Macroprudential stress testing of credit risk: A practical approach for policy makers

Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.     

Integrated Reporting,Stakeholder Engagement,and Balanced Investing at American Electric Power

The policies and practices of American Electric Power (AEP) encompass a number of paradoxes in the domain of sustainability. AEP is a large electric power provider with a predominantly coal‐fired power generation portfolio, which puts the company squarely in the center of national debates about global climate change and national air quality. At the same time, AEP is also a leader on several social and environmental fronts: integrated reporting, stakeholder engagement, technology innovation, and policy solutions for climate change. In this article, the authors describe AEP's rationale for providing leadership in these areas and then explore how the company tries to balance stakeholder interests and financial, environmental, and social concerns in its capital investment decisions. Using these examples, the authors expand on and discuss the limitations of Michael Jensen's theory of “enlightened value maximization.”     

Alternative futures for a multi-civilizational Europe

This article discusses the alternative futures for a multi-civilizational European Union; in other words, its capacity to embrace non-Western civilizations such as the Indian, Islamic, Chinese and others. It brings out three scenarios: (1) a Eurocentric future; (2) a pragmatically multi-civilizational European Union; and (3) a multi-civilizational European Union. Normatively, the third scenario, a genuinely multi-civilizational future appears the most preferred alternative for the rise of European Union as a respected and credible global actor, which plays a significant role in the stabilization and development of its neighbourhood regions and in the resolution of global level issues. Along with incentives, barriers, as discussed in relevant sections, are also explicit which might lead to two other scenarios if not eliminated. Practically, the article concludes that the co-existence of European and other civilizations within the European Union is more likely to lead to a multi-civilizational future than any attempt to integrate those civilizations within the dominant European tradition.     

Two scenarios for Europe: “Europe confronted with high energy prices” or “Europe after oil peaking”

A significant change in trends regarding energy prices (in particular oil) has taken place in 2003 at the beginning of the Iraq War. It has revealed a very strong tension between oil prices on the one hand and the relationship between global oil supply and demand on the other. The strong growth rates of emerging economies up to 2008 have generated a very sharp increase in oil prices. The temporary economic recession of 2008-2009 has resulted in turn into a significant decrease of oil prices, down to a level which remained, however, twice as high as that of early 2003. With the economy recovering from the recession, it is highly probable that energy prices will continue to increase and that Europe will be confronted with high energy prices in the coming decades. