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on Risk Management |
| By: | Leonardo Gambacorta; Sudipto Karmakar |
| Abstract: | The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios. |
| Keywords: | bank capital buffers, regulation, risk-weighted assets, leverage |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:586&r=rmg |
| By: | Yassine Bakkar (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Clovis Rugemintwari (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société) |
| Abstract: | We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before (2000-2006), during (2007-2009) and after (2010-2013) the global financial crisis. Prior to the crisis bank charter value is positively associated withrisk-taking and systemic risk for very large ―too-big-too-fail‖ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behavior before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' Business models also influence this relationship. In presence of strong diversification strategies, higher charter value increases standalone risk for very large banks. Conversely, for banks following a focus strategy, higher charter value amplifies systemic risk for very large banks and both standalone and systemic risk for large U.S. and European banks. Abstract We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before (2000-2006), during (2007-2009) and after (2010-2013) the global financial crisis. Prior to the crisis bank charter value is positively associated withrisk-taking and systemic risk for very large ―too-big-too-fail‖ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behavior before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' Business models also influence this relationship. In presence of strong diversification strategies, higher charter value increases standalone risk for very large banks. Conversely, for banks following a focus strategy, higher charter value amplifies systemic risk for very large banks and both standalone and systemic risk for large U.S. and European banks. |
| Keywords: | Systemic risk,Standalone risk,Charter value,Bank strategies,Too-big-too-fail,Global financial crisis,Bank regulation |
| Date: | 2016–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01337601&r=rmg |
| By: | Eufinger, Christian; Gill, Andrej |
| Abstract: | This paper proposes a new regulatory approach that implements capital requirements contingent on executive incentive schemes. We argue that excessive risk-taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea behind the proposed regulatory approach is thus that the more the compensation structure decouples the interests of bank managers from those of shareholders by curbing risk-taking incentives, the higher the leverage the bank is permitted to take on. Consequently, the risk-shifting incentives caused by government guarantees and the risk-mitigating incentives created by the compensation structure offset each other such that the manager chooses the socially efficient investment policy. |
| Keywords: | Basel III,capital regulation,compensation,leverage,risk |
| JEL: | G21 G28 G30 G32 G38 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:9r&r=rmg |
| By: | Jianxi Su; Edward Furman |
| Abstract: | Copulas have become an important tool in the modern best practice Enterprise Risk Management, often supplanting other approaches to modelling stochastic dependence. However, choosing the `right' copula is not an easy task, and the temptation to prefer a tractable rather than a meaningful candidate from the encompassing copulas toolbox is strong. The ubiquitous applications of the Gaussian copula is just one illuminating example. Speaking generally, a `good' copula should conform to the problem at hand, allow for asymmetry in the domain of definition and exhibit some extent of tail dependence. In this paper we introduce and study a new class of Multiple Risk Factor (MRF) copula functions, which we show are exactly such. Namely, the MRF copulas (1) arise from a number of meaningful default risk specification with stochastic default barriers, (2) are in general non-exchangeable and (3) possess a variety of tail dependences. That being said, the MRF copulas turn out to be surprisingly tractable analytically. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.02126&r=rmg |
| By: | J. D. Opdyke; Kirill Mayorov |
| Abstract: | We present an easily implemented, fast, and accurate method for approximating extreme quantiles of compound loss distributions (frequency+severity) as are commonly used in insurance and operational risk capital models. The Interpolated Single Loss Approximation (ISLA) of Opdyke (2014) is based on the widely used Single Loss Approximation (SLA) of Degen (2010), and maintains two important advantages over its competitors: first, ISLA correctly accounts for a discontinuity in SLA that otherwise can systematically and notably bias the quantile (capital) approximation under conditions of both finite and infinite mean. Secondly, because it is based on a closed-form approximation, ISLA maintains the notable speed advantages of SLA over other methods requiring algorithmic looping (e.g. fast Fourier transform or Panjer recursion). Speed is important when simulating many quantile (capital) estimates, as is so often required in practice, and essential when