nep-rmg New Economics Papers
on Risk Management
Issue of 2016‒02‒17
seven papers chosen by

  1. Contract Nonperformance and Ambiguity in Insurance Markets By Landmann, Andreas; Biener, Christian; Eling, Martin; Santana, Maria Isabel
  2. The Exposure of Microfinance Institutions to Financial Risk By Gietzen, Thomas
  3. Relationships between bank customers’ risk attitudes and their balance sheets By Hermansson, Cecilia
  4. Deposit Withdrawals from Distressed Commercial Banks By Guin, Benjamin; Brown, Martin; Morkötter, Stefan
  5. The Role of Corporate Culture in the Financial Industry By Barth, Andreas
  6. Signaling Crises: How to Get Good Out-of-Sample Performance Out of the Early Warning System By von Schweinitz, Gregor; Sarlin, Peter
  7. Capital regulation and trade in banking services By Haufler, Andreas; Wooton, Ian

  1. By: Landmann, Andreas; Biener, Christian; Eling, Martin; Santana, Maria Isabel
    Abstract: Insurance contract nonperformance relates to situations when valid claims are not paid by the insurer. We extend probabilistic insurance models to allow for such nonperformance risk as well as ambiguity regarding nonperformance and loss probabilities. We empirically test theoretical predictions from our model within a field lab experiment in a low-income setting. This is a persuasive context, since especially in emerging and poorly regulated markets there is a higher chance of contract nonperformance. In line with our predictions, insurance demand decreases by 17 percentage points in the presence of contract nonperformance risk and is reduced by a further 14 percentage points when contract nonperformance risk is ambiguous. It also seems that ambiguity does not easily disappear with experience. The results have implications for both industrialized and developing insurance markets.
    JEL: C91 D81 G22
    Date: 2015
  2. By: Gietzen, Thomas
    Abstract: This study examines the exposure of microfinance institutions to liquidity, interest rate and foreign exchange (FX) risk. It builds on a manually collected set of data on the maturity structure of assets and liabilities of the 309 largest microfinance institutions (out of which 112 actually report the maturity structure). The data suggests that, on average, microfinance institutions in the sample face virtually no liquidity risk and that exposure to FX risk is lower than generally assumed. Linking risk exposure to institutional characteristics, I find that legal status and regional affiliation are correlated to risk exposure while regulatory quality is not.
    JEL: G21 G32 O16
    Date: 2015
  3. By: Hermansson, Cecilia (Department of Real Estate and Construction Management, Royal Institute of Technology)
    Abstract: This paper analyzes relationships between Swedish bank customers’ risk appetite and their financial assets and debt, controlling for demographic, socio-economic, financial and educational variables including financial literacy. We use subjective risk measures, i.e. risk tolerance and risk preference, as well as an objective risk measure, i.e. relating customers’ saving deposits to more risky stocks and mutual funds as a share of total financial assets. Bank customers with high risk appetite have significantly more financial assets compared with those with medium and low risk appetite. The subjective risk measures show that those with high risk appetite have significantly higher debt than those with low risk appetite. The objective risk measure shows the opposite. The paper concludes that it is important to use several measures of risk. Also, policy makers and banks need to measure bank customers’ risk appetite in a more systematic and transparent way, in order to improve both the banks’ and their customers’ risk management, and not less importantly, to decrease macroeconomic risks.
    Keywords: Household saving; debt; risk attitudes
    JEL: D12 D14 E58 G21
    Date: 2016–02–02
  4. By: Guin, Benjamin; Brown, Martin; Morkötter, Stefan
    Abstract: We study retail deposit withdrawals from European commercial banks which incurred investment losses in the wake of the U.S. subprime crisis. We document a strong propensity of households to withdraw deposits from distressed banks, especially when a bank receives a public bailout. However, the withdrawal risk for a distressed bank is mitigated by strong bank-client relationships and household-level switching costs: Households which rely on a single deposit account, which do not live close to a non-distressed bank, or which maintain a credit relationship with a distressed bank are significantly less likely to withdraw deposits. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.
    JEL: D14 G21 G28
    Date: 2015
  5. By: Barth, Andreas
    Abstract: This paper analyzes the role of corporate culture in the financial industry. Theoretical literature emphasizes the role of corporate culture in the sorting process of workers into firms. We take this argument to the empirics and analyze whether banks that differ in their corporate culture use different compensation schemes in order to attract a specific type of workers. In a second step, we combine the role of corporate culture with the literature on CEO compensation and risk-taking and analyze empirically the impact of corporate culture on banks' risk-taking as well as on banks' performance. More precisely, we argue that the incentives arising from CEO compensation schemes are diluted once we control for the self-sorting mechanism of CEOs in firms with different corporate cultures. We find that CEOs of banks with a strong competition-oriented corporate culture have a larger share of variable payments in their total compensation. Moreover, we find that a more competition-oriented corporate culture is associated with a higher credit risk as well as with a higher buy-and-hold stock market return.
    JEL: G21 G34 M14
    Date: 2015
  6. By: von Schweinitz, Gregor; Sarlin, Peter
    Abstract: In past years, the most common approaches for deriving early-warning models belong to the family of binary-choice methods, which have been coupled with a separate loss function to optimize model signals based on policymakers preferences. The evidence in this paper shows that early-warning models should not be used in this traditional way, as the optimization of thresholds produces an in-sample overfit at the expense of out-of-sample performance. Instead of ex-post threshold optimization based upon a loss function, policymakers' preferences should rather be directly included as weights in the estimation function. Doing this strongly improves the out-of-sample performance of early-warning systems.
    JEL: C35 C53 G01
    Date: 2015
  7. By: Haufler, Andreas; Wooton, Ian
    Abstract: We set up a two-country, regional model of trade in financial services. Competitive firms in each country manufacture untraded consumer goods in an uncertain productive environment, borrowing funds from a bank in either the home or the foreign market. Duopolistic banks can choose their levels of monitoring of firms and thus the level of risk-taking, where the risk of bank failure is ultimately borne by taxpayers in the bank's home country. Moreover, each bank chooses the share of lending allocated to domestic and to foreign firms, respectively, but the bank's overall loan volume may be fixed by a capital requirement set in its home country. In this setting we consider two types of financial integration. A reduction in the transaction costs of cross-order banking reduces aggregate output and increases risk-taking, thus harming consumers and taxpayers in both countries. In contrast, a reduction in the costs of screening foreign firms is likely to be beneficial for banks, consumers, and taxpayers alike.
    JEL: F36 G18 H81
    Date: 2015

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