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on Risk Management |
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Issue of 2009‒08‒08
nine papers chosen by |
| By: | Olli Castrén (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Trevor Fitzpatrick (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Matthias Sydow (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In terms of regulatory and economic capital, credit risk is the most significant risk faced by banks. We implement a credit risk model - based on publicly available information - with the aim of developing a tool to monitor credit risk in a sample of large and complex banking groups (LCBGs) in the EU. The results indicate varying credit risk profiles across these LCBGs and over time. Furthermore, the results show that large negative shocks to real GDP have the largest impact on the credit risk profiles of banks in the sample. Notwithstanding some caveats, the results demonstrate the potential value of this approach for monitoring financial stability. JEL Classification: C02, C19, C52, C61, E32. |
| Keywords: | Portfolio credit risk measurement, stress testing, macroeconomic shock measurement. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091002&r=rmg |
| By: | Piergiorgio Alessandri (Bank of England, Threadneedle Street, London, EC2R 8AH, UK.); Mathias Drehmann (Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland.) |
| Abstract: | Banks typically determine their capital levels by separately analysing credit and interest rate risk, but the interaction between the two is significant and potentially complex. We develop an integrated economic capital model for a banking book where all exposures are held to maturity. Our simulations show that capital is mismeasured if risk interdependencies are ignored: adding up economic capital against credit and interest rate risk derived separately provides an upper bound relative to the integrated capital level. The magnitude of the difference depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities. JEL Classification: G21, E47, C13. |
| Keywords: | Economic capital, risk management, credit risk, interest rate risk, asset and liability management. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091041&r=rmg |
| By: | Ingo Fender (Bank for International Settlements (BIS), Monetary and Economic Department, Centralbahnplatz 2, 4002 Basel, Switzerland.); Martin Scheicher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates the market pricing of subprime mortgage risk on the basis of data for the ABX.HE family of indices, which have become a key barometer of mortgage market conditions during the recent financial crisis. After an introduction into ABX index mechanics and a discussion of historical pricing patterns, we use regression analysis to establish the relationship between observed index returns and macroeco-nomic news as well as market based proxies of default risk, interest rates, liquidity and risk appetite. The results imply that declining risk appetite and heightened concerns about market illiquidity - likely due in part to significant short positioning activity - have provided a sizeable contribution to the observed collapse in ABX prices since the summer of 2007. In particular, while fundamental factors, such as indicators of housing market activity, have continued to exert an important influence on the subordinated ABX indices, those backed by AA and AAA exposures have tended to react more to the general deterioration of the financial market environment. This provides further support for the inappropriateness of pricing models that do not sufficiently account for factors such as risk appetite and liquidity risk, particularly in periods of heightened market pressure. In addition, as related risk premia can be captured by unconstrained investors, ABX pricing patterns appear to lend support to government measures aimed at taking troubled assets off banks’ balance sheets - such as the US Troubled Asset Relief Program (TARP) in its original form. JEL Classification: E43, G12, G13, G14. |
| Keywords: | ABX index, mortgage-backed securities, pricing, risk premia. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091056&r=rmg |
| By: | René Aïd (EDF R&D - EDF, FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris Dauphine - Paris IX - CREST - EDF R&D) |
| Abstract: | Since the energy markets liberalisation at the beginning of the 1990s in Europe, electricity monopolies have gone through a profound evolution process. From an industrial organisation point of view, they lost their monopoly on their historical business, but gained the capacity to develop in any sector. Companies went public and had to upgrade their financial risk management process to international standards and implement modern risk management concepts and reporting processes (VaR, EaR...). Even though important evolutions have been accomplished, we argue here that the long-term risk management process of utility companies has not yet reached its full maturity and is still facing two main challenges. The first one concerns the time consistency of long-term and mid-term risk management processes. We show that consistencies issues are coming from the different classical financial parameters carrying information on firms' risk aversion (cost of capital and short-term risk limits) and the concepts inherited from the monopoly period, like the loss of load value, that are still involved in the utility company decision-making process. The second challenge concerns the need for quantitative models to assess their business model. With the deregulation, utilities have to address the question of their boundaries. Although intuition can provide insights on the benefits of some firm structures like vertical integration, only sound and tractable quantitative models can bring answers to the optimality of different possible firm structures. |
