nep-rmg New Economics Papers
on Risk Management
Issue of 2009‒04‒13
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Optimization Heuristics for Determining Internal Rating Grading Scales By Marianna Lyra; Johannes Paha; Sandra Paterlini; Peter Winker
  2. The impact of bank concentration on financial distress: the case of the European banking system By Andrea Cipollini; Franco Fiordelisi
  3. Financial Regulation and Risk Management: Addressing Risk Challenges in a Changing Financial Environment By Ojo, Marianne
  4. Sectoral Equity Returns in the Euro Region: Is There any Room for Reducing the Portfolio Risk? By Balli, Faruk; Ozer-Balli, Hatice
  5. Global Asset Return in Pension Funds: a dynamical risk analysis By Sergio, Bianchi; Alessandro, Trudda
  7. IT Governance in Romania: A Case Study By Mirela Gheorghe; Pavel Nastase; Dana Boldeanu; Aleca Ofelia
  8. "An Assessment of the Credit Crisis Solutions" By Elias Karakitsos

  1. By: Marianna Lyra; Johannes Paha; Sandra Paterlini; Peter Winker
    Abstract: Basel II imposes regulatory capital on banks related to the de- fault risk of their credit portfolio. Banks using an internal rating approach compute the regulatory capital from pooled probabilities of default. These pooled probabilities can be calculated by clustering credit borrowers into di®erent buckets and computing the mean PD for each bucket. The clustering problem can become very complex when Basel II regulations and real-world constraints are taken into account. Search heuristics have already proven remarkable performance in tackling this problem. A Threshold Accepting algorithm is proposed, which exploits the inherent discrete nature of the clustering problem. This algorithm is found to outperform alternative methodologies already proposed in the literature, such as standard k-means and Di®erential Evolution. Besides considering several clustering objectives for a given number of buckets, we extend the analysis further by introducing new methods to determine the optimal number of buckets in which to cluster banks' clients.
    Keywords: : credit risk; probability of default; clustering; Threshold Accepting; Differential Evolution
    JEL: C61
    Date: 2009–03
  2. By: Andrea Cipollini; Franco Fiordelisi
    Abstract: This paper examines the impact of bank concentration on bank financial distress using a balanced panel of commercial banks belonging to EU 25 over the sample period running from 2003 to 2007. Financial distress is proxied by the observations falling below a given threshold of the empirical distribution of a risk adjusted indicator of bank performance: the Shareholder Value ratio. We employ a panel probit regression estimated by GMM in order to obtain consistent and efficient estimates following the suggestion of Bertschek and Lechner (1998). Our findings suggest, after controlling for a number of enviroment variables, a positive effect of bank concentration on financial distress.
    Keywords: EVA; Banking; Panel Probit; GMM
    JEL: C33 C35 G21 G32
    Date: 2009–02
  3. By: Ojo, Marianne
    Abstract: Amongst other things, this paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. In addressing the problems posed as a result of the difficulty in quantifying risks, it will consider a means whereby risks can be quantified reasonably without the consequential effects which result from the dual nature of risk that is, risks emanating from the management of institutional risks. Current attempts by the European Union to regulate risks will also be discussed. This discussion will be facilitated through a consideration of recent developments in the EU which are aimed at addressing risks posed by hedge funds. The results obtained from a consultation process on hedge funds, and which will be discussed in the concluding section of this paper, reveal whether the systemic relevance of hedge funds and prime brokerage regulation need to be reviewed. Questions also addressed during the consultation process, which include whether indirect prudential regulation is inadequate to shield the financial system from hedge funds’ failure and whether prudential authorities have necessary tools to monitor exposures of the core financial system to hedge funds, will also be discussed.
    Keywords: risk; management; regulation; hedge funds
    JEL: K2
    Date: 2009–04–06
  4. By: Balli, Faruk; Ozer-Balli, Hatice
    Abstract: The economic integration among Euro members has important consequences for the factors driving asset pricing and asset trading within the financial markets. In particular, since the start of the Euro, cross-country equity index correlations in the region have showed upward trends and domestic investors have allocated their portfolios mostly inside of the region. This paper studies the impact of these recent structural changes on the Euro-wide sectoral equity indices. We modeled the return and volatility of the Euro sector equity indices between years 1992 and 2007. We documented that aggregate world equity or global sector equity indices have not been affecting the sector equity indices since the beginning of the Euro. Aggregate Euro stock index, however, still has been affecting most of the sector equity indices, even though its effect has been declining remarkably for some sectors. In particular, we found that financial sector indices (financial services, insurance, and banking) are being affected increasingly by the aggregate Euro equity index fluctuations after the start of the Euro. However, some ``basic industry sector'' indices, including basic resources, food and beverage, health-care, retail services, and oil & gas had become less dependent to the aggregate Euro index within the same period, suggesting that diversification across these sectors within the region would be much more effective tool for reducing portfolio risk.
