottschalk Ballo, Jannike |
| Abstract: | This paper deals with the actors and the changing power relations involved in global financial regulation. It explores the private sector's influence on Basel III regulatory reforms, which were formulated by the Basel Committee on Banking Supervision as a response to the global financial crisis following the US subprime mortgage crisis in 2007-2008. Scholars argue that the dynamic between market actors and regulators of international finance has experienced a shift in power during the last couple of decades. Banks and other financial institutions have become more influential at the expense of states and regulatory institutions. This essay argues that private actors are important to ensure legitimacy and efficiency of regulation, and finds that they possess far greater powers than their consultative positions towards regulators might indicate. -- |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubipe:132012&r=ban |
| By: | Völker, Florian; Cremers, Heinz; Panzer, Christof |
| Abstract: | -- Most traditional Value at Risk models neglect market liquidity risk and hence only consider the market price risk (i.e. risk associated with holding a certain position). In order to fully capture the market risk associated to holding and trading a position, we first define market liquidity risk, its dimensions (tightness, depth, resiliency, immediacy) and causes (exogenous / endogenous). We then present and evaluate different liquidity-adjusted Value at Risk models which capture one or more dimensions of market liquidity risk and thereby present a more true view on the overall market risk. This paper also spotlights how Basel III regulation defines liquid assets, derived from the Liquidity Coverage Ratio (LCR) framework, and evaluates if this regulation adequately reflects market liquidity risk. We conclude that the LCR concept is flawed as the defined buckets of liquid assets do not reflect the true liquidity of certain assets. Furthermore it can be said that the defined buckets might result in heightened systematic risk as banks will focus on certain asset classes. Additionally the corporate fixed income sector might experience a crowding out as these assets will appear less rewarding to banks. |
| Keywords: | Market Risk,Market Liquidity Risk,Market Microstructure,Liquidity-adjusted Value-at-Risk,Basel III,Liquidity Coverage Ratio,Liquid Assets |
| JEL: | C1 C14 C16 D4 G1 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:198&r=ban |
| By: | Calderon, Cesar; Kubota, Megumi |
| Abstract: | The main goal of the paper is to examine whether surges in private capital inflows lead to credit booms. The authors built a quarterly database on gross capital inflows, credit to the private sector, and other macro-financial indicators for a sample of 71 countries from 1975q1 to 2010q4. Identifying credit booms is not trivial: they use different criteria implemented in the literature. The estimates suggest that: (i) Surges in gross private capital inflows are overall good predictors of credit booms. (ii) The likelihood of credit booms is higher if the surges in foreign flows are driven by private other investment inflows and, to a lesser extent, portfolio investment inflows. (iii) Surges in gross inflows are also good predictors of credit booms that end up in a financial crisis --"bad"credit booms. This finding holds even after controlling for the appreciation of the local currency and the build-up of leverage. (iv) Bad credit booms are more likely to occur when surges are driven by other investment inflows. At best, foreign direct investment inflow-driven surges help mitigate the incidence of this type of credit boom. (v) The predictive ability of gross other investment inflows is primarily driven by bank inflows. (vi) Consistent with the literature, the analysis finds that the build-up of leverage and the real overvaluation of the currency help predict credit booms that are followed by a systemic crisis. Controlling for these factors, capital flows are still a significant predictor of credit booms. |
| Keywords: | Financial Crisis Management&Restructuring,Economic Theory&Research,Banks&Banking Reform,Currencies and Exchange Rates,Bankruptcy and Resolution of Financial Distress |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6270&r=ban |
| By: | Paolo Angelini (Banca d'Italia); Sergio Nicoletti-Altimari (Banca d'Italia); Ignazio Visco (Banca d'Italia) |
| Abstract: | We review the recent literature on macroprudential policy and its interaction with other policies, extracting several points. First, there are externalities in the financial sector, often in the form of excessive credit growth. Second, monetary policy needs to take financial stability into account. Third, macroprudential instruments can moderate the financial cycle. Finally, there are complementarities between monetary and macroprudential policies, but also potential conflict. We then relate these points to recent events in the euro area where, following the sovereign debt crisis, a retrenchment of finance within national borders is taking place, amplifying the divergences across economies. We argue that in principle national authorities would like to adjust macroprudential instruments to compensate for the highly heterogeneous financial conditions, but at present they have little leeway to do so, since in the run-up to the crisis insufficient capital buffers had been accumulated. Various factors may explain low bank capitalization levels worldwide. We discuss the role of risk-weighted assets, which may have inadequately captured actual risks in many jurisdictions; we also document that European and US banks’ capital ratios decline monotonically with bank size. This confirms that key features of the microprudential apparatus are crucial for preventing financial instability. |
