|
on Banking |
| By: | Daniel Gurara; Andrea F Presbitero; Miguel Sarmiento |
| Abstract: | Cross-border bank lending is a growing source of external finance in developing countries and could play a key role for infrastructure financing. This paper looks at the role of multilateral development banks (MDBs) on the terms of syndicated loan deals, focusing on loan pricing. The results show that MDBs' participation is associated with higher borrowing costs and longer maturities---signaling a greater willingness to finance high risk projects which may not be financed by the private sector---but it is also associated with lower spreads for riskier borrowers. Overall, our findings suggest that MDBs could crowd in private investment in developing countries through risk mitigation. |
| Keywords: | Financial inclusion;Cross-border banking;Microfinance;Borrowing;Multilateral development institutions;Developing countries;inancial inclusion, microfinance, loan expansion program, credit reference bureau |
| Date: | 2018–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:263&r=all |
| By: | Koetter, Michael; Müller, Carola; Noth, Felix; Fritz, Benedikt |
| Abstract: | We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of governmen-owned banks: the unification of counties. County mergers lead to enforced governmen-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms. |
| Keywords: | political frictions,governance,excess capacity,banking,market exit |
| JEL: | G21 G29 O16 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:492018&r=all |
| By: | Makoto (M.) Watanabe (VU Amsterdam); Tarishi Matsuoka (Tokyo Metropolitan University) |
| Abstract: | This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements, and constructive ambiguity. |
| Keywords: | Monetary Equilibrium; Banking Panic; Moral Hazard; Lender of Last Resort |
| JEL: | E40 |
| Date: | 2019–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190002&r=all |
| By: | Miguel Sarmiento (Central Bank of Colombia); ; |
| Abstract: | This paper examines the impact of exogenous liquidity shocks in the unsecured interbank market. We evaluate the effects of idiosyncratic liquidity shocks—arising from deposits outflow at the bank level—and of the aggregate liquidity shock related to the U.S. tapering observed between May and September of 2013. We find that both liquidity shocks are associated with higher interbank loan prices, albeit the magnitude of the overprice and the impact on the access to interbank liquidity differ depending on the borrower-specific characteristics. More capitalized and liquid banks tend to pay less for liquidity—concurrent with evidence on market discipline—but also can absorb better the impact of exogenous liquidity shocks, suggesting benefits from capital and liquidity ratios. Our results suggest that lending relationships can alleviate funding costs during idiosyncratic liquidity shocks, while central bank liquidity contributes to smooth the impact of aggregate liquidity shocks. Results have implications for both financial stability and monetary policy transmission. |
| Keywords: | interbank markets; market discipline; liquidity shocks; monetary policy; financial stability. |
| JEL: | E43 E58 L14 G12 G21 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp01-2019&r=all |
| By: | Döttling, Robin |
| Abstract: | How do near-zero deposit rates affect (optimal) bank capital regulation and risk taking? I study these questions in a tractable, dynamic equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, subject to a (zero) lower bound constraint on deposit rates (ZLB). At the ZLB, capital requirements become less effective in curbing excessive risk-taking incentives, as they disproportionately hurt franchise values. As a consequence, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Subsidizing bank funding costs at the ZLB dampens risk-taking, but may reduce overall welfare. |
| Keywords: | Zero lower bound,Search for yield,Capital regulation,Bank competition,Franchise value |
| JEL: | G21 G28 E43 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:191028&r=all |
| By: | Angelo Baglioni (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Luca Colombo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Paola Rossi |
| Abstract: | When the debt of firms in distress is dispersed, a restructuring agreement is difficult to reach because of free riding. We develop a repeated game in which banks come across each other frequently, allowing them to threaten a punishment in case of free riding. As the number of lending banks grows, the chance of meeting again a bank and of being punished for free riding increases, improving the likelihood of cooperation. Looking at Italian firms in distress, we find that the restructuring probability increases with the number of banks up to a threshold - three banks - beyond which coordination problems prevail. |
| Keywords: | banks, debt restructuring, number of creditors. |
| JEL: | G21 G33 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def077&r=all |
| By: | Laura Alfaro; Manuel García-Santana; Enrique Moral-Benito |
