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on Risk Management |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We consider Pareto optimal risk sharing between a buyer and a seller of insurance contracts, as well as consumption substitution and saving in a two-period context. The separation of the time periods allows us to consider the substitution effect. We show that the classical result of Pareto optimal risk sharing between a customer and an insurer is robust, and remains so also with recursive utility. For both expected utility and recursive utility we obtain precautionary savings with prudence. With recursive utility we identify the connection between the coefficient of elasticity of substitution in consumption and optimal saving, both under certainty and uncertainty. The separation of consumption substitution from risk aversion is shown to be partial. |
| Keywords: | Pareto optimal risk sharing; two-period models; recursive utility; consumption substitution; separation; precautionary savings |
| JEL: | G00 G22 |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_007 |
| By: | Beverly Hirtle; Matthew Plosser |
| Abstract: | Conventional measures of bank solvency fail to account for the unique liquidity risks posed by deposits. Using public regulatory data, we develop a novel measure, economic capital, that jointly quantifies the impact of credit, liquidity, and market risk on bank solvency. We validate that economic capital is a more timely and accurate indicator of bank health than standard solvency measures. Using our framework, we examine the evolution of banking sector risk exposures over several decades. Despite significant reforms in the aftermath of the Global Financial Crisis, economic capital suggests that liquidity and market risks have grown and remain elevated. |
| Keywords: | bank capital; solvency; liquidity; financial stability |
| JEL: | G21 G17 G01 |
| Date: | 2025–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99679 |
| By: | Putra, Riski Ade; Afriyeni, Afriyeni |
| Abstract: | The purpose of this study is to find out how the Implementation of Operational Risk Management in the Teller Unit of PT. Bank Tabungan Pensiunan Nasional Kantor Cabang Padang Methods of data analysis in this study using descriptive methods and interviewing related parties (tellers). Based on the results of this study it was found that PT. Bank Tabungan Pensiunan Nasional Kantor Cabang Padang has implemented operational risk management in the teller unit. This is indicated by several incidents in operational activities such as negligence in submitting new information to customers and other risks such as the risk of counterfeit money, errors in inputting nominal values, negligence in entering the nominal amount of tax paid, negligence in entering clearing account numbers and negligence. Typing the customer's name in conducting clearing transactions. |
| Date: | 2023–05–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:bt5qh_v1 |
| By: | Daniel Pastorek (Department of Department of Finance and Accounting, Faculty of Business and Economics, Mendel University in Brno, Czech Republic); Peter Albrecht (Department of Department of Finance and Accounting, Faculty of Business and Economics, Mendel University in Brno, Czech Republic) |
| Abstract: | Our study examines to what extent the introduction of Bitcoin spot exchange-traded funds (ETFs) affected Bitcoin’s properties, including market dynamics, volatility, returns, return distribution, and tracking errors. Using block bootstrap simulations, OLS regression, EGARCH modeling, and non-parametric tests, we find that Bitcoin ETFs increase volatility and downside risk while leaving average returns unchanged. Return distribution shifts, including reduced skewness and kurtosis, suggest partial normalization, typically linked to greater liquidity and market participation. However, unlike traditional ETFs, Bitcoin ETFs introduce fail-to-deliver (FTD) occurrences—previously absent in Bitcoin markets—which mitigate extreme price movements through delayed settlement. Tracking error analysis confirms that spot ETFs more accurately track Bitcoin’s price than futures-based ETFs. These findings offer critical insights into Bitcoin ETFs’ market effects, particularly regarding stability and investor behavior. |
| Keywords: | Bitcoin, ETFs, volatility, market dynamics, FTDs |
| JEL: | G11 G12 G14 G23 C58 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:men:wpaper:99_2025 |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We analyze optimal risk sharing between a customer and an in surer, and present alternative explanations for the prevalence of kinks in Pareto optimal contracts, like deductibles and upper bounds as in XL-contracts. Linear indemnity functions have primarily been considered in the literature. We focus on nonlinear contracts, which can be explained on the basic of different preferences held by the parties involved. In this setting we derive Pareto optimal contracts with ”near” deductibles and ”near’ caps, which we illustrate by examples. Lastly we consider a model based on non-verifiability where the insurer is risk-neutral. We change to a setting where both the cedent and the reinsurer are strictly risk averse. This rationalizes both an endogenous upper cap and a deductible, retaining compensations for risk bearing. |
| Keywords: | Pareto optimal risk sharing; nonlinear contracts; XL-contracts; non-verifiability |
| JEL: | G00 G22 |
| Date: | 2025–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_008 |
