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on Risk Management |
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Issue of 2012‒04‒03
eight papers chosen by |
| By: | Duellmann, Klaus; Kick, Thomas |
| Abstract: | This paper introduces a stress test of the corporate credit portfolios of 24 large German banks by a two-stage approach: First, a macro-econometric model is used to forecast the impact of a substantial increase of the user cost of business capital for firms worldwide on three particularly export-oriented industry sectors in Germany. Second, the impact of this economic multi-sector stress on banks' credit portfolios is captured by a state-of-theart CreditMetrics-type portfolio model with sector-dependant unobservable risk factors as drivers of the systematic risk. The German credit register provides us with access to highly granular risk information on loan volumes and banks' internal estimates of default probabilities which is key for an accurate assessment of the impact of the stress scenario. We find that the increase of the capital charge for the unexpected loss needs to be considered together with the increase in banks' expected losses in order to assess the change of banks' capital ratios. We also confirm that highly granular information on the level of borrowerspecific probabilities of default has a significant impact on the outcome of the stress test. -- |
| Keywords: | Asset correlation,portfolio credit risk,macroeconomic stress tests |
| JEL: | G21 G33 C13 C15 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:042012&r=rmg |
| By: | Pausch, Thilo; Welzel, Peter |
| Abstract: | We integrate Basel II (and III) regulations into the industrial organization approach to banking and analyze the interaction between capital adequacy regulation and credit risk transfer with credit default swaps (CDS) including its effect on lending behavior and risk sensitivity of a risk-neutral bank. CDS contracts may be used to hedge a bank's credit risk exposure at a certain (potentially distorted) price. Regulation is found to induce the risk-neutral bank to behave in a more risk-sensitive way: Compared to a situation without regulation the optimal volume of loans decreases more as the riskiness of loansincreases. CDS trading is found to interact with the former effect when regulation accepts CDS as an instrument to mitigate credit risk. Under the substitution approach in Basel II (and III) a risk-neutral bank will over-, fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased, unbiased or upward biased. However, the substitution approach weakens the tendency to over-hedge or under-hedge when CDS markets are biased. This promotes the intention of the Basel II (and III) regulations to 'strengthen the soundness and stability of banks'. -- |
| Keywords: | Banking,regulation,credit risk |
| JEL: | G21 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:052012&r=rmg |
| By: | Dániel Holló (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.); Manfred Kremer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. JEL Classification: G01, G10, G20, E44. |
| Keywords: | Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111426&r=rmg |
| By: | Nooraslinda Abdul Aris Author_Email: nooraslinda@salam.uitm.edu.my (Accountancy Research Institute & Faculty of Accountancy, UiTM, Malaysia. ); Roszana Tapsir (Accountancy Research Institute & Faculty of Accountancy, UiTM, Malaysia. ); Mohammad Kamil bin Abu Talib (Jabatan Kemajuan Islam Malaysia) |
| Keywords: | Takaful, Shari’ah, risk management |
| JEL: | M0 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cms:1asb11:2011-028-183&r=rmg |
| By: | Mohammad Majid Fouladgar Author_Email: (Fateh Research Group, Tehran, Iran); Abdolreza Yadani-Chamzini (Fateh Research Group, Tehran, Iran); Mohammad Hossein Basiri (Tarbiat Modares University) |
| Keywords: | Decision Making, Fuzzy Set, Risk Management, Tunnelling |
| JEL: | M0 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:cms:1icm11:2011-087-331&r=rmg |
| By: | Fulvio Baldovin; Francesco Camana; Michele Caraglio; Attilio L. Stella; Marco Zamparo |
| Abstract: | The occurrence of aftershocks following a major financial crash manifests the critical dynamical response of financial markets. Aftershocks put additional stress on markets, with conceivable dramatic consequences. Such a phenomenon has been shown to be common to most financial assets, both at high and low frequency. Its present-day description relies on an empirical characterization proposed by Omori at the end of 1800 for seismic earthquakes. We point out the limited predictive power in this phenomenological approach and present a stochastic model, based on the scaling symmetry of financial assets, which is potentially capable to predict aftershocks occurrence, given the main shock magnitude. Comparisons with S&P high-frequency data confirm this predictive potential. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1203.5893&r=rmg |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21. |
| Keywords: | Risk-taking channel, monetary policy, credit crisis, bank characteristics. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111427&r=rmg |
| By: | Zinna, Gabriele (Bank of England) |
| Abstract: | This study investigates the systematic risk factors driving emerging market (EM) credit risk by jointly modelling sovereign and corporate credit spreads at a global level. We use a multi-regional Bayesian panel VAR model, with time-varying betas and multivariate stochastic volatility. This model allows us to decompose credit spreads and to build indicators of EM risks. We find that indices of EM sovereign and corporate credit spreads differ because of their specific reactions to global risk factors. Following the failure of Lehman Brothers, EM sovereign spreads ‘decoupled’ from the US corporate market. In contrast, EM corporate bond spreads widened in response to higher US corporate default risk. We also find that the response of sovereign bond spreads to the VIX was short-lived. However, both EM sovereign and corporate bond spreads widened in flight-to-liquidity episodes, as proxied by the OIS-Treasury spread. Overall, the model is capable of generating other interesting results about the comovement of sovereign and corporate spreads. |
| Keywords: | Bayesian econometrics; factor models; emerging markets; credit spreads |
| JEL: | F31 F34 |
| Date: | 2011–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0430&r=rmg |