|
on Banking |
| By: | Salvatore Morelli (CSEF, University of Naples and INET Oxford, University of Oxford) |
| Abstract: | This paper examines the response of the national income shares accruing to different groups within the richest decile in the US to the occurrence of major systemic banking crises since the beginning of the twentieth century. The findings suggest that the impact of banking crises on the US top income shares is mostly small in magnitude. Indeed, the estimated total effect of crises is never bigger than one standard deviation of a specific top shares under investigation. Results are robust to a variety of checks and the analysis also highlights interesting heterogeneity across different income groups. Additional results also point out that the short-term impact of crises may be also temporary in nature as top shares recover faster in the aftermath of a shock. These findings lend indirect support to the idea that only substantial changes in government policies and institutional frameworks can bring about radical changes in income distribution. |
| JEL: | D31 D39 E32 E37 |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:359&r=ban |
| By: | H. Evren Damar; Reint Group; Adi Mordel |
| Abstract: | The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank-level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms’ investment, where even temporary adverse credit supply shocks are associated with significant real effects. |
| Keywords: | Credit and credit aggregates; Domestic demand and components; Financial Institutions |
| JEL: | E21 E44 G21 G01 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-7&r=ban |
| By: | Bing Xu (Universidad Carlos III); Adrian van Rixtel (Bank for international settlements); Michiel van Leuvensteijn (All pensions group) |
| Abstract: | Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar- Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not evidence these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these, firstly, are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed. |
| Keywords: | competition, banking industry, China, lending markets, marginal costs, regulation, deregulation |
| JEL: | D4 G21 L1 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1404&r=ban |
| By: | Zaghini, Andrea |
| Abstract: | We analyze the risk premium on bank bonds at origination with a special focus on the role of implicit and explicit public guarantees and the systemic relevance of the issuing institutions. By looking at the asset swap spread on 5,500 bonds, we find that explicit guarantees and sovereign creditworthiness have a substantial effect on the risk premium. In addition, while large institutions still enjoy lower issuance costs linked to the TBTF framework, we find evidence of enhanced market disciple for systemically important banks which face, since the onset of the financial crisis, an increased premium on bond placements. -- |
| Keywords: | Too-big-to-fail,Market discipline,Sovereign guarantees,G-SIFIs |
| JEL: | G21 G01 G18 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:454&r=ban |
| By: | Teodora Paligorova; João Santos |
| Abstract: | This paper shows that banks that rely heavily on short-term funding engage less in maturity transformation in an attempt to decrease their exposure to rollover risk. These banks shorten both the maturity of their portfolio of loans as well as the maturity of newly issued loans. We find that the loan yield curve becomes steeper with banks’ increasing use of short-term funding. The loan maturity shortening is driven by banks and affects borrowers’ financing choices - they turn to the bond market for long-term funding. To the extent that borrowers do not manage to compensate for the undesirable shortening of loan maturities by going to the bond market, they may become more exposed to rollover risk due to banks. This potential synchronization of banks’ and borrowers’ rollover risk can be a source of financial instability once short-term funding suddenly disappears. |
| Keywords: | Financial stability |
| JEL: | G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-8&r=ban |
| By: | Kurmas Akdogan; Burcu Deniz Yildirim |
| Abstract: | We provide a detailed classification of core and non-core liabilities for the Turkish banking system à la Shin and Shin (2010). We further carry out a two-stage liquidity stress test similar to Van Den End (2010) where we simulate inflow and outflow factors as well as the network topology of mutual liabilities between financial institutions. Our results indicate that Turkish banking system with relatively low level of non-core liabilities is to a great extent robust to liquidity shocks. Nevertheless, the level of non-core liabilities should be monitored closely considering its pro-cyclical behaviour over the business cycle and its strong correlation with credit growth |
| Keywords: | Financial stability, non-core liabilities, liquidity stress test, network topology |
| JEL: | C15 E44 G21 G28 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1412&r=ban |
| By: | Aptus, Elias; Britz, Volker; Gersbach, Hans |
| Abstract: | We examine the impact of so-called Crisis Contracts on bank managers' risktaking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs. This can be viewed as a retroactive tax that is levied only when a crisis occurs and that leads to a form of collective liability for bank managers. We develop a game-theoretic model of a banking sector whose shareholders have limited liability, so that society at large will suffer losses if a crisis occurs. Without Crisis Contracts, the managers' and shareholders' interests are aligned, and managers take more than the socially optimal level of risk. We investigate how the introduction of Crisis Contracts changes the equilibrium level of risk-taking and the remuneration of bank managers. We establish conditions under which the introduction of Crisis Contracts will reduce the probability of a banking crisis and improve social welfare. We explore how Crisis Contracts and capital requirements can supplement each other and we show that the efficacy of Crisis Contracts is not undermined by attempts to hedge. -- |
