|
on Risk Management |
| By: | Petr Kadeřábek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Komerční banka, a.s); Aleš Slabý (Komerční banka, a.s); Josef Vodička (Komerční banka, a.s; Société Genérale, Paris) |
| Abstract: | This paper introduces a model for stress testing of probability of default of individuals. The model rests on assumption that the individual defaults if his savings fall below zero. The probability of default is then described as a function of several macroeconomic indicators such as wages, unemployment and interest rates. Stress testing is carried out by applying exogenous stress scenarios for development of these indicators. The model implies that sensitivity of probability of default to the stress is mainly driven by Installment to Income Ratio and for mortgages also by loan maturity. Hence Installment to Income ratio is suggested as the appropriate tool to manage credit risk of retail portfolios. |
| Keywords: | banking; credit risk; stress testing; probability of default |
| JEL: | G21 E32 E21 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_11&r=rmg |
| By: | Allen Berger; Robert DeYoung; Mark Flannery; David Lee; Ozde Oztekin |
| Abstract: | Large banking organizations in the U.S. hold significantly more equity capital than the minimum required by bank regulators. This capital cushion has built up during a period of unusual profitability for the banking system, leading some observers to argue that the capital merely reflects recent profits. Others contend that the banks deliberately choose target capital levels based on their risk exposures and their counterparties’ sensitivities to default risk. In either case, the existence of “excess” capital makes it difficult to observe how banks manage their capital levels, particularly in response to regulatory changes (such as Basel II). We propose several hypotheses to explain this “excess” capital, and test these hypotheses using annual panel data for large, publicly traded U.S. bank holding companies (BHCs) from 1992 through 2006, and an innovative partial adjustment approach that allows both the target capital ratios and the speed of adjustment toward those targets to vary with firm-specific characteristics. We find evidence to suggest that large BHCs actively managed their capital ratios during our sample period. Our tests suggest that large BHCs choose target capital levels substantially above well-capitalized regulatory minima; that these targets increase with BHC risk but decrease with BHC size; that BHCs adjust toward these targets relatively quickly; and that adjustment speeds are faster for poorly capitalized BHCs, but slower (ceteris paribus) for BHCs under severe regulatory pressure. |
| Keywords: | Banks and banking ; Capital |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-01&r=rmg |
| By: | Susanto Basu; Robert Inklaar; J. Christina Wang |
| Abstract: | Rather than charging direct fees, banks often charge implicitly for their services via interest spreads. As a result, much of bank output has to be estimated indirectly. In contrast to current statistical practice, dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output. We apply these models and find that between 1997 and 2007, in the U.S. National Accounts, on average, bank output is overestimated by 21 percent and GDP is overestimated by 0.3 percent. Moreover, compared with current methods, our new estimates imply more plausible estimates of the share of capital in income and the return on fixed capital. |
| Keywords: | Banks and banking ; Risk management |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:08-4&r=rmg |
| By: | Hanno Lustig; Nikolai Roussanov; Adrien Verdelhan |
| Abstract: | Currency excess returns are highly predictable, more than stock returns, and about as much as bond returns. In addition, these predicted excess returns are strongly counter-cyclical. The average excess returns on low interest rate currencies are 4.8 percent per annum smaller than those on high interest rate currencies after accounting for transaction costs. We show that a single return-based factor, the return on the highest minus the return on the lowest interest rate currency portfolios, explains the cross-sectional variation in average currency excess returns from low to high interest rate currencies. This evidence suggests currency risk premia are large and time-varying. In a simple affine pricing model, we show that the high-minus-low currency return measures the component of the stochastic discount factor innovations that is common across countries. To match the carry trade returns in the data, low interest rate currencies need to load more on this common innovation when the market price of global risk is high. |
| JEL: | F31 G12 G15 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14082&r=rmg |