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on Risk Management |
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Issue of 2012‒07‒01
nine papers chosen by |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans’ probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements. |
| Keywords: | Banking regulation, Basel capital requirements, Capital market frictions, Credit rationing, Loan defaults, Relationship banking, Social cost of bank failure. |
| JEL: | G21 G28 E44 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1202&r=rmg |
| By: | Dante Amengual (CEMFI, Centro de Estudios Monetarios y Financieros); Gabriele Fiorentini (Università di Firenze and RCEA); Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | Sequential maximum likelihood and GMM estimators of distributional parameters obtained from the standardised innovations of multivariate conditionally heteroskedastic dynamic regression models evaluated at Gaussian PML estimators preserve the consistency of mean and variance parameters while allowing for realistic distributions. We assess the efficiency of those estimators, and obtain moment conditions leading to sequential estimators as efficient as their joint maximum likelihood counterparts. We also obtain standard errors for the quantiles required in VaR and CoVaR calculations, and analyse the effects on these measures of distributional misspecification. Finally, we illustrate the small sample performance of these procedures through Monte Carlo simulations. |
| Keywords: | Elliptical distributions, Efficient estimation, Systemic risk, Value at risk. |
| JEL: | C13 C32 G11 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1201&r=rmg |
| By: | Carmassi, Jacopo; Micossi, Stefano |
| Abstract: | Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6734&r=rmg |
| By: | Benos, Evangelos (Bank of England); Garratt, Rodney (University of California at Santa Barbara); zimmerman, Peter (Bank of England) |
| Abstract: | We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures. |
| Keywords: | Payments; Intraday liquidity; Credit default swap; Operational outage; Insurance |
| JEL: | E42 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0451&r=rmg |
| By: | Bachev, Hrabrin |
| Abstract: | This paper incorporates the interdisciplinary New Institutional Economics and presents a comprehensive framework for analyzing the risk management in agri-food sector. First, it specifies the diverse (natural, technical, behavioral, economic, policy etc.) type of agri-food risks, and the (market, private, public and hybrid) modes of their management. Second, it defines the efficiency of risk management and identifies (personal, institutional, dimensional, technological, natural) factors of governance choice. Next, it presents stages in analysis of risk management and for the improvement of public intervention in the risk governance. Finally, it identifies contemporary opportunities and challenges for risk governance in agri-food chain. |
| Keywords: | risk management; market; private; and public governance; agri-food chain |
| JEL: | L25 D81 Q12 Q18 D23 L14 Q52 O17 Q13 L22 |
| Date: | 2012–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39594&r=rmg |
| By: | Takeaki Kariya |
| Abstract: | In this paper we formulate a corporate bond (CB) pricing model for deriving the term structure of default probabilities (TSDP) and the recovery rate (RR) for each pair of industry factor and credit rating grade, and these derived TSDP and RR are regarded as what investors imply in forming CB prices in the market at each time. A unique feature of this formulation is that the model allows each firm to run several business lines corresponding to some industry categories, which is typical in reality. In fact, treating all the cross-sectional CB prices simultaneously under a credit correlation structure at each time makes it possible to sort out the overlapping business lines of the firms which issued CBs and to extract the TSDPs for each pair of individual industry factor and rating grade together with the RRs. The result is applied to a valuation of CDS (credit default swap) and a loan portfolio management in banking business. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.4766&r=rmg |
| By: | Mircea Epure; Esteban Lafuente |
| Abstract: | This paper devises management and accounting tools for monitoring bank performance. We first propose a multidimensional efficiency measure that integrates credit risk and is adapted to the real banking technology. Second, traditional accounting ratios complement the analysis. Third, the impact of different risk measures over efficiency and accounting ratios is shown. Fourth, we examine the effect of CEO turnover on future performance. An empirical application considers a unique dataset of Costa Rican banks during 1998-2007. Results reveal that performance improvements follow regulatory changes and that risk explains differences in performance. Non-performing loans negatively affect efficiency and return on assets, whereas the capital adequacy ratio positively affects the net interest margin. This supports that incurring monitoring costs and having higher levels of capitalisation may enhance performance. Finally, results confirm that appointing CEOs from outside the bank significantly improves performance, thus suggesting the potential benefits of new organisational practices. |
| Keywords: | efficiency; accounting; performance; risk; CEO turnover. |
| JEL: | G21 G28 G3 M1 M2 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1310&r=rmg |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements. |
| Keywords: | Banking regulation, Basel II, capital requirements, procyclicality. |
| JEL: | G21 G28 E44 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1205&r=rmg |
| By: | Alicia H. Munnell; Anthony Webb; Luke Delorme; Francesca Golub-Sass |
| Abstract: | The National Retirement Risk Index (NRRI) measures the share of American households “at risk” of being unable to maintain their pre-retirement standard of living in retirement. The NRRI is determined by comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target rates that would allow them to maintain their living standards. A recent update shows that, in the wake of the financial crisis and the Great Recession, 51 percent of today’s working households are at risk.1 But a key assumption of the NRRI is that people retire at age 65. Clearly if people worked longer, the percentage at risk would decline. This brief adapts the NRRI calculations to address the question: At what age would the vast majority of households be ready to retire? The discussion proceeds as follows. The first section lays out the nuts and bolts of the NRRI and explains how it has been adapted for this analysis. Projected replacement rates are calculated not only for the generally assumed retirement age of 65, but also for every potential retirement age between 50 and 90. These replacement rates are then compared to a target rate to determine the percentage of house-holds “ready” for retirement at each age. The second section presents the results, showing the cumulative percentage of households ready for retirement at dif-ferent ages, with breakdowns by income and current age.2 The third section addresses how much longer households have to work beyond age 65 to be pre-pared for retirement. The final section concludes that over 85 percent of households would be prepared to retire by age 70. Thus, many individuals will need to work longer than their parents did, but they will still be able to enjoy a reasonable period of retirement, es-pecially as health and longevity continue to improve. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:crr:issbrf:ib2012-12&r=rmg |