| Keywords: | banking crises,Crisis Contracts,excessive risk taking,banker's pay,hedging,capital requirements |
| JEL: | C79 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:453&r=ban |
| By: | Gilchrist, S.; Mojon, B. |
| Abstract: | We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizeable contractions in output, increases in unemployment, and declines in inflation across the euro area. |
| Keywords: | credit cycle, euro area, financial crisis. |
| JEL: | E32 E43 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:482&r=ban |
| By: | Xiaobing Feng; Haibo Hu |
| Abstract: | The negative externalities from an individual bank failure to the whole system can be huge. One of the key purposes of bank regulation is to internalize the social costs of potential bank failures via capital charges. This study proposes a method to evaluate and allocate the systemic risk to different countries/regions using a SIR type of epidemic spreading model and the Shapley value in game theory. The paper also explores features of a constructed bank network using real globe-wide banking data. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.5689&r=ban |
| By: | Maylis Avaro (École normale supérieure de Cachan); Henri Sterdyniak (OFCE) |
| Abstract: | In June 2012 European Council launched the banking union as a new project expected to contribute to solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? A banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, by establishing common mechanisms to solve banking crises, and by encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme (EDGS). Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other issues are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other issues are related to the EU specificity (is the banking union a step towards more federalism?); the more stringent are related to structural choices regarding the European banking system. Banks'solvency and ability to lend, would depend primarily on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed by the interdiction to run risky activities on financial markets. Can European peoples leave such strategic choices in the hands of the ECB? |
| Keywords: | Banking union; European Construction |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/144pedpca18ff8v7fh3tvnp99m&r=ban |
| By: | Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR.; Università di Napoli "Federico II" and CSEF) |
| Abstract: | Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis. |
| Keywords: | financial crisis, risk taking, systemic risk, financial regulation, monetary policy, politics |
| JEL: | G01 G18 G21 G28 H81 O16 |
| Date: | 2014–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:361&r=ban |
| By: | Chia-Lin Chang (Department of Applied Economics, Department of Finance, National Chung Hsing University, Taiwan); Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid); Esfandiar Maasoumi (Department of Economics, Emory University); Teodosio Pérez Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid) |
| Abstract: | The Basel III Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one of a range of alternative risk models to forecast Value-at-Risk (VaR). The risk estimates from these models are used to determine the daily capital charges (DCC) and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realized losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models and discuss the optimal selection of financial risk models. A previous approach to model selection for predicting VaR proposed combining alternative risk models and ranking such models on the basis of average DCC. This method is based only on the first moment of the DCC distribution, supported by a restrictive evaluation function. In this paper, we consider uniform rankings of models over large classes of evaluation functions that may reflect different weights and concerns over different intervals of the distribution of losses and DCC. The uniform rankings are based on recently developed statistical tests of stochastic dominance (SD). The SD tests are illustrated using the prices and returns of VIX futures. The empirical findings show that the tests of SD can rank different pairs of models to a statistical degree of confidence, and that the alternative (recentered) SD tests are in general agreement. |
| Keywords: | Stochastic dominance; Value-at-Risk; daily capital charges; violation penalties; optimizing strategy; Basel III Accord; VIX futures; global financial crisis. |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1408&r=ban |
| By: | Müller, Kirsten; Musshoff, Oliver; Weber, Ron |
| Abstract: | Financial institutions still neglect to address agricultural clients. The main reasons for that are their perception that farmers bear higher risks than non-farmers and that their loan products are inadequate to accommodate the needs of agricultural entrepreneurs. As a result, many farmers still lack access to external finance. The aim of this paper is to investigate determinants of credit risk for agricultural loans disbursed by a Microfinance Institution (MFI) in Azerbaijan. In this context special attention is paid to repayment flexibility and the role of collaterals. MFIs are among the first financial institutions recently focusing on farmers with new loan products. We find that farmers are less risky than non-farmers, which is surprising because the opposite is widely believed. We furthermore find that the level of collateral has a negative influence on credit risk. Beyond that, we find that repayment flexibility increases credit risk. -- |
