nep-rmg New Economics Papers
on Risk Management
Issue of 2013‒01‒12
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Enforcement actions and bank behavior By Delis, Manthos D; Staikouras, Panagiotis; Tsoumas, Chris
  2. On Reduced Form Intensity-based Model with Trigger Events By Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng
  3. Liquidity risk in banking: is there herding? By Diana Bonfim; Moshe Kim
  4. Systemic Risk Analysis using Forward-Looking Distance-to-Default Series By Martín Saldías
  5. Reinsurance as capital optimization tool under Solvency II By Gurenko, Eugene N.; Itigin, Alexander
  6. How can banks effectively stabilize their retail customers saving behavior? The impact of contractual rewards on saving persistence and cash flow volatility By Schlüter, Tobias; Sievers, Sönke; Hartmann-Wendels, Thomas
  7. On Infectious Model for Dependent Defaults By Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng
  8. Basel III and CEO compensation: a new regulation attempt after the crisis By Eufinger, Christian; Gill, Andrej

  1. By: Delis, Manthos D; Staikouras, Panagiotis; Tsoumas, Chris
    Abstract: Employing a unique data set for the period 2000-2010, this paper examines the impact of enforcement actions (sanctions) on bank capital, risk, and performance. We find that high risk weighted asset ratios tend to attract supervisory intervention. Sanctions whose cause lies at the core of bank safety and soundness curtail the risk-weighted asset ratio, but amplify the risk of insolvency and returns volatility, which implies that these sanctions do not improve the risk profile of the involved banks, possibly because they come too late. Sanctions targeting internal control and risk management weaknesses appear to be well-timed and to restrain further increases in the risk-weighted assets ratio without impairing bank fundamentals. Sanctions against institution-affiliated parties do not seem to affect bank behavior. We suggest that supervisory attention should be placed on the timely uncovering of internal control and risk management deficiencies as this would allow the early tackling of the origins of financial distress.
    Keywords: Enforcement actions; banking supervision; capital; bank risk; bank performance
    JEL: G28 G21 G01
    Date: 2013–01–04
  2. By: Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng
    Abstract: Corporate defaults may be triggered by some major market news or events such as financial crises or collapses of major banks or financial institutions. With a view to develop a more realistic model for credit risk analysis, we introduce a new type of reduced-form intensity-based model that can incorporate the impacts of both observable "trigger" events and economic environment on corporate defaults. The key idea of the model is to augment a Cox process with trigger events. Both single-default and multiple-default cases are considered in this paper. In the former case, a simple expression for the distribution of the default time is obtained. Applications of the proposed model to price defaultable bonds and multi-name Credit Default Swaps (CDSs) are provided.
    Date: 2013–01
  3. By: Diana Bonfim; Moshe Kim
    Abstract: <div align="left">Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the financial system. This is the main argument to support the regulation of liquidity risk. However, there may be incentives, related for instance to the role of the lender of last resort, for banks to optimize their choices not strictly at the individual level, but engaging instead in collective risk taking strategies, which may intensify systemic risk. In this paper we look for evidence of such herding behaviors, with an emphasis on the period preceding the global financial crisis. Herding is significant only among the largest banks, after adequately controlling for relevant endogeneity problems associated with the estimation of peer effects. This result suggests that the regulation of systemically important financial institutions may play an important role in mitigating this specific component of liquidity risk.
    JEL: G21 G28
    Date: 2012
  4. By: Martín Saldías
    Abstract: Based on Contingent Claims Analysis, this paper develops a method to monitor systemic risk in the European banking system. Aggregated Distance-to-Default series are generated using option prices information from systemically important banks and the STOXX Europe 600 Banks Index. These indicators provide methodological advantages in monitoring vulnerabilities in the banking system over time: 1) they<br />capture interdependences and joint risk of distress in systemically important banks; 2) their forward-looking feature endow them with early signaling properties compared to traditional approaches in the literature and other market-based indicators; 3) they produce simultaneously smooth and informative long-term signals and quick and clear reaction to market distress and 4) they incorporate additional information through option prices about tail risk and correlation breaks, in line with recent findings in the literature.
    JEL: G01 G12 G21
    Date: 2012
  5. By: Gurenko, Eugene N.; Itigin, Alexander
    Abstract: This paper compares solvency capital requirements under Solvency I and Solvency II for a sample mid-size insurance portfolio. According to the results of a study, changing the solvency capital regime from Solvency I to Solvency II will lead to a substantial additional solvency capital requirement that might represent a heavy burden for the company's shareholders. One way to reduce the capital requirement under Solvency II is to increase reinsurance protection, which will reduce the net retained risk exposure and hence also the solvency capital requirement. Therefore, this paper proposes an extended reinsurance structure that, under Solvency II, brings the capital requirement back to the level of that required under Solvency I. In a step-by-step approach, the paper demonstrates the extent of solvency relief attained by the insurer by applying different possible adjustments in the reinsurance structure. To evaluate the efficiency of reinsurance as the solvency capital relief instrument, the authors introduce a cost-of-capital based approach, which puts the achieved capital relief in relation to the costs of extending the reinsurance protection. This approach allows a direct comparison of reinsurance as a capital relief instrument with debt instruments available in the capital market. With the help of the introduced approach, the authors show that the best capital relief efficiency under all examined reinsurance alternatives is achieved when a financial quota share contract is chosen for proportional reinsurance.
    Keywords: Insurance&Risk Mitigation,Insurance Law,Debt Markets,Banking Law,Hazard Risk Management
    Date: 2013–01–01
  6. By: Schlüter, Tobias; Sievers, Sönke; Hartmann-Wendels, Thomas
    Abstract: We examine the saving behavior of banks retail customers. Our unique dataset comprises the contract and cash flow information for approximately 2.2 million individual contracts from 1991 to 2010. We find that contractual rewards, i.e., qualified interest payments, and government subsidies, effectively stabilize saving behavior. The probability of an early contract termination decreases by approximately 40%, and cash flow volatility drops by about 25%. Our findings provide important insights for the newly proposed bank liquidity regulations (Basel III) regarding the stability of deposits and the minimum requirements for risk management (European Commission DIRECTIVE 2006/48/EC; in Germany, translated into the MaRisk). Finally, the results inform bank managers how the price setting via deposit interests influences their funding. --
    JEL: G01 G21 G28
    Date: 2012
  7. By: Jia-Wen Gu; Wai-Ki Ching; Tak-Kuen Siu; Harry Zheng
    Abstract: In this paper, we propose a two-sector Markovian infectious model, which is an extension of Greenwood's model. The central idea of this model is that the causality of defaults of two sectors is in both direction, which enrich dependence dynamics. The Bayesian Information Criterion is adopted to compare the proposed model with the two-sector model in credit literature using the real data. We find that the newly proposed model is statistically better than the model in past literature. We also introduce two measures: CRES and CRVaR to give risk evaluation of our model.
    Date: 2013–01
  8. By: Eufinger, Christian; Gill, Andrej
    Abstract: The paper analyzes the interaction between an endogenous capital structure and investment decision, and the incentive scheme of bank executives. We show that the implementation of capital requirements, which are contingent on compensation schemes, drive a wedge between the interests of the shareholder and the CEO. This non-alignment can mitigate excessive risk taking. In particular, linking the amount of insured debt to the ratio of fixed and performance based salary encourages first-best outcomes. We derive empirical predictions and policy implications. --
    JEL: G28 G32 G21
    Date: 2012

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