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on Risk Management |
| By: | KARL-THEODOR EISELE (LaRGE Research Center, Université de Strasbourg); PHILIPPE ARTZNER (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper is based on a general method for multiperiod prudential supervision of companies submitted to hedgeable and non-hedgeable risks. Having treated the case of insurance in an earlier paper, we now consider a quantitative approach to supervision of commercial banks. The various elements under supervision are the bank’s current amount of tradeable assets, the deposit amount, and four flow processes: future trading risk exposures, deposit flows, flows of loan repayments and of deposit remunerations. The approach uses a multiperiod risk assessment supposed not to allow supervisory arbitrage. Coherent and non-coherent examples of such risk assessments are given. The risk assessment is applied to the risk bearing capital process composed out of the amounts of assets and deposits, and the four flow processes mentioned above. We give a general definition of a supervisory margin which uses the risk assessment under the assumption of optimal trading risk exposures. The transfer principle together with a cost-of-capital ratio gives quantitative definitions of the risk margin and of the non-hedgeable equity capital requirement. The hedgeable equity capital requirement measures the inadequacy of the bank’s portfolio of tradeable assets with respect to the optimal trading risk exposures. The hierarchy of different interferences of a supervisor is related to these quantities. Finally, a simple allocation principle for margins and the equity capital requirements is derived. |
| Keywords: | equity capital requirements, hierarchy of supervisor’s interferences, multiperiod risk assessment, optimal trading risk exposures, supervisory margin. |
| JEL: | G18 G21 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2013-05&r=rmg |
| By: | KARL-THEODOR EISELE (LaRGE Research Center, Université de Strasbourg); MICHAEL KUPPER |
| Abstract: | In this paper asymptotically stable risk assessments are studied. They are characterized by not being sensitive with respect to huge additional capital in the very far future. Under the additional hypothesis of being locally continuous from below, these risk assessments are exactly those which allow a robust representation with so-called local test probabilities having a support with finite time horizon. Time-consistent risk assessments can be constructed by composing a sequence of generators. We give several conditions for the generators such that the resulting risk assessments are indeed asymptotically stable. |
| Keywords: | asymptotic stability of risk assessments, construction by generators, local test probabilities, robust representation, time-consistency. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2013-04&r=rmg |
| By: | Federico Parmeggiani |
| Abstract: | A rating trigger is a particular type of debt covenant that mandates the borrower to maintain its own credit rating above a certain rating threshold, requiring in the event of a rating downgrade the adoption of specific enforceable actions aimed at securing the lender claims from the borrower's higher risk level. Rating triggers lower the cost of borrowing capital, but in case they are activated they exacerbate the borrower's need for liquidity just in the moment when its credit risk is higher, making the borrower's default more likely to occur. Despite the potential threat posed by rating triggers on debt markets, these contractual devices remain almost unregulated both in the U.S.and in Europe. The purpose of this paper is first to analyze the effects rating triggers can ha ve on overall market risk and second to assess the proliferation of rating triggers among large U.S. companies in order to ensure whether these contractual devices need a stricter regulation. The article is divided in two parts. From section 2 to 5, I provide an overview on the different types of triggers and analyze the rationale behind their use in terms of advantages and disadvantages for both issuers and investors. From section 6 to 9 I perform an empirical analysis by assessing the rating triggers that have been used by Dow Jones Industrial Average index companies. I then examine the correlation between the use of rating triggers and the companies’ risk profiles by measuring their credit ratings and their Altman’s Z-Scores in order to find out whether triggers are mostly used by risky companies, capable of being impaired by the triggers’ activation and thus posing a threat to market stability . Then in section 10 I draw the conclusions suggesting the introduction by U.S. and European regulators of a specific duty to disclose all the rating triggers that listed companies include every year in bond indentures and in financial contracts. |
| Keywords: | Rating Trigger, Credit Rating, Credit Risk, Financial Regulation |
| JEL: | G24 G28 K2 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:1301&r=rmg |
| By: | Ray Barrell; Dilruba Karim |
| Abstract: | Credit growth is widely used as an indicator of potential financial stress, and it plays a role in the new Basel III framework. However, it is not clear how good an indicator it is in markets that have been financially liberalised. We take a sample of 14 OECD countries and 14 Latin American and East Asian countries and investigate early warning systems for crises in the post Bretton Woods period. We show that there is a limited role for credit in an early warning system, and hence little reason for the Basel III structure. We argue that the choice of model for predicting crises depends upon both statistical criteria and on the use to which the model is to be put. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp217&r=rmg |
| By: | Konstantinos Spiliopoulos; Justin A. Sirignano; Kay Giesecke |
| Abstract: | We analyze the fluctuation of the loss from default around its large portfolio limit in a class of reduced-form models of correlated firm-by-firm default timing. We prove a weak convergence result for the fluctuation process and use it for developing a conditionally Gaussian approximation to the loss distribution. Numerical results illustrate the accuracy and computational efficiency of the approximation. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1304.1420&r=rmg |
| By: | Diamondopoulos, John |
| Abstract: | This paper critically examines the quantitative approach to financial crises from two perspectives. First, the assumption of comparability of financial crises is analyzed. The key question here is: how comparable are crises? An important consideration here is the context – social and political. Second, if financial crises are comparable to a certain extent, then we should be able to make predictions. Thus, the second key question is: how predictable are crises? The results have implications for the development of a theory of financial crises and government policies on crisis management. |
| Keywords: | Financial crises, Crisis, Crisis Models, Crisis Management |
| JEL: | G01 G17 G18 H12 |
| Date: | 2012–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45668&r=rmg |