| Abstract: | We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all firms in Spain with a matched bank-firm-loan dataset on the universe of corporate loans for 2003-2013 to identify bank-specific shocks for each year using methods from the matched employer-employee literature. We construct firm-specific exogenous credit supply shocks and estimate their direct and indirect effects on real activity using firm-specific measures of upstream and downstream exposure. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period, especially during the 2008-2009 global financial crisis. In terms of mechanisms, trade credit extended by suppliers and price adjustments play a role in accounting for downstream propagation of financial shocks. |
| JEL: | E44 G21 L25 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25458&r=all |
| By: | Golden, Brian (Central Bank of Ireland); Maqui, Eduardo (Central Bank of Ireland) |
| Abstract: | This paper focuses on cross-border debt issuance linking banks and shadow banking entities, providing new evidence associated with the characteristics of international banks sponsoring Irish-resident SPEs. Our empirical results show that banks sponsoring Irish-resident SPEs are larger and finanancially weaker across a range of indicators compared to other banks. We analyse how these indicators evolve following debt issuance through Irish-resident SPEs, where the impact is concentrated in the short term and largely dissipates after a year. This contrasts with the impact of debt issuance elsewhere, which is sustained beyond a year. However, a key purpose of banks issuing debt through Irish-resident SPEs may be to access debt markets elsewhere. We observe banks markedly increasing their issuance volumes in debt markets elsewhere after issuing debt through Irish-resident SPEs. |
| Keywords: | International banking, cross-border debt issuance, special purpose entities (SPEs), Irish non-bank financial sector, shadow banking. |
| JEL: | G21 G01 G15 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:14/rt/18&r=all |
| By: | Oliver Rehbein; Santiago Carbo-Valverde |
| Abstract: | The decision to change or terminate a bank-firm relationship has been demonstrated to be crucial for firm performance following bank mergers. We find both competition and the available firm collateral to be important factors in enabling firms to switching banks, instead of dropping their bank relationships. We also provide novel evidence that firms who are able to \textit{add} a bank relationship following a merger exhibit much stronger post-merger performance. Our findings are consistent with the interpretation that bank-mergers cause a reduction in lending to most firms, leading them to search for alternative sources of finance. |
| Keywords: | bank mergers, relationship banking, competition |
| JEL: | G21 G34 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2018_044&r=all |
| By: | Mankart, Jochen; Michaelides, Alexander; Pagratis, Spyros |
| Abstract: | We estimate a dynamic structural banking model to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk-weighted capital requirements reduce loan supply and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Tighter leverage requirements, on the other hand, increase lending, preserve bank charter value and incentives to accumulate equity buffers, therefore leading to lower bank failure rates. |
| Keywords: | Banking,Equity Buffers,Regulatory Interactions |
| JEL: | E44 G21 G38 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:512018&r=all |
| By: | Heller, Yuval; Peleg Lazar, Sharon; Raviv, Alon |
| Abstract: | We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebt-holders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events, but can lead to higher levels of risk, depending on the relative bargaining power, (2) does not change the level of risk-shifting when side payments are possible, and (3) may yield the surprising result that risk-shifting increases with tighter regulatory control. |
| Keywords: | Risk-taking, asset risk, financial institutions, stress test, leverage, bargaining |
| JEL: | G21 G28 |
| Date: | 2019–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:91381&r=all |
| By: | Oliver Rehbein |
| Abstract: | I show that natural disasters transmit to firms in non-disaster areas via their banks. This spillover of non-financial shocks through the banking system is stronger for banks with less regulatory capital. Firms connected to a disaster-exposed bank with below median capital, reduce their employment by 11\% and their fixed assets by 20\% compared to firms in the same region without such a bank during the 2013 flooding in Germany. Low bank capital thus carries a negative externality because it amplifies regional shock spillovers. I show that bank liquidity, and firm capital and liquidity are less relevant to prevent shock transmission. |
| Keywords: | natural disaster, real effects, shock transmission, bank capital |
| JEL: | G21 G29 E44 E24 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2018_043&r=all |