| Keywords: | macroprudential policy, monetary policy, capital requirements |
| JEL: | E44 E58 E61 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_140_12&r=ban |
| By: | Tarisa Watanagase (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper discusses the relevance of Basel III to Asian emerging markets. It reviews some of the proposed regulations of Basel III in order to evaluate their likely implications for, and their ability to enhance, the stability of the banking and financial system. This is followed by a discussion on the challenges faced by the regulators of Asian emerging markets in effectively managing their financial regulations, given their capacity and institutional constraints. The paper concludes with policy recommendations for Asian emerging markets to strengthen and enhance the stability of their banking and financial systems. |
| Keywords: | Global Financial Regulatory Landscape, Asian Emerging Markets, Basel, banking and financial systems |
| JEL: | E52 G21 G28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23351&r=ban |
| By: | Alan, Sule; Lóránth, Gyöngyi |
| Abstract: | Using a unique panel data set from a UK credit card company, we analyze the interest rate sensitivity of subprime credit card borrowers. In addition to all individual transactions and loan terms, we also have access to details of a randomized interest rate experiment conducted by the lender on the existing (inframarginal) loans. Access to such information by academic researchers is rare. The data and the experimental design provide us with a clean identification of heterogenous interest rate sensitivities across borrower types within the subprime population. We find that subprime credit card borrowers generally do not reduce their demand for credit when subject to increases in interest rates. However, we estimate a number of interesting responses that suggest that subprime borrowers are not a homogenous group. The paper also contributes to the literature by demonstrating the importance of isolating exogenous variation in interest rates. We show that estimating a standard credit demand equation with the non-experimental variation in the data leads to severely biased estimates. This is true even when conditioning on a rich set of controls and individual fixed effects. |
| Keywords: | subprime credit; randomized trials; liquidity constraints |
| JEL: | D11 D12 D14 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9210&r=ban |
| By: | Leitão, Nuno Carlos |
| Abstract: | This manuscript examines the link between bank lending and economic growth for European Union (EU-27). The period was examined, between 1990 and 2010. We apply a dynamic panel data (GMM-System estimator). This estimator permits the researchers to solve the problems of serial correlation, heteroskedasticity and endogeneity for some explanatory variables .As the results show, savings indeed promotes growth. The inflation has a negative impact on economic growth as previous studies. Our results show that domestic credit discourages the growth. |
| Keywords: | Bank credit; economic growth; and panel data |
| JEL: | G2 O16 C33 |
| Date: | 2012–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42664&r=ban |
| By: | Manfred Jaeger-Ambrozewicz |
| Abstract: | This paper derives -- considering a Gaussian setting -- closed form solutions of the statistics that Adrian and Brunnermeier and Acharya et al. have suggested as measures of systemic risk to be attached to individual banks. The statistics equal the product of statistic specific Beta-coefficients with the mean corrected Value at Risk. Hence, the measures of systemic risks are closely related to well known concepts of financial economics. Another benefit of the analysis is that it is revealed how the concepts are related to each other. Also, it may be relatively easy to convince the regulators to consider a closed form solution, especially so if the statistics involved are well known and can easily be communicated to the financial community. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1211.4173&r=ban |
| By: | Leonardo Becchetti (Università di Roma "Tor Vergata"); Stefano Castriota (Università di Roma "Tor Vergata"); Pierluigi Conzo (Università di Torino and CSEF) |
| Abstract: | The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap by building adataset which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while people hit by the calamity receive more money. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history and those not damaged by the calamity pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers. |
| Keywords: | Tsunami, disaster recovery, microfinance, strategic default, contagion, microinsurance. |
| JEL: | G21 G32 G33 |
| Date: | 2012–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:324&r=ban |
| By: | Dimitri O. Ledenyov; Viktor O. Ledenyov |