simulations of simulations are needed (e.g. some power studies). The modified ISLA (MISLA) presented herein increases the range of application across the severity distributions most commonly used in these settings, and it is tested against extensive Monte Carlo simulation (one billion years' worth of losses) and the best competing method (the perturbative expansion (PE2) of Hernandez et al., 2014) using twelve heavy-tailed severity distributions, some of which are truncated. MISLA is shown to be comparable PE2 in terms of both speed and accuracy, and it is arguably more straightforward to implement for the majority of Advanced Measurement Approaches (AMA) banks that are already using SLA (and failing to take into account its biasing discontinuity). |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.03718&r=rmg |
| By: | Olivier Le Marois (fluks - FLUKS); Julia Mikhalevsky (FEDERIS Gestion d'Actifs - Federis Gestion d'Actifs); Raphaël Douady (Riskdata - Financial Risk Management Software, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The LP formula is based upon the substitution of the exogenous risk aversion hypothesis by a credit equilibrium hypothesis. This leads to a trade-off between expected blue-sky return – the expected return excluding default scenarios – and extreme risk estimated from scenarios leading to default. An empirical study on the past 90 years shows that this trade-off curve is almost identical across asset classes. In equilibrium, an asset expected blue-sky return is proportional to its contribution to extreme risk. Assuming normal returns, we obtain CAPM as a sub-case of the LP relation. This relationship makes extreme risk underestimation a strong driver of asset price bubbles. |
| Keywords: | asset allocation,extreme risk,CAPM,risk budgeting,equilibrium |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01151376&r=rmg |
| By: | Nassim Nicholas Taleb (NYU Polytechnic School of Engineering); Raphaël Douady (Riskdata - Financial Risk Management Software, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We provide a mathematical definition of fragility and antifragility as negative or positive sensitivity to a semi-measure of dispersion and volatility (a variant of negative or positive "vega") and examine the link to nonlinear effects. We integrate model error (and biases) into the fragile or antifragile context. Unlike risk, which is linked to psychological notions such as subjective preferences (hence cannot apply to a coffee cup) we offer a measure that is universal and concerns any object that has a probability distribution (whether such distribution is known or, critically, unknown). We propose a detection of fragility, robustness, and antifragility using a single "fast-and-frugal", model-free, probability free heuristic that also picks up exposure to model error. The heuristic lends itself to immediate implementation, and uncovers hidden risks related to company size, forecasting problems, and bank tail exposures (it explains the forecasting biases). While simple to implement, it improves on stress testing and bypasses the cillib flaws in Value-at-Risk. |
| Keywords: | stress testing,fragility,impulse response,Jensen inequality |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01151340&r=rmg |
| By: | Isabelle Distinguin (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Aref Mahdavi-Ardekani (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société) |
| Abstract: | This paper investigates the impact of interbank network topology on bank liquidity ratios. Whereas more emphasis has been put on liquidity requirements by regulators since the global financial crisis of2007-2008, how differently shaped interbank networks impact individual bank liquidity behavior remains an open issue. We look at how bank interconnectedness within interbank loan and deposit networks affects their decision to hold more or less liquidity during normal times and distress times and depending on the overall size of the banking sector. Our results show that taking into account the way that banks are linked to each other within a network adds value to traditional liquidity models. Our findings have critical implications with regards to the implementation of Basel III liquidity requirements and bank supervision more generally. JEL Classification: G32, G21, G28 and G01 |
| Keywords: | Interbank network topology,Basel III,Liquidity risk,Financial Crisis |
| Date: | 2016–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01336784&r=rmg |
| By: | Véronique Maume-Deschamps (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique); Didier Rullière (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1); Khalil Said (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper is devoted to the introduction and study of a new family of multivariate elicitable risk measures. We call the obtained vector-valued measures multivariate expectiles. We present the different approaches used to construct our measures. We discuss the coherence properties of these multivariate expectiles. Furthermore, we propose a stochastic approximation tool of these risk measures. |
| Keywords: | Multivariate expectiles, Copulas, Stochastic approximation, Coherence properties, Elicitability,Multivariate risk measures, Solvency 2, Risk management, Risk theory, Dependence modeling, Capital allocation |