| Keywords: | microfinance,collaterals,Tobit Model,credit risk,small-scale farmer |
| JEL: | Q12 Q14 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:daredp:1402&r=ban |
| By: | Luca Arciero (Bank of Italy); Ronald Heijmans (De Nederlandsche Bank); Richard Heuver (De Nederlandsche Bank); Marco Massarenti (European Central Bank); Cristina Picillo (Bank of Italy); Francesco Vacirca (Bank of Italy) |
| Abstract: | This paper develops a methodology, based on Furfine (1999), for identifying unsecured interbank money market loans from the transaction data of the most important euro payment processing system TARGET2, for maturities ranging from one day (overnight) up to three months. The implementation has been verified with (i) interbank money market transactions executed on the e-MID Italian electronic trading platform and (ii) aggregated reporting by the EONIA panel banks. The Type2 (false negative) error for the best performing algorithm setup is 0.92%. We find aggregated interest rates very close to the EONIA but observe a high degree of heterogeneity across countries and market participants. The different stages of the global financial crisis and of the sovereign debt crises are clearly revealed in the interbank money market by significant drops in turnover. The results focus on three levels: euro-area, country group and country (Italy and the Netherlands). |
| Keywords: | euro interbank money market, Furfine, TARGET2, financial stability, EONIA |
| JEL: | E42 E44 E58 G01 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_215_14&r=ban |
| By: | Andrew Green; Chris Kenyon |
| Abstract: | Credit (CVA), Debit (DVA) and Funding Valuation Adjustments (FVA) are now familiar valuation adjustments made to the value of a portfolio of derivatives to account for credit risks and funding costs. However, recent changes in the regulatory regime and the increases in regulatory capital requirements has led many banks to include the cost of capital in derivative pricing. This paper formalises the addition of cost of capital by extending the Burgard-Kjaer semi-replication approach to CVA and FVA to include an addition capital term, Capital Valuation Adjustment (KVA, i.e. Kapital Valuation Adjustment to distinguish from CVA. Two approaches are considered, one where the (regulatory) capital is released back to shareholders upon counterparty default and one where the capital can be used to offset losses in the event of counterparty default. The use of the semi-replication approach means that the flexibility around the treatment of self-default is carried over into this analysis. The paper further considers the practical calculation of KVA with reference to the Basel II (BCBS-128) and Basel III (BCBS-189) Capital regimes and its implementation via CRD IV (CRD-IV-Regulation,CRD-IV-Directive). The paper assesses how KVA may be hedged, given that any hedging transactions themselves would lead to regulatory capital requirements and hence KVA. To conclude, a number of numerical examples are presented to gauge the cost impact of KVA on vanilla derivative products. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1405.0515&r=ban |
| By: | Elliott, Douglas J.; Rauch, Christian |
| Abstract: | In the United States, on April 1, 2014, the set of rules commonly known as the Volcker Rule, prohibiting proprietary trading activities in banks, became effective. The implementation of this rule took more than three years, as proprietary trading is an inherently vague concept, overlapping strongly with genuinely economically useful activities such as market-making. As a result, the final Rule is a complex and lengthy combination of prohibitions and exemptions. In January 2014, the European Commission put forward its proposal on banking structural reform. The proposal includes a Volcker-like provision, prohibiting large, systemically relevant financial institutions from engaging in proprietary trading or hedge fund-related business. This paper offers lessons to be learned from the implementation process for the Volcker rule in the US for the European regulatory process. -- |
| Keywords: | banking separation proposals,proprietary trading ban,Dodd-Frank Act |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:13&r=ban |
| By: | Warren E. Weber |
| Abstract: | In the United States prior to 1863 each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes. It examines historical evidence on how well the bank notes - a privately-issued currency system with multiple issuers - functioned with respect to ease of transacting, counterfeiting, safety, overissuance and par exchange. It finds that bank notes made transacting easier and were not subject to overissuance. However, counterfeiting of bank notes was widespread, bank notes were not perfectly safe, and notes of different banks did not exchange at par and rates of exchange were volatile. The paper also examines how bank notes were regulated and supervised and how that regulation and supervision affected the functioning of the system. The U.S. experience with state bank notes suggests that a privately-issued e-money system can operate efficiently but only with appropriate government intervention, regulation, and supervision to minimize counterfeiting and to promote safety and par exchange. |
| Keywords: | Bank notes, E-money, Financial services |
| JEL: | E E4 E41 E42 E5 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-15&r=ban |
| By: | Michael Ehrmann; Michael Ziegelmeyer |
