New Economics Papers
on Risk Management
Issue of 2011‒08‒29
seven papers chosen by

  1. Macroprudential regulation of credit booms and busts : the experience of the National Bank of the Republic of Macedonia By Celeska, Frosina; Gligorova, Viktorija; Krstevska, Aneta
  2. The importance of qualitative risk assessment in banking supervision before and during the crisis By Kick, Thomas; Pfingsten, Andreas
  3. Default, liquidity and crises: an econometric framework By Monfort, A.; Renne, J-P.
  4. Bank risk taking and liquidity creation following regulatory interventions and capital support By Berger, A.N.; Bouwman, C.H.S.; Kick, T.; Schaeck, K.
  5. Mapping the State of Financial Stability By Sarlin, Peter; Peltonen, Tuomas A.
  6. Catastrophe Financing for Governments: Learning from the 2009-2012 MultiCat Program in Mexico By Erwann Michel-Kerjan; Ivan Zelenko; Victor Cardenas; Daniel Turgel
  7. ALM practices, multiple uncertainty and monopolistic behavior: A microeconomic study of banking decisions By Ruiz-Porras, Antonio

  1. By: Celeska, Frosina; Gligorova, Viktorija; Krstevska, Aneta
    Abstract: This paper provides an overview of the macroprudential measures undertaken by the National Bank of the Republic of Macedonia to prevent further deterioration of the systemic risk and to promote resilience of the banking system. The measures were generally aimed at addressing the time dimension of the systemic risk and were intended to protect the banking system against the increase of credit risk arising from the credit boom. The paper also outlines the future challenges facing financial regulation and supervision, as well as the most important quantitative and qualitative impacts of the utilized macroprudential measures.
    Keywords: Debt Markets,Banks&Banking Reform,Emerging Markets,Currencies and Exchange Rates,Bankruptcy and Resolution of Financial Distress
    Date: 2011–08–01
  2. By: Kick, Thomas; Pfingsten, Andreas
    Abstract: Banking supervision requires regular inspection and assessment of financial institutions. In Germany this task is carried out by the central bank ('Deutsche Bundesbank, BBK') in cooperation with the Federal Financial Supervisory Authority ('Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin'). In accordance with the Basel II approach, quantitative and qualitative information is used. It is still an open question whether supervisors provide information, based on on-site inspections, which is not known from the numbers already, or simply duplicate the quantitative information, or even overrule it by their impressions gained through visits. In our analysis we use a unique dataset on financial institutions' risk profiles, i.e. the banking supervisors' risk assessment. Methodologically, we apply a partial proportional odds model to explain the supervisor's ordinal grading by a purely quantitative CAMEL covariate vector, which is standard in many bank rating models, and we also include the bank inspector's qualitative risk assessment into the model. We find that not only the quantitative CAMEL vector is clearly important for the final supervisory risk assessment; it is, indeed, also qualitative information on a bank's internal governance, ICAAP, interest rate risk, and other qualitative risk components that plays an equally important role. Moreover, we find evidence that supervisors have become more conservative in their final judgement at the beginning of the financial crisis, i.e. the supervisory assessment seems to be more forward-looking than the mere numbers. This result underpins the importance of bank-individual on-site risk assessments. --
    Keywords: Bank rating,banking supervision,generalized ordered logit
    JEL: C35 G21 G32 L50
    Date: 2011
  3. By: Monfort, A.; Renne, J-P.
    Abstract: In this paper, we present a general discrete-time affine framework aimed at jointly modeling yield curves associated with different debtors. The underlying fixed-income securities may differ in terms of credit quality and/or in terms of liquidity. The risk factors follow conditionally Gaussian processes, with drifts and variance-covariance matrices that are subject to regime shifts described by a Markov chain with (historical) non-homogenous transition probabilities. While flexible, the model remains tractable. In particular, bond prices are given by quasi-explicit formulas. Various numerical examples are proposed, including a sector-contagion model and credit-rating modeling.
    Keywords: credit risk, liquidity risk, term structure, affine model, regime switching, Car process.
    JEL: E43 E44 E47 G12 G24
    Date: 2011
  4. By: Berger, A.N.; Bouwman, C.H.S.; Kick, T.; Schaeck, K. (Tilburg University, Center for Economic Research)