| By: | Fatouh, Mahmoud (Bank of England); McMunn, Ayowande (Carmihnac Asset Managers) |
| Abstract: | This paper presents a model of shareholders’ willingness to exert effort to reduce the likelihood of bank distress, and the implications of the presence of contingent convertible (CoCo) bonds in the liabilities structure of a bank. Consistent with the existing literature, we show that the direction of the wealth transfer at the conversion of CoCo bonds determines their impact on shareholder risk-taking incentives. We also find that ‘anytime’ CoCos (CoCo bonds trigger-able anytime at the discretion of managers) have a minor advantage over regulator CoCo bonds, and that quality of capital requirements can reduce the risk-taking incentives of shareholders. We argue that shareholders can also use manager-specific CoCo bonds to reduce the riskiness of the bank activities. The issuance of such bonds can increase the resilience of individual banks and the whole banking system. Regulators can use restrictions on conversion rates and/or requirements on the quality of capital to address the impact of CoCo bonds issuance on risk-taking incentives. |
| Keywords: | Risk-taking; CoCo bonds; anytime CoCos; quality of capital requirements; additional Tier 1 capital (AT1); bank manager compensation packages; compensation policy. |
| JEL: | D81 G21 G28 G30 |
| Date: | 2019–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0775&r=all |
| By: | Gaffney, Edward (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland) |
| Abstract: | Banks must make forward-looking provisions for loan losses under new international accounting standards introduced in 2018. In Europe, banks will assign performing exposures to a new “Stage 2” category with a higher provisioning penalty, if they have experienced significant increase in credit risk (SICR). We use a loan-level credit risk model and Irish residential mortgage panel data to assign performing loans into the appropriate stage. Using this technique, we characterise approximately 30 per cent of the performing Irish mortgage portfolio at end-2015 as Stage 2. We then calculate backward-looking, static estimations of Stage 2 mortgages between 2008 and 2015. This exercise suggests that loan stage assignment can be highly pro-cyclical. The share of Stage 2 among performing mortgages rises during the economic downturn to peak in 2013, after which large transitions are assigned from Stage 2 into lower risk performing loans, as the economy improves. |
| Keywords: | Mortgage defaults; credit risk; stress testing; loan provisioning |
| JEL: | G21 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:16/rt/18&r=all |
| By: | Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen |
| Abstract: | EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model that allows us to explain these patterns in the data, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:311&r=all |
| By: | Bredl, Sebastian |
| Abstract: | Against the backdrop of a high stock of non-performing loans (NPLs) in several European countries, this paper investigates the role of NPLs for lending rates charged for newly granted loans in the euro area. More precisely, it looks for an effect that extends beyond losses caused by that stock which have already been incorporated into the banks' capital positions. The paper focuses on the question of which channels are responsible for such a potential effect. The results indicate that a higher stock of net NPLs is associated with higher lending rates, whereby there are indications that this relation tends to be offset by loan loss reserves. Although the NPL stock affects banks' idiosyncratic funding costs as well, the latter do not seem to constitute an important link between the stock of NPLs and lending behavior. Furthermore, NPLs do not strongly affect the banks' interest rate pass-through. |
| Keywords: | lending rates,non-performing loans,impaired loans,funding costs |
| JEL: | G21 E43 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:522018&r=all |
| By: | Thierno Barry (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Alassane Diabaté (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges) |
| Abstract: | Using quarterly data of U.S. commercial banks, we investigate the impact of market liquidity shortages on banks' capitalization and balance sheet adjustments. Our findings reveal that an acute liquidity shortage leads small U.S. commercial banks, but not large ones, to positively adjust their total capital ratio. Small banks adjust their total capital ratio by downsizing, by restricting dividend payments, by decreasing the share of assets with higher risk weights and specifically by extending less loans. Furthermore, the positive impact on total capital ratios is stronger for small banks which are more reliant on market liquidity and small banks operating below their target capital ratio. |
| Date: | 2018–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01965938&r=all |
| By: | Matthias Efing; Stefan Goldbach; Volker Nitsch |
