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on Risk Management |
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Issue of 2018‒03‒12
eighteen papers chosen by |
| By: | Fidrmuc, Jarko; Lind, Ronja |
| Abstract: | We present a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III). The empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP level effect in response to a change in the capital ratio. Meta-regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics, such as econometric specifications, the authors’ affiliations, and the underlying financial system. Finally, we document a significant positive publication bias. |
| Keywords: | Meta-analysis,publication bias,banking,loans,capital requirements,Basel III |
| JEL: | E51 E44 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vswi16:175189&r=rmg |
| By: | Peter Martey Addo (Data Scientist (Lead), Expert Synapses, SNCF Mobilite); Dominique Guegan (Université Paris1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne, LabEx ReFi and Ca' Foscari University of Venezia); Bertrand Hassani (VP, Chief Data Scientist, Capgemini Consulting and LabEx ReFi) |
| Abstract: | Due to the hyper technology associated to Big Data, data availability and computing power, most banks or lending financial institutions are renewing their business models. Credit risk predictions, monitoring, model reliability and effective loan processing are key to decision making and transparency. In this work, we build binary classifiers based on machine and deep learning models on real data in predicting loan default probability. The top 10 important features from these models are selected and then used in the modelling process to test the stability of binary classifiers by comparing performance on separate data. We observe that tree-based models are more stable than models based on multilayer artificial neural networks. This opens several questions relative to the intensive used of deep learning systems in the enterprises |
| Keywords: | Credit risk; Financial regulation; Data Science; Bigdata; Deep learning |
| JEL: | C02 C13 C19 G01 G21 G28 D81 G31 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:18003&r=rmg |
| By: | Omneya Abdelsalam (Durham University); Marwa Elnahass (Newcastle University); Sabur Mollah (School of Management, Swansea University) |
| Abstract: | We test the impact of religiosity and ownership structure on the risk profile of banks, which issued securitisation. We employ GMM estimation using unique database on asset securitization of 672 commercial banks (4889 year-observations) in 22 countries (from 2003-2012), which have dual banking system. We find that banks with higher securitisation activity have consistently shown a riskier profile by being significantly less adequately capitalised and offering higher ratio of net loans to total assets. Controlling for bank type (Islamic and conventional banks), we find that although Islamic banks, in general, show a conservative approach towards risk by keeping higher reserves and more liquidity, banks involved in new issuance of asset securitization as still exposed to a higher risk profile . Controlling for a country religiosity shows different risk profile of banks in countries with different religiosity thresholds. Controlling for different types of bank ownership highlights an additional exposure to credit risk in addition to capital adequacy and liquidity risks. Our results emphasize the importance of identifying the impact of bank type and the religiosity / culture factors in global banking studies. Our results are of importance to both local and international regulators as well as different stakeholders in banks. |
| Keywords: | Securitisation, Islamic banks, Conventional banks, Bank Risk, Capitalization. |
| JEL: | C23 G01 G21 G28 L50 M41 |
| Date: | 2018–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:swn:wpaper:2018-17&r=rmg |
| By: | Morrison, Alan; Walther, Ansgar |
| Abstract: | We analyze a general equilibrium model in which financial institutions generate endogenous systemic risk, even in the absence of any government support. Banks optimally select correlated investments and thereby expose themselves to fire sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence of banks' fundamental role as delegated monitors. Our model sheds light on recent and historical trends in measured systemic risk. Technological innovations and government-directed lending can cause surges in systemic risk. Strict capital requirements and well-designed government asset purchase programs can combat systemic risk. |
| Keywords: | macro-prudential regulation; market discipline; return correlation; systemic risk |
| JEL: | G01 G21 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12689&r=rmg |
| By: | Grigat, Daniel; Caccioli, Fabio |
| Abstract: | We reverse engineer dynamics of financial contagion to find the scenario of smallest exogenous shock that, should it occur, would lead to a given final systemic loss. This reverse stress test can be used to identify the potential triggers of systemic events, and it removes the arbitrariness in the selection of shock scenarios in stress testing. We consider in particular the case of distress propagation in an interbank market, and we study a network of 44 European banks, which we reconstruct using data collected from banks statements. By looking at the distribution across banks of the size of smallest exogenous shocks we rank banks in terms of their systemic importance, and we show the effectiveness of a policy with capital requirements based on this ranking. We also study the properties of smallest exogenous shocks as a function of the parameters that determine the endogenous amplification of shocks. We find that the size of smallest exogenous shocks reduces and that the distribution across banks becomes more localized as the system becomes more unstable. |
