New Economics Papers
on Risk Management
Issue of 2011‒01‒16
nine papers chosen by

  1. Counterparty Risk Subject To ATE By Zhou, Richard
  2. Managementul riscului de creditare: realizari actuale, analiza critica, sugestii By NUCU, Anca Elena
  3. Preparing for Basel IV : why liquidity risks still present a challenge to regulators in prudential supervision (II) By Ojo, Marianne
  4. Mortgage lending in Korea : an example of a countercyclical macroprudential approach By Chang, Soon-taek
  5. Systemic Risk, an Empirical Approach By G. de Cadenas-Santiago; L. de Mesa; A. Sanchís
  7. Containing systemic risk : paradigm-based perspectives on regulatory reform By de la Torre, Augusto; Ize, Alain
  8. Some stylized facts of returns in the foreign exchange and stock markets in Peru By Humala, Alberto; Rodriguez, Gabriel
  9. A flaw in the model ... that defines how the world works By Bieta, Volker; Milde, Hellmuth; Weber, Nadine

  1. By: Zhou, Richard
    Abstract: Rating trigger ATE (Additional Termination Event) is a counterparty risk mitigant that allows banks to terminate and close out bilateral derivative contracts if the credit rating of the counterparty falls below the trigger level. Since credit default is often preceded by rating downgrades, ATE clause effectively reduces the counterparty credit risk by early termination of exposure. However, there is still the risk that counterparty may default without going through severe downgrade. This article presents a practical model for valuating CVA in the presence of ATE.
    Keywords: Counterparty Risk; Credit Valuation Adjustment; Rating Transition; Rating Trigger; Additional Termination Event
    JEL: C00
    Date: 2010–12
  2. By: NUCU, Anca Elena
    Abstract: In the context of macroeconomic uncertainty and liquidity problems existing on international markets, expanding the banking system leads to amplification interferences of a broad spectrum of risks. This article delineates the recent area of researchers’ interest in the domain of credit risk management in banking and highlights the issues of relevant studies, both theoretical and empirical, in the area of credit-scoring, models for credit risk assessment and regulatory framework, on the background mutations caused by the international financial crisis.
    Keywords: credit risk; model evaluation; credit scoring; retail banking; financial crisis
    JEL: D81 C53 E51
    Date: 2011–01–06
  3. By: Ojo, Marianne
    Abstract: Whilst the predecessor (Part I) to this paper addresses criticisms and challenges which have arisen in response to recent Basel Committee's initiatives aimed at addressing capital and liquidity standards, the present paper highlights further measures which are being introduced by the Basel Committee to address such criticisms and challenges. As well as presenting and drawing attention to proposals which could serve as means of addressing challenges presented by liquidity risks, Part I of the paper concludes with the result that market based regulation is an essential and vital tool in the Basel Committee's efforts to address some of the challenges presented by liquidity risks. The present paper highlights the Basel Committee's acknowledgement of this conclusion. Furthermore, it draws attention to other areas which are considered to constitute fertile substrates for purposes of future research. This paper will also illustrate why the potential of banking regulations and disclosure requirements to impact risk taking levels is not only dependent on certain factors such as the dissemination of information to appropriate recipients, appropriate volume of disseminated information, when to disseminate such information, but also on other factors such as ownership structures and effective corporate governance measures aimed fostering monitoring, supervision and accountability.
    Keywords: liquidity risks; systemic risks; capital; standards; Basel III; moral hazard; disclosure; information; Liquidity Coverage Ratio (LCR); Net Stable Funding Ratio (NSFR); accountability; corporate governance
    JEL: K2 E32 G3 D8
    Date: 2010–12–30
  4. By: Chang, Soon-taek
    Abstract: Regulatory regimes are actively discussing macroprudential policy. Korea pursued a countercyclical macroprudential approach to prevent the overheating of mortgage lending and to minimize the risk of loan default. The Korean financial supervisory authority made adjustments in response to both the condition of the housing market and trends in mortgage loans. The lessons learned from the Korean experience are applicable to other situations. First, regulations regarding loan-to-value and debt-to-income ratios and other restrictions on mortgage lending can be employed as an important part of a countercyclical framework. Next, measures need to be applied in a timely manner and according to the specific conditions of each country. Finally, authorities should preemptively prepare macroprudential instruments before banks enter a period of rapid mortgage lending to avoid reckless mortgage lending operations and weaken any speculative motive in the housing market.
    Keywords: Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Housing Finance
    Date: 2010–12–01
  5. By: G. de Cadenas-Santiago; L. de Mesa; A. Sanchís