| Abstract: | We study the effects of financial sanctions on cross-border credit supply. Using a differences-in-differences approach to analyze eleven sanctions episodes between 2002 and 2015, we find that banks located in Germany reduce their positions in countries with sanctioned entities by 38%. The average German branch or subsidiary located outside Germany does not adjust its positions after the imposition of sanctions. For affiliated banks located in countries with low financial standards, we even observe a relative increase in credit supply. These effects are stronger if sanctions are only imposed by EU member states and not by the entire UN. |
| Keywords: | financial sanctions, law and finance, cross-border lending, international banking |
| JEL: | F51 G18 G28 G38 K33 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7424&r=all |
| By: | Brahim Gaies; Stéphane Goutte (LED - Université Paris 8); Khaled Guesmi |
| Abstract: | We examine the determinants of banking crises occurrence in developing countries, focusing on the impact of the nature of external liabilities and exchange rate stability. For this purpose, we use a logit panel model, including 67 developing countries observed between 1972 and 2011, as well as a set of alternative estimation methods (logit fixed-effects and probit random-effects) and robustness tests. We find that FDI liabilities reduce the occurrence of banking crises, but debt liabilities increase them. In addition, banking crises occurrence decreases in developing countries with the stability of the exchange rate, real GDP growth, as well as better human capital quality and better political institutions. |
| Keywords: | Financial Crises,External Liabilities,Exchange Rate Stability |
| Date: | 2019–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01968084&r=all |
| By: | Ran Sun Lyng (Department of Economics and Business Economics, Aarhus University, Denmark); Jie Zhou (University of Winnipeg, Canada) |
| Abstract: | We document the temporal patterns of the household portfolio choice over a 7-year period around a house purchase, using unique administrative panel data from Denmark. We find that (i) households accumulate considerably more liquid wealth in a few years before the purchase of a house and draw down liquid wealth at the year of purchase; (ii) the equity market participation rate drops during the year of the house purchase; and (iii) conditional on participation, the risky asset share of liquid wealth decreases and reaches the lowest point 1 year before a house purchase but jumps up immediately after. These findings suggest that of the three channels identified in the literature that affect the risky asset demand after a house purchase, the diversification effect and the debt retirement channel dominate the liquidity demand. Liquidity demand, however, has a larger effect on the portfolio choice for poorer households after a house purchase. |
| Keywords: | Portfolio choice, Personal finance, Housing |
| JEL: | D14 G11 R21 |
| Date: | 2019–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2019-01&r=all |
| By: | Sanjiv R. Das; Kris James Mitchener; Angela Vossmeyer |
| Abstract: | We employ a unique hand-collected dataset and a novel methodology to examine systemic risk before and after the largest U.S. banking crisis of the 20th century. Our systemic risk measure captures both the credit risk of an individual bank as well as a bank’s position in the network. We construct linkages between all U.S. commercial banks in 1929 and 1934 so that we can measure how predisposed the entire network was to risk, where risk was concentrated, and how the failure of more than 9,000 banks during the Great Depression altered risk in the network. We find that the pyramid structure of the commercial banking system (i.e., the network’s topology) created more inherent fragility, but systemic risk was nevertheless fairly dispersed throughout banks in 1929, with the top 20 banks contributing roughly 18% of total systemic risk. The massive banking crisis that occurred between 1930{33 raised systemic risk per bank by 33% and increased the riskiness of the very largest banks in the system. We use Bayesian methods to demonstrate that when network measures, such as eigenvector centrality and a bank’s systemic risk contribution, are combined with balance sheet data capturing ex ante bank default risk, they strongly predict bank survivorship in 1934. |
| Keywords: | systemic risk, banking networks, Great Depression, Global Financial Crisis, marginal likelihood |
| JEL: | L10 N20 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7425&r=all |
| By: | Luisa Corrado; Tobias Schuler |
| Abstract: | This paper analyzes the effects of several policy instruments to mitigate financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios and allow for interbank trading. We then show how a financial bubble can develop from a financial innovation. By incorporating a loan management technology and a bank equity channel we can evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement as best. |
| Keywords: | financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies |
| JEL: | E44 E52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7422&r=all |