| Abstract: | The purpose of this research article is to discover how the econophysics analysis can complement the econometrics models in application to the risk management in the central banks and financial institutions, operating within the nonlinear dynamical financial system. We consider the modern risk management models and show the appropriate techniques to calculate the various existing risks in the finances. We make a few comments on the possible limitations in the models of statistical modeling of volatility such as the Autoregressive Conditional Heteroskedasticity (GARCH) model, because of the nonlinearities appearance in the nonlinear dynamical financial systems. We propose that the various types of nonlinearities, which can originate in the financial and economical systems, have to be taken to the detailed consideration during the Cost of Capital calculation in the finances and economics. We propose the new theory of nonlinear dynamic volatilities and the new nonlinear dynamic chaos (NDC) volatility model for the statistical modeling of financial volatility with the aim to determine the Value at Risk. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1211.4108&r=ban |
| By: | Wolfgang Reitgruber |
| Abstract: | The dependency structure of credit risk parameters is a key driver for capital consumption and receives regulatory and scientific attention. The impact of parameter imperfections on the quality of expected loss in the sense of a fair, unbiased estimate of risk expenses however is barely covered. So far there are no established backtesting procedures for EL, quantifying its impact with regards to pricing or risk adjusted profitability measures, such as RARORAC. In this paper, a practically oriented, top-down approach to assess the quality of EL by backtesting with actually observed risk impact on capital is introduced. In a first step, the concept of risk expenses (Cost of Risk) has to be extended beyond the classical provisioning (P&L) view, towards a more adequate capital consumption approach (Impact of Risk, IoR). On this basis, the difference between parameter-based EL and actually reported Impact of Risk is decomposed into its key components (PL Backtest and NPL Backtest). The proposed method will deepen the understanding of practical properties of EL, aligns the EL with actually observed risk impact on capital and has the potential to improve the quality of EL-based business decisions. Besides assumptions on the stability of parameter estimates and default identification, there are no further requirements on the underlying credit risk parameters. The method is robust irrespective whether parameters are simple, expert based values or highly predictive and perfectly calibrated IRBA compliant methods. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1211.4946&r=ban |
| By: | Thomas F. Huertas |
| Abstract: | None |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp213&r=ban |
| By: | M. Cadoni; Roberta Melis; A. Trudda |
| Abstract: | It has been debated that pension funds should have limitations on their asset allocation, based on the risk profile of the different financial instruments available on the financial markets. This issue proves to be highly relevant at times of market crisis, when a regulation establishing limits to risk taking for pension funds could prevent defaults. In this paper we present a framework for evaluating the risk level of a single financial instrument or a portfolio. By assuming that asset returns can be described by a multifractional Brownian motion, we evaluate the risk using the time dependent Hurst parameter H(t) which models volatility. To provide a measure of the risk, we model the Hurst parameter with a random variable with beta distribution. We prove the efficacy of the methodology by implementing it on different risk level financial instruments and portfolios. |
| Keywords: | Pension Funds; risk control; multifractional Brownian motion |
| JEL: | C22 G11 G23 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201231&r=ban |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | The Eurosystem’s TARGET2 payments system has featured heavily in academic and popular discussions in recent years. Much of this commentary had described the system as being responsible for a “secret bailout” of Europe’s periphery which has led to huge credit risks for the Bundesbank should the euro break up. This paper discusses the TARGET2 system, focusing in particular on how it impacts the balance sheets of the central banks that participate in the system. It concludes that the TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of the periphery or that the system is playing a key role in facilitating peripheral current account deficits turn out to be wide of the mark. Risks to Germany due to the loss of TARGET2-related revenues for the Bundesbank after a euro break-up turn out to relatively small because these revenues are limited and because there are potentially large gains from new seigniorage revenues in this scenario. Many criticisms involving TARGET2 turn out, on closer examination, to be criticisms of the ECB’s core principle of treating credit institutions across the euro area in an equal manner. Proposals that the ECB adopt procedures that discriminate between banks in different countries (or that restrict the operation of payments systems in certain countries) are likely to be incompatible with the continuation of the euro as a common currency. |
| Keywords: | TARGET2, ECB, Euro Crisis |
| JEL: | E51 E52 E58 |
| Date: | 2012–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201229&r=ban |