| Abstract: | Mortgages constitute the largest part of household debt. An essential choice when taking out a mortgage is between fixed-interest-rate mortgages (FRMs) and adjustable-interest-rate mortgages (ARMs). However, so far, no comprehensive cross-country study has analyzed what determines household demand for mortgage types, a task that this paper takes up using new data for the euro area. Our results support the hypothesis of Campbell and Cocco (2003) that the decision is best described as household risk management: income volatility reduces the take-out of ARMs, while increasing duration and relative size of the mortgages increase it. Controlling for other supply factors through country fixed effects, loan pricing also matters, as expected, with ARMs becoming more attractive when yield spreads rise. The paper also conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income. |
| Keywords: | Credit and credit aggregates; Transmission of monetary policy |
| JEL: | D12 E43 E52 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-1&r=ban |
| By: | Andrew Green; Chris Kenyon |
| Abstract: | Central counterparties (CCPs) require initial margin (IM) to be posted for derivative portfolios cleared through them. Additionally, the Basel Committee on Banking Supervision has proposed in BCBS-261 that all significant OTC derivatives trading must also post IM by 2019. IM is typically calculated using Value-at-Risk (VAR) or Conditional Value-at-Risk (CVAR, aka Expected Shortfall), based on historical simulation. As previously noted (Green2013a), (Green2013b) IM requirements give rise to a need for unsecured funding similar to FVA on unsecured derivatives. The IM cost to the derivatives originator requires an integral of the funding cost over the funding profile which depends on VAR- or CVAR-based calculation. VAR, here, involves running a historical simulation Monte Carlo inside a risk-neutral Monte Carlo simulation. Brute force calculation is computationally unfeasible. This paper presents a computationally efficient method of calculating IM costs for any derivative portfolio: Longstaff-Schwartz Augmented Compression, (LSAC). Essentially, Longstaff-Schwartz is used with an augmented state space to retain accuracy for VAR-relevant changes to the state variables. This method allows rapid calculation of IM costs both for portfolios, and on an incremental basis. LSAC can be applied wherever historic simulation VAR is required such as lifetime cost of market risk regulatory capital using internal models. We present example costs for IM under BCBS-261 for interest rate swap portfolios of up to 10000 swaps and 30 year maturity showing significant IM FVA costs and two orders of magnitude speedup compared to direct calculation. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1405.0508&r=ban |
| By: | Vuillemey, G.; Breton, R. |
| Abstract: | This paper proposes a network formation model of an OTC derivatives market where both prices and quantities are bilaterally negociated. The key feature of the framework is to endogenize the network of exposures, the gross and net notional amounts traded and the collateral delivered through initial and variation margins, as a function of idiosyncratic counterparty risk and regulatory collateral and clearing requirements. Using the framework, we investigate numerically the size of the derivatives network, the aggregate collateral demand and the pricing of the contracts under the following schemes: (i) various levels of collateralization for uncleared transactions, (ii) rehypothecation of received collateral and (iii) clearing through a central clearing party (CCP). Overall results suggest that dynamic effects due to the endogeneity of the derivative network to the collateralization and clearing requirements have sizeable consequences on both contract volumes and prices. Intermediary trading and market liquidity are reduced by higher collateralization requirements and enhanced by rehypothecation, while the potential for contagion is reduced. Not accounting for dynamic effects in current market conditions may lead to over-estimate collateral demand induced by mandatory central clearing by up to 22%. |
| Keywords: | Collateral, Credit derivatives, Central Clearing Party (CCP), Rehypothecation, Network formation. |
| JEL: | G11 G17 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:483&r=ban |
| By: | Yongmiao Hong; Yanhui Liu; Shouyang Wang |
| Abstract: | Controlling and monitoring extreme downside market risk are important for financial risk management and portfolio/investment diversification. In this paper, we introduce a new concept of Granger causality in risk and propose a class of kernel-based tests to detect extreme downside risk spillover between financial markets, where risk is measured by the left tail of the distribution or equivalently by the Value at Risk (VaR). The proposed tests have a convenient asymptotic standard normal distribution under the null hypothesis of no Granger causality in risk. They check a large number of lags and thus can detect risk spillover that occurs with a time lag or that has weak spillover at each lag but carries over a very long distributional lag. Usually, tests using a large number of lags may have low power against alternatives of practical importance, due to the loss of a large number of degrees of freedom. Such power loss is fortunately alleviated for our tests because our kernel approach naturally discounts higher order lags, which is consistent with the stylized fact that today’s financial markets are often more influenced by the recent events than the remote past events. A simulation study shows that the proposed tests have reasonable size and power against a variety of empirically plausible alternatives in finite samples, including the spillover from the dynamics in mean, variance, skewness and kurtosis respectively. In particular, nonuniform weighting delivers better power than uniform weighting and a Granger-type regression procedure. The proposed tests are useful in investigating large comovements between financial markets such as financial contagions. An application to the Eurodollar and Japanese Yen highlights the merits of our approach. |