| JEL: | G32 F3 G3 |
| Date: | 2017–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86746&r=rmg |
| By: | John Cotter (University College Dublin); Anita Suurlaht (University College Dublin) |
| Abstract: | We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. A multiple structural break estimation procedure is employed to detect sudden changes in the time varying spillover indices in response to major market events and policy events and policy interventions undertaken by the European Central Bank and the Bank of England. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables; whereas the role of the other variables reverses over the course of the crisis. Real estate market risk is also found to be mostly affected by country specific events. The shock transmission dynamics of interest rate risk and interbank liquidity risk differs for the UK and Eurozone countries; empirical results imply that interest rate changes lead changes in interbank liquidity. |
| Keywords: | macro-financial state variables, financial crisis, spillover effects, credit default swaps, real estate risk. |
| JEL: | G01 G15 G20 |
| Date: | 2018–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201805&r=rmg |
| By: | F. Zhou; W.J.W. Botzen |
| Abstract: | The theory on the disaster impacts on firm growth is ambiguous and the empirical evidence on this topic is scarce, which hampers the design of disaster risk reduction and climate change adaptation policies. This paper estimates growth models of the impacts of natural disasters on labour, capital, and value-added growth of firms in the short run, and identifies the role of financial constraints in shaping disaster outcomes. The analysis uses a comprehensive enterprise census data (2000-2009) and also two different types of disaster measures from Vietnam: the physical intensity measures and the socioeconomic damage measures. We apply the Blundell-Bond generalized method of moments (GMM) to estimate firm level disaster impacts, and find robust evidence that natural disasters on average increase firm growth significantly. We also find stronger positive impacts in labour and output growth for more constrained firms. We argue that this occurs because financially more constrained firms substitute labour for capital during the reconstruction phase after a disaster. |
| Keywords: | Natural disaster, disaster impact, firm growth, financial constraints, disaster measure |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1720&r=rmg |
| By: | Omneya Abdelsalam (Durham University); Marwa Elnahass (Newcastle University); Sabur Mollah (School of Management, Swansea University) |
| Abstract: | This study is among the first attempts to tests for the relative differences between Islamic and conventional asset securitizations on bases of bank’s capitalization and risk (credit risk and liquidity risk) during two evidential crises, financial crisis (2007-2009) and the political crisis (2011-2012). We employ GMM estimation for uniquely constructed data for global asset securitization of commercial banks in 22 countries in the years 2003 to 2012, data of 672 global banks (4889 year-observations). We find that on average, securitized banks are less capitalized but more liquid than non-securitized banks. Islamic banks (IBs) involved in securitization hold higher quality loan portfolios and are more prudent but less liquid than securitizing conventional banks (CBs). We find no relative differences between the two sectors with respect to capitalization. Results are robust during the financial crisis. Additional tests, distinguishes between retained and non-retained interests for asset securitizations to test whether the level of control of the securitizing assets affect banks’ risk and capital adequacy. We find that non-retain interests by banks over securitization indicate significantly high prudence by banks however; this is associated with lower liquidity Our results are of importance to both local and international regulators as well as different stakeholders in banks. The bank type does not matters but the relative size of retained interests to the total issuance is that matters because it shows that there is impact on credit risk. Constrained model of IBs do not improve their liquidity though but helped with loan portfolio. |
| Keywords: | Securitisation, Islamic banks, Conventional banks, Bank Risk, Capitalization. |
| JEL: | C23 G01 G21 G28 L50 M41 |
| Date: | 2018–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:swn:wpaper:2018-15&r=rmg |
| By: | Bovenberg, Lans (Tilburg University, School of Economics and Management); Nijman, Theo (Tilburg University, School of Economics and Management) |
| Abstract: | To improve the design of the pay-out phase of DC plans, this paper proposes a new approach to structure pension products: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous individuals. Unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year-on-year volatility in consumption streams or opaque and rigid valuation and smoothing rules. The synthesis of a PPR structure provides new opportunities for product innovation and for the comparison of retirement products. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:227bdfce-9f38-4e8a-8665-f18e1943a5de&r=rmg |