    Abstract: During times of bank distress, authorities often engage in regulatory interventions and provide capital support to reduce bank risk taking. An unintended effect of such actions may be a reduction in bank liquidity creation, with possible adverse consequences for the economy as a whole. This paper tests hypotheses regarding the effects of regulatory interventions and capital support on bank risk taking and liquidity creation using a unique dataset over the period 1999-2009. We find that both types of actions are generally associated with statistically significant reductions in risk taking and liquidity creation in the short run and long run. While the effects of regulatory interventions are also economically significant, the effects of capital support are only economically significant in the long run. Thus, both types of actions have important intended and unintended consequences with implications for policymakers.
    Keywords: risk taking;liquidity creation;bank distress;regulatory interventions;capital support.
    JEL: G21 G28
    Date: 2011
  5. By: Sarlin, Peter (BOFIT); Peltonen, Tuomas A. (BOFIT)
    Abstract: The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks on a two-dimensional plane as well as for predicting systemic financial crises. The Self-Organizing Financial Stability Map (SOFSM) enables a two-dimensional representation of a multidimensional financial stability space and thus allows disentangling the individual sources impacting on systemic risks. The SOFSM can be used to monitor macro-financial vulnerabilities by locating a country in the financial stability cycle: being it either in the pre-crisis, crisis, post-crisis or tranquil state. In addition, the SOFSM performs better than or equally well as a logit model in classifying in-sample data and predicting out-of-sample the global financial crisis that started in 2007. Model robustness is tested by varying the thresholds of the models, the policymaker’s preferences, and the forecasting horizon.
    Keywords: systemic financial crisis; systemic risk; self-organizing maps; visualisation; prediction; macroprudential supervision
    JEL: E44 E58 F01 F37
    Date: 2011–08–22
  6. By: Erwann Michel-Kerjan; Ivan Zelenko; Victor Cardenas; Daniel Turgel
    Abstract: With rapidly increasing population and growing catastrophe exposure in their countries, many more government leaders (including Presidents, Prime Ministers and Rulers) are now faced with a strategic question: how best develop a national strategy to hedge against the massive economic burden of extreme events that could hit their country tomorrow? <p>We propose a framework to help those leaders in governments around the world and their advisors think more clearly about these issues, focusing specifically on the role that risk transfer mechanisms alternative to traditional insurance can play. The paper provides a case study of the $290 million multi-peril, multi-tranche catastrophe bond recently sponsored by the Government of Mexico and arranged by the World Bank under the MultiCat Program. We discuss the step-bystep creation of this catastrophe bond, from starting discussions that took place in 2008 to the investor road show and the successful issuance of the bond in October 2009. <p>This joint initiative could provide an example for other countries that wish to establish their own financial coverage solution against disasters, as part of a broader national risk management strategy. We illustrate this with the case of the government of Chile and earthquake risks. It also shows that considering countries, or even cities, for the issuance of such insurancelinked securities (ILS) could considerably expand this market for alternative catastrophe risk transfer instruments.
    Keywords: Mexico, catastrophe economics, Risk Financing, leadership in government, ART, MultiCat Program, Sovereign Catastrophe Bonds
    Date: 2011–05
  7. By: Ruiz-Porras, Antonio
    Abstract: We study the decisions that a monopolistic bank takes to achieve risk management and profit objectives. The bank faces liquidity and solvency risks because loans may not be repaid and because unexpected deposit withdrawals may occur. The Asset-Liability-Management (ALM) banking model shows that compromise solutions are necessary to deal with the tradeoffs between liquidity management and profitability. It also shows that asset management practices increase profits. Moreover it shows that liability management practices and market power support profitability. Finally, the model confirms that banks should undertake long-term risky investments when depositors trust the viability of the asset transformation process.
    Keywords: Banking; ALM; multiple uncertainty; monopolistic behavior
    JEL: D81 L21 G32 G21
    Date: 2011–07–15

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