| Keywords: | Cross-spectrum; Extreme downside risk; Financial contagion; Granger causality in risk; Nonlinear time series; Risk management; Value at Risk |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002098&r=ban |
| By: | Eleonora Iachini (Banca d'Italia); Stefano Nobili (Banca d'Italia) |
| Abstract: | This paper introduces a coincident indicator of systemic liquidity risk in the Italian financial markets. In order to take account of the systemic dimension of liquidity stress, standard portfolio theory is used. Three sub-indices, that reflect liquidity stress in specific market segments, are aggregated in the systemic liquidity risk indicator in the same way as individual risks are aggregated in order to quantify overall portfolio risk. The aggregation takes account of the time-varying cross-correlations between the sub-indices, using a multivariate GARCH approach. This is able to capture abrupt changes in the correlations and makes it possible for the indicator to identify systemic liquidity events precisely. We evaluate the indicator on its ability to match the results of a survey conducted among financial market experts to determine the most liquidity stressful events for the Italian financial markets. The results show that the systemic liquidity risk indicator accurately identifies events characterized by high systemic risk, while not exaggerating the level of stress during calm periods. |
| Keywords: | financial crisis, liquidity risk, systemic risk, stress index, multivariate GARCH |
| JEL: | G01 G10 G20 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_217_14&r=ban |
| By: | Jonathan Chiu; Tsz-Nga Wong |
| Abstract: | What makes e-money more special than cash? Is the introduction of e-money necessarily welfare enhancing? Is an e-money system necessarily stable? What is the optimal way to design an efficient and stable e-money scheme? This paper provides a first attempt to develop a micro-founded, dynamic, general-equilibrium model of e-money for investigating these policy issues. We first identify some superior features of e-money which help mitigate informational frictions and enhance social welfare in a cash economy. A model that features both trading frictions and two-sided platforms is then built and used to compare two potential e-money schemes: (i) public provision of e-money with decentralized adoption, and (ii) private monopolistic provision of e-money. We show that, in general, both public and private provision of e-money are inefficient, and we characterize the optimal incentive scheme by addressing four potential sources of inefficiency – market powers in goods trading, network externality, liquidity constraint and monopoly distortion in e-money issuance. We show that the welfare impact of e-money depends critically on whether cash is a viable alternative to e-money as a means of payment. When it is not (e.g., for online payments where usage of money is prohibitively costly), the adoption of e-money is always welfare enhancing, albeit not welfare maximizing. However, when cash is a viable alternative (e.g., in a coffee shop), introducing e-money can sometimes reduce social welfare. Moreover, a system with public provision and decentralized adoption is inherently unstable, while a planner or a private issuer can design a pricing scheme to restore stability. Lastly, we examine an alternative e-money scheme – a hypothetical set-up with public provision through a private platform. We also compare the impact of various provision schemes on central bank seigniorage income. While this scheme may or may not improve efficiency, it can always increase seigniorage income, even though there may exist better policy options such as imposing a cash reserve requirement or collecting a charter fee. |
| Keywords: | Bank notes, E-money, Payment clearing and settlement systems |
| JEL: | E E4 E42 E5 E58 L L5 L51 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-16&r=ban |
| By: | Jacob Oduor; Moses Muse Sichei; Samuel Kiplangat Tiriongo; Chris Shimba |
| Abstract: | This paper assesses the role that bank segmentation plays in the efficiency of the interbank market and the extent to which segmentation and inefficiency of the interbank market impedes the effectiveness of monetary policy. Using a unique (not public) Kenyan daily dataset for the period June 2003 to September 5 2012 obtained from the Central Bank of Kenya (CBK), and utilizing network framework and event studies, the findings show that the Kenyan interbank market is incomplete, segmented and inefficient and this impedes monetary policy effectiveness in the short run particularly during periods of liquidity volatility. Evidence however shows that monetary policy is still effective in the long run, notwithstanding inefficiencies at the interbank market. However, this should not be any consolation for monetary policy makers since monetary policy is intended to work in the short to medium term. To improve the efficiency of the interbank and its role as a channel of transmitting monetary policy in such underdeveloped interbank markets like Kenya, monetary authorities must broaden the product tenors, increase the number of currencies traded, link the interbank with other money market segments and address counterparty risks. |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:adb:adbwps:2106&r=ban |