nep-rmg New Economics Papers
on Risk Management
Issue of 2014‒08‒28
nine papers chosen by
Stan Miles
Thompson Rivers University

  1. Supply Chain Disruption Management: Review of Issues and Research Directions By Brown, Adam; Badurdeen, Fazleena
  2. Downturn LGD: A More Conservative Approach for Economic Decline Periods By Mauro R. Oliveira; Armando Chinelatto Neto
  3. Accelerated Portfolio Optimization with Conditional Value-at-Risk Constraints using a Cutting-Plane Method By Georg Hofmann
  4. Risk Minimization in Markets Imposing Minimal Transaction Costs By Yan Dolinsky; Yuri Kifer
  5. Managerial compensation, regulation and risk in banks: theory and evidence from the financial crisis By Vittoria Cerasi; Tommaso Oliviero
  6. When Do Companies Need a Board-Level Risk Management Committee? By Ivan Choi
  7. A Look at the Structural Bank Regulation Initiatives and a Discussion over Turkish Banking Sector? By Burçhan Sakarya
  8. Removal of the Unwinding Provisions in the Automated Clearing Settlement System: A Risk Assessment By Nicolas Labelle; Varya Taylor
  9. Higher bank capital requirements and mortgage pricing: evidence from the Counter-Cyclical Capital Buffer By Christoph Basten; Catherine Koch