| Date: | 2016–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01367277&r=rmg |
| By: | Brühl, Volker |
| Abstract: | The recent financial crisis has demonstrated that a failure of Systemically Important Financial Institutions (SIFIs) could seriously damage the stability of the financial system. A precise and consistent definition of a SIFI is pivotal to ensure efficient and effective regulation of the global financial sector. This paper proposes a threefold test logic that allows to classify Financial Institutions as systemically important across the various industry segments. |
| JEL: | G10 G20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:538&r=rmg |
| By: | Sokolovska, Olena |
| Abstract: | The paper provides analysis of conceptual background of the trade credit insurance in the world. We analyzed briefly the problems, arising in insurance markets due to asymmetric information, such as adverse selection and moral hazard problems. Also we discuss the main stages of development of trade credit insurance in countries worldwide. Using comparative and graphical analysis we provide a brief evaluation of the dynamics of claims and recoveries for both short-term and long and medium term trade credit insurance in the world. For this purpose we used data on claims paid and recoveries for the period of 2005-2015. We found that the claims related to the commercial risk for medium and long trade credits in recent years exceed the recoveries, while with the political risk the reverse trend holds. |
| Keywords: | Trade credit insurance, export credit, international trade, international finance |
| JEL: | F10 F39 G22 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74303&r=rmg |
| By: | Pia Hüttl; Dirk Schoenmaker |
| Abstract: | During the global financial crisis and subsequent euro-debt crisis, the fiscal resources of some countries appeared to be insufficient to support their banking systems. These countries needed outside support to stabilise their banking systems and thereby their wider economies. This Policy Contribution assesses the potential fiscal costs of recapitalising large banks. Based on past financial crises, we estimate that the cost to recapitalise an individual bank amounts to 4.5 percent of its total assets. During a severe crisis, a country might have to recapitalise up to three of its large systemic banks. We assume that bail-in of private investors is not fully possible during a systemic crisis. Our empirical findings suggest that large countries, such as the United States, China and Japan, can still provide credible fiscal backstops to their large systemic banks. In the euro area, the potential fiscal costs are unevenly distributed and range from 4 to 12 percent of GDP. Differences in the strengths of the fiscal backstops in euro-area countries contribute to divergences in financing conditions across the banking union. To counter this fragmentation, we propose that the European Stability Mechanism (ESM) could be used as a fiscal backstop to recapitalise systemically important banks directly within the banking union, in the case of a severe systemic crisis. But this would be only a last resort, after other tools such as bail-in have been used to the maximum extent possible. The governance of the ESM should be reconsidered, to ensure swift and clear application in times of crisis. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:16765&r=rmg |
| By: | SK, Shanthi; Nangia, Vinay Kumar; Sircar, Sanjoy; Reddy, Kotapati Srinivasa |
| Abstract: | Purpose: The purpose of this special issue is to gain a deeper understanding of banking regulatory practices in emerging markets in the light of the financial crisis of 2007-08. The crisis necessitated countries to adopt macro-prudential policies in the current environment of globalized capital flows. The interconnectedness of financial institutions occurs not only across the world but also across a plethora of financial markets. Design/Methodology/Approach: The papers in this volume have a focused approach that addresses issues relating to the banking sector. The papers explore diverse issues such as the link between increased competition and the performance efficiency, application of macro prudential norms in credit growth and its relation thereof with the ownership pattern of banks, co-ordination between regulations and compensation in the event of bank failure and risk based regulation. All the papers are country specific and they take in India, Hong Kong and Nigeria.They will contribute to a better understanding of the various issues and will be of great use to academics for further research and for practitioners in new policy initiatives in the area of banking reform and regulation. |
| Keywords: | Emerging markets; Banking regulations; Financial markets laws; Global financial crisis; Policy development |
| JEL: | E5 E58 E6 G1 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74289&r=rmg |
| By: | Giovanni Favara; Simon Gilchrist; Kurt F. Lewis; Egon Zakrajsek |
| Abstract: | Beginning with the publication of this Note, we will provide updated estimates of the EBP and the associated model-implied probability of a U.S. recession every month. |
| Date: | 2016–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2016-10-06&r=rmg |