| By: | Álvaro Fernández-Gallardo (BANCO DE ESPAÑA); Simon Lloyd (BANCO DE ESPAÑA); Ed Manuel (BANCO DE ESPAÑA) |
| Abstract: | We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth for advanced European economies using a narrative-identification strategy in a quantile-regression framework. While macroprudential policy has near-zero effects on the centre of the GDP-growth distribution, tighter policy brings benefits by reducing the variance of future growth, significantly boosting the left tail while simultaneously reducing the right. Assessing a range of channels through which these effects materialise, we find that macroprudential policy particularly operates through ‘credit-at-risk’: it reduces the right tail of future credit growth, dampening booms, in turn reducing the likelihood of extreme GDP-growth outturns. |
| Keywords: | growth-at-risk, macroprudential policy, narrative identification, quantile local projections. |
| JEL: | E32 E58 G28 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2519 |
| By: | Steven Kelly; Jonathan D. Rose |
| Abstract: | This article critically reviews the 2023 banking crisis with the benefit of two years of hindsight. We highlight seven facts that depart from the standard account of the crisis that has developed. We describe the crisis as a reaction to bank business models that focused on providing banking services to certain economic sectors, crypto-asset firms and venture capital, that had come under economic pressure during the preceding year. We argue this view of the crisis provides a more precise explanation of which banks were affected compared to an explanation focused solely on banks’ balance sheet metrics. We also argue that this view of the crisis has different policy implications, more focused on surveilling bank business models and institutional depositors. |
| Keywords: | Banking crisis; Business models; Uninsured deposits; unrealized losses |
| JEL: | G01 G21 G28 H12 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:99678 |
| By: | Aliaksandr Zaretski (University of Surrey) |
| Abstract: | I study the optimal regulation of a financial sector where individual banks face self-enforcing constraints countering their default incentives. The constrained-efficient social planner can improve over the unregulated equilibrium in two dimensions. First, by internalizing the impact of banks’ portfolio decisions on the prices of assets and liabilities that affect the enforcement constraints. Second, by redistributing future net worth from new entrants to surviving banks, which increases the current forward-looking value of all banks, relaxing their enforcement constraints and decreasing the probability of banking crises. The latter can be accomplished with systemic preemptive bailouts that are time consistent and unambiguously welfare improving. Unregulated banks can be both overleveraged and underleveraged depending on the state of the economy, thus macroprudential policy requires both taxes and subsidies, while minimum bank capital requirements are generally ineffective. |
| JEL: | E44 E60 G21 G28 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0325 |
| By: | Reid Taylor; Madeline Turland; Joakim A. Weill |
| Abstract: | An increasing number of people are denied home insurance coverage in the private market and must instead turn to state-sponsored plans known as “Insurers of Last Resort.” This paper examines how insurers of last resort interact with the private market under increasing disaster risks. We first present a simple model of an adversely selected insurance market, highlighting that the insurer of last resort allows strict price regulation to be compatible with full insurance. We then empirically study the California non-renewal moratoriums, a regulation that forced insurers to supply insurance to current customers following wildfires in 2019 and 2020. Using quasi-random geographic variation in regulatory borders and a difference-in-differences strategy, we find that the moratoriums successfully reduced company-initiated non-renewals and cancellations in the short run. The effects only lasted for one year, with insurers dropping policies as soon as the moratorium lapsed. The moratoriums had no discernible effect on participation in the State’s insurer of last resort. |
| Keywords: | insurance; natural disasters; wildfires |
| JEL: | D22 G22 L10 Q54 |
| Date: | 2025–03–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99740 |
| By: | Ronel Elul; Deeksha Gupta; David K. Musto |
| Abstract: | When home prices threaten to decline, large investors may attempt to prop up prices by fostering new lending. We show this motive increased acquisitions of risky mortgages by the government-sponsored enterprises in the first half of 2007. When home prices threaten to decline, large mortgage investors can benefit from fostering new lending that boosts demand. We ask whether this benefit contributed to the growth in acquisitions of risky mortgages by the government-sponsored enterprises (GSEs) in the first half of 2007. We find that it helps explain the variation of this growth across regions as well as regional house price and credit changes. The growth predicted by this benefit is on top of the acquisition growth caused by the exit of private-label securitizers. Our results are consistent with the GSEs actively targeting their acquisitions to counter home-price declines. |
| Keywords: | GSEs; Concentration; Risk Exposure |
| JEL: | G01 G21 L25 R31 |
| Date: | 2025–03–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99739 |