  1. By: Brown, Adam; Badurdeen, Fazleena
    Abstract: Supply Chain Risk Management (SCRM) is an increasingly popular subject of research which emphasizes the goals of achieving improved supply chain robustness through development of design and operational strategies. Disruption management is one aspect of SCRM which examines the ability of the supply chain to maintain a high level of performance under the effects of major disruptions. Specifically, disruptions refer to events characterized by a low likelihood of occurrence and a large impact. Because of their limited rate of occurrence, disruptions are associated with a high uncertainty with respect to their expected impact. Improved modeling of the disruption impact is one key issue in this field. Other issues include the design of methods for supply chain performance measurement, disruption monitoring and detection, evaluation of recovery strategies, and methods of optimal supply chain design. Design features to be considered include flexibility, redundancy, and operating efficiency. The relevant literature is presented in the context of these major issues and future directions suggested by researchers in the field are discussed.
    Keywords: Supply Chain, Disruptions, Risk Management, Gray Swan
    JEL: C6 C61 M20
    Date: 2014–06–03
  2. By: Mauro R. Oliveira; Armando Chinelatto Neto
    Abstract: The purpose of this paper is to identify a relevant statistical correlation between rate of default, RD, and loss given default, LGD, in a major Brazilian financial institution Retail Home Equity exposure rated using the IRB approach, so that we may find a causal relationship between the two risk parameters. Therefore, according to Central Bank of Brazil requirements, a methodology is applied to add conservatism to the estimation of the Loss Given Default parameter at times of economic decline, reflected as increased rates of default.
    Date: 2014–08
  3. By: Georg Hofmann
    Abstract: Financial portfolios are often optimized for maximum profit while subject to a constraint formulated in terms of the Conditional Value-at-Risk (CVaR). This amounts to solving a linear problem. However, in its original formulation this linear problem has a very large number of linear constraints, too many to be enforced in practice. In the literature this is addressed by a reformulation of the problem using so-called dummy variables. This reduces the large number of constraints in the original linear problem at the cost of increasing the number of variables. In the context of reinsurance portfolio optimization we observe that the increase in variable count can lead to situations where solving the reformulated problem takes a long time. Therefore we suggest a different approach. We solve the original linear problem with cutting-plane method: The proposed algorithm starts with the solution of a relaxed problem and then iteratively adds cuts until the solution is approximated within a preset threshold. This is a new approach. For a reinsurance case study we show that a significant reduction of necessary computer resources can be achieved.
    Date: 2014–08
  4. By: Yan Dolinsky; Yuri Kifer
    Abstract: We study partial hedging for game options in markets with transaction costs bounded from below. More precisely, we assume that the investor's transaction costs for each trade are the minimum between proportional transaction costs and a fixed transaction costs. We prove that in the continuous time Black--Scholes (BS) model, there exists a trading strategy which minimizes the shortfall risk. Furthermore, the trading strategy is given by a dynamical programming algorithm.
    Date: 2014–08
  5. By: Vittoria Cerasi; Tommaso Oliviero
    Abstract: This paper analyzes the relation between CEOs monetary incentives, financial regulation and risk in banks. We present a model where banks lend to opaque entrepreneurial projects to be monitored by managers; managers are remunerated according to a pay-for-performance scheme and their effort is unobservable to depositors and shareholders. Within a prudential regulatory framework that defines a capital requirement and a deposit insurance, we study the effect of increasing the variable component of managerial compensation on risk taking. We then test empirically how monetary incentives provided to CEOs in 2006 affected banks’ stock price and volatility during the 2007-2008 financial crisis on a sample of large banks around the World. The cross-country dimension of our sample allows us to study the interaction between CEO incentives and financial regulation. The empirical analysis suggests that the sensitivity of CEOs equity portfolios to stock prices and volatility has been indeed related to worse performance in countries with explicit deposit insurance and weaker monitoring by shareholders. This evidence is coherent with the main prediction of the model, that is, the variable part of the managerial compensation, combined with weak insiders’ monitoring, exacerbates the risk-shifting attitude by managers.
    Keywords: managerial compensation, risk taking, financial regulation, monitoring
    JEL: G21 G38
    Date: 2014–07
  6. By: Ivan Choi
    Keywords: Insurance and Risk Mitigation Social Protections and Labor - Labor Policies Law and Development - Banking Law Governance - National Governance Finance and Financial Sector Development - Non Bank Financial Institutions
    Date: 2013
  7. By: Burçhan Sakarya (BRSA (Banking Regulation and Supervision Agency), Strategy Development Department, Turkey)
    Abstract: Following the 2007-8 Global Crisis, a significant shift is observed towards the international regulatory approach about the banks. Apart from reform efforts from international institutions such as the IMF, G20 and BIS, several proposals are set forward in some advanced financial systems. Moreover, it is debated that, these so called structural bank reform efforts, also present a chance to indirectly solve the issue of “To-big-to-fail” problem, the SIFI-“systemically Important Financial Institution” problem by its new title. In this study the fundamental characteristics of globally known structural bank reform initiatives are compared and a panel data analysis conducted for the Turkish commercial banks for the 2002-2012 period to investigate the effect of risk diversification on profitability to test for diversification in bank activities.
    Keywords: : Structural Reforms in Banking, Turkish Banking Sector
    JEL: G21 G01 C23
    Date: 2013
  8. By: Nicolas Labelle; Varya Taylor
    Abstract: A default in the Automated Clearing Settlement System (ACSS) occurs when a Direct Clearer is unable to settle its final obligation. In August 2012, the Canadian Payments Association amended the ACSS by-law and rules to repeal the unwinding provisions from the ACSS default framework. Without unwinding, payment items are no longer returned by the defaulter to the other participants as a means of reducing the defaulter’s final obligation. Instead, the other Direct Clearers (survivors) pay only additional settlement obligations to cover the defaulter’s shortfall. To assess the potential exposures of an ACSS default without unwinding, we use simulations to estimate the value of additional settlement obligations for each survivor and compare these exposures to their capital and liquid assets. Results indicate that these exposures are indeed manageable by survivors and, therefore, that the ACSS does not pose systemic risk.
    Keywords: Payment clearing and settlement systems; Financial stability
    JEL: C C15 G G01 G2 G3
    Date: 2014
  9. By: Christoph Basten; Catherine Koch
    Abstract: We examine mortgage pricing before and after Switzerland was the first country to activate the Counter-Cyclical Capital Buffer of Basel III. Observing multiple mortgage offers per request, we obtain three core findings. First, capitalconstrained and mortgage-specialized banks raise their rates relatively more. Second, risk-weighting schemes supposed to discriminate against more risky borrowers do not amplify the effect of higher capital requirements. Third, CCB-subjected banks and CCB-exempt insurers raise mortgage rates, but insurers raise rates by on average 8.8 bp more. To conclude, lenders welcome the opportunity to increase mortgage rates, but stricter capital requirements do not discourage banks from risky mortgage lending.
    Keywords: Bank lending, mortgage market
    JEL: G21 E51
    Date: 2014–07

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