| By: | Steven J. Davis; John C. Haltiwanger |
| Abstract: | The Great Recession and its aftermath saw the worst relative performance of young firms in at least 35 years. More broadly, as we show, young-firm activity shares move strongly with local economic conditions and local house price growth. In this light, we assess the effects of housing prices and credit supply on young-firm activity. Our panel IV estimation on MSA-level data yields large effects of local house price changes on local young-firm employment growth and employment shares and a separate, smaller role for locally exogenous shifts in bank lending supply. A novel test shows that house price effects work through wealth, liquidity and collateral effects on the propensity to start new firms and expand young ones. Aggregating local effects to the national level, housing market ups and downs play a major role – as transmission channel and driving force – in medium-run fluctuations in young-firm employment shares in recent decades. The great housing bust after 2006 largely drove the cyclical collapse of young-firm activity during the Great Recession, reinforced by a contraction in bank loan supply. As we also show, when the young-firm activity share falls (rises), local employment shifts strongly away from (towards) younger and less-educated workers. |
| JEL: | E2 E3 E5 G2 J2 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25466&r=all |
| By: | Bernd Hayo (Philipps-Universitaet Marburg); Kai Henseler (Philipps-Universitaet Marburg); Marc Steffen Rapp (Philipps-Universitaet Marburg) |
| Abstract: | Using an event-study design, we investigate monetary policy interest-rate-to-performance sensitivity of the European banking sector over the 07/2012–06/2017 period when interest rates were (close to) zero. We apply the Wordscores approach to introductory statements of ECB's Governing Council press conferences to estimate a ‘shadow prime rate’. Based on short-run intraday event windows, we find shadow prime rate changes positively affect changes in the EURO-STOXX-Banks Future. Our findings add to the recent evidence documenting that banks benefit from increasing interest rate levels in a low-interest-rate environment. |
| Keywords: | ECB, central bank communication, banking sector, interest rate sensitivity, textual analysis, Wordscores |
| JEL: | E43 E52 E58 G14 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201902&r=all |
| By: | Mariusz Jarmuzek; Tonny Lybek |
| Abstract: | This paper argues that better governance practices can reduce the costs, risks and uncertainty of financial intermediation. Our sample covers high-, middle- and low-income countries before and after the global financial crisis (GFC). We find that net interest margins of banks are lower if various governance indicators are better. More cross-border lending also appears conducive to lower intermediation costs, while the level of capital market development is not significant. The GFC seems not to have had a strong impact except via credit risk. Finally, we estimate the size of potential gains from improved governance. |
| Keywords: | Corruption;Governance;financial intermediation costs, Relation of Economics to Social Values, Government Policy and Regulation, Illegal Behavior and the Enforcement of Law |
| Date: | 2018–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/279&r=all |
| By: | Jan Dhaene; Roger J. A. Laeven; Yiying Zhang |
| Abstract: | Conditional risk (co-risk) measures and risk contribution measures are increasingly used in quantitative risk analysis to evaluate the systemic risk that the failure (or loss) of a component spreads to other components or even to the entire system. Co-risk measures are conditional versions of measures usually employed to assess isolated risks, while risk contribution measures evaluate how a stress situation for one component incrementally affects another one. In this article, we introduce the rich classes of conditional distortion (CoD) risk measures and distortion risk contribution ($\Delta$CoD) measures, which contain the well-known conditional Value-at-Risk (CoVaR), conditional Expected Shortfall (CoES), and risk contribution measures in terms of the VaR and ES ($\Delta$CoVaR and $\Delta$CoES) as special cases. Sufficient conditions are presented for two random vectors to be ordered by the proposed CoD-risk measures and distortion risk contribution measures. These conditions are stated in terms of the stochastic dominance, increasing convex/concave, dispersive order, and excess wealth orders of the marginals under some assumptions of positive/negative stochastic dependence. Numerical examples are provided to illustrate our theoretical findings. This paper is the second in a triplet of papers on systemic risk by the same authors. In Dhaene et al. (2018), we introduce and analyze some new stochastic orders related to systemic risk. In a third (forthcoming) paper, we attribute systemic risk to the different participants in a given risky environment. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.04689&r=all |