    Abstract: We have developed a quantitative analysis to verify the extent to which the sources of systemic risk identified in the academic and regulatory literature actually contribute to it. This analysis shows that all institutions contribute to systemic risk albeit to a different degree depending on various risk factors such as size, interconnection, un-substitutability, balance sheet and risk quality. From the analysis we conclude that using a single variable or a limited series of variables as a proxy for systemic risk generates considerable errors when identifying and measuring the systemic risk of each institution. When designing systemic risk mitigation measures, all contributing factors should be taken into account. Likewise, classifying institutions as systemic/non-systemic would mean giving similar treatment to institutions that may bear very different degrees of systemic risk, while treating differently institutions that may have very similar charge of systemic risk inside. Therefore, we advocate that some continuous approach to systemic risk -in which all institutions are deemed systemic but to varying degrees- would be preferable. We acknowledge that this analysis may prove somehow limited in the way that it is not founded on a predefined conceptual approach, does not fully consider other very relevant qualitative factors1 and accounts only for some of the relevant sources of systemic risk in the banking system2. These limits are currently set due to data availability and state of the art in empirical research, but we believe that these should not hinder our work identifying the true sources of systemic risk and our aim to help avoiding any partial and thus limited prudential policy approach.
    Date: 2010–12
  6. By: Virginia ATANASIU (Mathematics Department, Academy of Economic Studies, Bucharest)
    Abstract: An original paper, which describes techniques for estimating premiums for risks, containing a fraction (a part) of the variance of the risk as a loading on the net risk premium.
    Keywords: esscher premium, variance premium, the linearized credibility formula.
    JEL: D81
    Date: 2010–08
  7. By: de la Torre, Augusto; Ize, Alain
    Abstract: Financial crises can happen for a variety of reasons: (a) nobody really understands what is going on (the collective cognition paradigm); (b) some understand better than others and take advantage of their knowledge (the asymmetric information paradigm); (c) everybody understands, but crises are a natural part of the financial landscape (the costly enforcement paradigm); or (d) everybody understands, yet no one acts because private and social interests do not coincide (the collective action paradigm). The four paradigms have different and often conflicting prudential policy implications. This paper proposes and discusses three sets of reforms that would give due weight to the insights from the collective action and collective cognition paradigms by redrawing the regulatory perimeter to internalize systemic risk without promoting dynamic regulatory arbitrage; introducing a truly systemic liquidity regulation that moves away from a purely idiosyncratic focus on maturity mismatches; and building up the supervisory function while avoiding the pitfalls of expanded official oversight.
    Keywords: Debt Markets,Emerging Markets,Financial Intermediation,Banks&Banking Reform,Labor Policies
    Date: 2011–01–01
  8. By: Humala, Alberto (Banco Central de Reserva del Perú); Rodriguez, Gabriel (Pontificia Universidad Católica del Perú)
    Abstract: Some stylized facts for foreign exchange and stock market returns are explored using statistical methods. Formal statistics for testing presence of autocorrelation, asymmetry, and other deviations from normality is applied to these financial returns. Dynamic correlations and different kernel estimations and approximations of the empirical distributions are also under scrutiny. Furthermore, dynamic analysis of mean, standard deviation, skewness and kurtosis are also performed to evaluate time-varying properties in return distributions. Main results reveal different sources and types of non-normality in the return distributions in both markets. Left fat tails, excess kurtosis, return clustering and unconditional time-varying moments show important deviations from normality. Identifiable volatility cycles in both forex and stock markets are associated to common macro financial uncertainty events.
    Keywords: Non-Normal Distributions, Stock Market Returns, Foreign Exchange Market Returns.
    JEL: C16 E44 F31 G10
    Date: 2010–12
  9. By: Bieta, Volker; Milde, Hellmuth; Weber, Nadine
    Abstract: The authors of this paper claim that modeling financial markets based on probability theory is a severe systematic mistake that led to the global financial crisis. They argue that the crisis was not just the result of risk managers using outdated financial data, but that the employed efficiency model -- also referred to as the stochastic model -- is basically flawed. In an exemplary way, the analysis proves that this model is unable to account for interactions between market participants, neglects strategic interdependences, and hence leads to erroneous solutions. The central message is that the existing efficiency model should be replaced by an approach using agent-based scenario analysis.
    Keywords: Banks&Banking Reform,Debt Markets,Labor Policies,Access to Finance,Economic Theory&Research
    Date: 2010–12–01

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