| By: | Colesnic, Olga; Kounetas, Kostas; Polemis, Michael |
| Abstract: | The aim of this study is two-fold. Firstly, it attempts to analyse the effect of risk on Middle East bank's efficiency levels before and after the recent financial crisis. Secondly, it seeks to determine the influence of bank size taking into consideration the possible inefficiency originated to risk abatement cost. To examine the aforementioned issues we introduce a risk efficiency index based on an output orientated directional distance function with weak and strong disposability assumptions. The methodology has been applied on a panel data of Middle East banks spanning the period 1998-2014.The empirical findings suggest that on average small banks are more efficient and their size have less negative impact on their technical efficiency and risk management. On the other hand, large banks' risk management is found to be more flexible during financial crisis. Finally, banks with higher fixed assets are associated with more costly dispose of non performing loans justifying the rejection of a positive relation between bank size and technical efficiency. |
| Keywords: | Risk efficiency, Middle East banks, Directional distance function, Metatechnology |
| JEL: | D20 D24 G1 G2 G21 |
| Date: | 2018–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:84795&r=rmg |
| By: | Stefano Cosma; Francesca Pancotto; Paola Vezzani |
| Abstract: | In many countries, Banking Authorities have adopted an Alternative Dispute Resolution (ADR) procedure to manage complaints that customers and financial intermediaries cannot solve by themselves. As a consequence, banks have had to implement complaint management systems in order to deal with customers’ demands. The growth rate of customer complaints has been increasing during the last few years. This does not seem to be only related to the quality of financial services or to lack of compliance in banking products. Another reason lies in the characteristics of the procedures themselves, which are very simple and free of charge. The paper analyzes some determinants regarding the willingness to complain. In particular, it examines whether a high customers’ probability of default leads to an increase in non-valid complaints. The paper uses a sample of approximately 1,000 customers who received a loan and made a claim against the lender. The analysis shows that customers with higher Probability of Default are more likely to make claims against Financial Institutions. Moreover, it shows that opportunistic behaviors and non-valid complaints are more likely if the customer is supported by a lawyer or other professionals and if the reason for the claim may result in a refund or damage compensation. |
| Keywords: | Alternative Dispute Resolution (ADR); credit complaints; consumer credit; customer relationship |
| JEL: | G21 G23 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:18031&r=rmg |
| By: | International Monetary Fund |
| Abstract: | This report describes the tasks completed, findings and recommendations of the mission undertaken during the period October 26–November 4, 2015. The mission built further on previous AFE missions and focussed on (i) assisting IRA in building capacity in analyzing and assessing reinsurance (both life and non-life) from both a primary insurer’s and a reinsurer’s perspectives; (ii) providing on-site coaching to the supervisory team at Uganda Reinsurance Company in assessing areas specific to a reinsurer (reinsurance assumed, retrocessions and technical provisions); (iii) participating in an industry workshop to discuss IRA’s move towards risk-based supervision and its implications for IRA and the industry; and (iv) meeting with the IRA Board to discuss essential elements for successful implementation of risk-based supervision as well as recommendations resulting from July 2015 TA report to give the members of the Board a deeper appreciation of what needs to be done for success. |
| Keywords: | Sub-Saharan Africa;Uganda; |
| Date: | 2018–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:18/7&r=rmg |
| By: | Lee, Donghoon (Federal Reserve Bank of New York); Tracy, Joseph (Federal Reserve Bank of Dallas) |
| Abstract: | The Federal Housing Administration (FHA) has stated that its goal is to foster sustainable homeownership. In this paper, we propose some metrics for evaluating the degree to which the FHA is attaining this goal for first-time homebuyers. This work uses New York Fed Consumer Credit Panel data to examine the long-term outcome for households that make the transition from renting to owning using an FHA-insured mortgage. In addition to calculating the fraction of these borrowers whose FHA homeownership experience ends in default, we measure the degree to which these borrowers successfully remain homeowners after paying off their credit risk to the FHA. For the 2001 and 2002 cohorts, which were less impacted by the financial crisis than later cohorts, we find that 12 percent had their homeownership experience end in default while around 55 percent sustained their homeownership without the need for an FHA mortgage. Another 20 percent are either in their original home or have moved but continue to use an FHA mortgage. |