| Keywords: | electricity markets; risk management; investment decision; long-term risk |
| Date: | 2008–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00409030_v2&r=rmg |
| By: | Edmund Cannon; Ian Tonks |
| Abstract: | Using data on historical returns on international financial assets, the paper simulates pension fund and pension replacement ratios, building up frequency distributions of these ratios for individuals saving in a defined contribution pension plan in different countries. These frequency distributions illustrate the risk in the pension replacement ratio faced by an individual who saves in a typical defined contribution pension scheme. |
| Keywords: | Risks, Defined contribution pension schemes, pension replacement ratio. |
| JEL: | E62 G14 H55 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:09/610&r=rmg |
| By: | Laurent Devineau (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429, R&D, Milliman, Paris - Milliman); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429) |
| Abstract: | Two approaches may be considered in order to determine the Solvency II economic capital: the use of a standard formula or the use of an internal model (global or partial). However, the results produced by these two methods are rarely similar, since the underlying hypothesis of marginal capital aggregation is not verified by the projection models used by companies. We demonstrate that the standard formula can be considered as a first order approximation of the result of the internal model. We therefore propose an alternative method of aggregation that enables to satisfactorily capture the diversity among the various risks that are considered, and to converge the internal models and the standard formula. |
| Date: | 2009–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00403662_v2&r=rmg |
| By: | KAMGNA, Severin Yves; TINANG, Nzesseu Jules; TSOMBOU, Kinfak Christian |
| Abstract: | The main purpose of this paper is to determine the macro-prudential indicators of financial strength that can be used under supervision of the banking system in CEMAC. More specifically, we start from a set of indicators listed in the literature on macro-prudential supervision, and identify those that are relevant to the announcement of a deterioration of the banking system in the subregion. We sought these indicators among the variables of micro-aggregated banking sector, macroeconomic variables and the combination of these two sets. At the end of this study, it appears that the claims on the private sector, foreign direct investment and the combination of exports and credits to the private sector, increase the risk of degradation of the banking system, while this risk is reduced by the exchange rate, the capital of the banking system and inflation. This set of indicators should therefore attract the attention of the regulator to allow a quick solve of any potential banking crisis in CEMAC. |
| Keywords: | Système Bancaire; Indicateurs Macro-Prudentiels; Fragilité; Dégradation; CEMAC; Cameroun; Congo; Guinée Equatoriale; Tchad; Banque |
| JEL: | C13 E58 C12 G38 G28 E47 G21 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16555&r=rmg |
| By: | Charles Yuji Horioka (Institute of Social and Economic Research, Osaka University, 6-1, Mihogaoka, Ibaraki, Osaka 567-0047, JAPAN); Shizuka Sekita (Graduate School of Economics, Nagoya City University, Yamanohata 1, Mizuho, Mizuho, Nagoya, Aichi 467-8501, JAPAN) |
| Abstract: | We analyze the effect of the degree of judicial enforcement on the probability of credit constraints, the amount of loan and the probability of default. Contrary to the traditional view on judicial efficiency of credit market, our estimation results show that better judicial enforcement increases the probability of being rationed and decreases credit granted by banks, consistent with laziness effects. In order to confirm the laziness effect more directly, we analyzed the effect of the degree of judicial enforcement on the probability of default and found that better judicial enforcement increases the probability of default, as expected. |
| Keywords: | segregation, Schelling, potential function, coordination, tax, vote |
| JEL: | C63 C72 C73 D62 J15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0916&r=rmg |
| By: | Itai Agur |
| Abstract: | How damaging is competition between bank regulators? This paper develops a model in which both banks' risk profile and their access to wholesale funding are endogenous. Regulators weigh not only welfare, but also the number of banks under their supervision. Simulations indicate that the gains from consolidating US regulation are moderate, roughly 0.5-1% of GDP. But retaining multiple regulators implies a choice for a financial system that is both more profitable and more fragile. The paper also shows how complex balance sheet items give rise to a gradual rise in bank risk, followed by a sudden interbank crisis. |
| Keywords: | regulatory competition; arbitrage; bank risk; liquidity risk; interbank market. |
| JEL: | G21 G28 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:213&r=rmg |