    Keywords: Stock Market Correlation; Sector Equity Indices; Euro Portfolio Bias; Euro; GARCH.
    JEL: G12 G15
    Date: 2009
  5. By: Sergio, Bianchi; Alessandro, Trudda
    Abstract: The aim of the paper is to develop a technique for rebalancing pension fund portfolios in function of their pointwise level of risk. The performance of pension funds is often measured by their global asset returns because of the latter’s influence on periodic contributions and/or future benefits. However, in periods of market crisis attention is focused on the risk level given their social security (and not speculative) function. We describe the process of the global asset return by a multifractional Brownian motion using the function H(t) to detect high or low volatility phases. A procedure is carried out to balance the asset composition when the established local degree of risk is exceeded. The application is carried out on portfolios obtained in accordance with Italian regulations regarding investment limits.
    Keywords: Pension Funds; risk control; multifractional Brownian motion
    JEL: G11 G23 C22
    Date: 2008–05–25
  6. By: Elisabetta Gualandri; Andrea Landi; Valeria Venturelli
    Abstract: This paper aims to stress the importance of market liquidity for the stability of the financial system, emphasizing the pivotal role played by liquidity risk in the development of the current financial crisis, pointing out the flaws of regulation and supervision and stressing the need for their reform. We first investigate the evolution of the concept of liquidity and the nexus between the transformations of financial systems and their increased vulnerability to liquidity risks. Then we focus on the causes of the emergence of liquidity risk in the ongoing financial crisis. We point out two intertwined processes: firstly, the huge increase in financial assets stemming from the shift to an “originate-to-distribute” intermediation model; secondly, the growth of a parallel financial circuit. After this, we focus on the main lessons for regulation and supervision: first of all we address the case for adjustments to or reform of Basel 2 in view of the nexus between solvency and liquidity. Further crucial points relate to market liquidity and OTC markets, scale and scope of LLR function, architecture of supervisory authorities and perimeter of controls. Finally we stress the need for harmonization, or at least coordination, of national liquidity regimes, at least for cross-border groups.
    Keywords: financial innovation; financial crisis; market liquidity risk; financial regulation; supervision
    JEL: D53 E58 F37 G1 G18 G21 G24 G28
    Date: 2009–01
  7. By: Mirela Gheorghe (Academy of Economic Studies, Romania.); Pavel Nastase (Bucharest Uiversity of Economics); Dana Boldeanu (Bucharest University of Economics); Aleca Ofelia (Bucharest University of Economics)
    Abstract: Relatively new in Romania, IT Governance is defined as procedures and policies established in order to assure that the IT system of an organization sustains its goals and strategies. This bundle of policies and procedures, following the best practices in the area, intends to guide and control the IT function in order to add value to the organization and to minimize IT risks.The purpose of the research is to identify the measure in which the IT governance practices are implemented to the level of the financial institutions in Romania. More over, the paper has as goal a comparative analysis of implementing IT governance using data offered by the IT Governance Institute. This institute makes every year a study (IT Governance Global Status Report - 2006) to determine the sense of priorities and the developed actions for implementing IT governance, data which acknowledge ones more the need of any organization for tools and services to assure an efficient IT governance. In this way, the research will analyze to the level of financial institutions from Romania: the most serious IT problems pointed out from the respondents from the last year; the most efficient measures considered top management for resolving problems pointed out; the best used practices in IT governance; the most used frameworks for implementing IT governance practices.Keywords: IT Governance, IT Risk Management, Strategic Alignment, Basel II.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008.
    Date: 2008–08–29
  8. By: Elias Karakitsos
    Abstract: All of the various schemes that have been put forward to resolve the current credit crisis follow either the "business as usual" or the "good bank" model. The "business as usual" model takes different forms--insurance or guarantee of the assets or liabilities of the financial institutions, creation of a "bad bank" to buy toxic assets, temporary nationalization--and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s. The "good bank" solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression. In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified "good bank" approach, with the government either guaranteeing a large proportion of the personal sector's assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured.
    Date: 2009–03

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