| Keywords: | FHA mortgages; first-time homebuyers; Federal Housing Administration |
| JEL: | G21 G28 R31 |
| Date: | 2018–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:839&r=rmg |
| By: | International Monetary Fund |
| Abstract: | The RBI is to be commended for the remarkable progress in strengthening banking supervision since the last FSAP. Supervision and regulation by the RBI remain strong and have improved in recent years. A key achievement is implementation of a risk-based supervisory approach that uses a complex supervisory assessment framework to guide the intensity of supervisory actions and the allocation of supervisory resources. Also, most of the Basel III framework (and related guidance) has been implemented and cooperation arrangements, both domestically and cross-border, are now firmly in place. The system-wide asset quality review (AQR) and the strengthening of prudential regulations in 2015 testify to the authorities’ commitment to transparency and a more accurate recognition of banking risks. |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:18/4&r=rmg |
| By: | Bollerslev, Tim; Hood, Benjamin; Huss, John; Pedersen, Lasse Heje |
| Abstract: | Based on a unique high-frequency dataset for more than fifty commodities, currencies, equity indices, and fixed income instruments spanning more than two decades, we document strong similarities in realized volatilities patterns across assets and asset classes. Exploiting these similarities within and across asset classes in panel-based estimation of new realized volatility models results in superior out-of-sample risk forecasts, compared to forecasts from existing models and more conventional procedures that do not incorporate the information in the high-frequency intraday data and/or the similarities in the volatilities. A utility-based framework designed to evaluate the economic gains from risk modeling highlights the interplay between parsimony of model specification, transaction costs, and speed of trading in the practical implementation of the different risk models. |
| Keywords: | high-frequency data; Market and volatility risk; realized utility; realized volatility; risk modeling and forecasting; risk targeting; volatility trading |
| JEL: | C22 C51 C53 C58 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12687&r=rmg |
| By: | Jarque, Arantxa (Federal Reserve Bank of Richmond); Walter, John R. (Federal Reserve Bank of Richmond); Evert, Jackson (Federal Reserve Bank of Richmond) |
| Abstract: | We say that a large financial institution is "resolvable" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans ("living wills") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact score that compares expected losses in the economy stemming from a resolution in bankruptcy with those expected under an assisted resolution or a bailout, based solely on objective characteristics of a bank holding company. We provide a framework that allows us to discuss the data needed and the concepts that underlie the construction of such a score. Importantly, the same firm characteristics may be ascribed different impacts under different resolution methods or crisis scenarios, and these impacts can depend on policymakers' assessments. We say that a firm's structure is acceptable if its impact score under bankruptcy is lower than that of any other resolution method. We study the current score used to designate firms as GSIBs and propose a modified version that we view as a starting point for an impact score. |
| Keywords: | resolution; bankruptcy; financial regulation; safety net |
| JEL: | G01 G21 G28 G33 |
| Date: | 2018–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:18-06&r=rmg |
| By: | Asness, Clifford S.; Frazzini, Andrea; Gormsen, Niels Joachim; Pedersen, Lasse Heje |
| Abstract: | We test whether the low-risk effect is driven by (a) leverage constraints and thus risk should be measured using beta vs. (b) behavioral effects and thus risk should be measured by idiosyncratic risk. Beta depends on volatility and correlation, where only volatility is related to idiosyncratic risk. Hence, the new factor betting against correlation (BAC) is particularly suited to differentiating between leverage constraints vs. lottery explanations. BAC produces strong performance in the US and internationally, supporting leverage constraint theories. Similarly, we construct the new factor SMAX to isolate lottery demand, which also produces positive returns. Consistent with both leverage and lottery theories contributing to the low-risk effect, we find that BAC is related to margin debt while idiosyncratic risk factors are related to sentiment and casino profits. |
| Keywords: | Asset Pricing; leverage constraints; lottery demand; margin; sentiment |
| JEL: | G02 G12 G14 G15 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12686&r=rmg |
| By: | Simon Hochgerner; Florian Gach |
| Abstract: | Within the context of traditional life insurance, a model-independent relationship about how the market value of assets is attributed to the best estimate, the value of in-force business and tax is established. This relationship holds true for any portfolio under run-off assumptions and can be used for the validation of models set up for Solvency~II best estimate calculation. Furthermore, we derive a lower bound for the value of future discretionary benefits. Again, this bound can be used in practice for validation purposes. |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1802.07009&r=rmg |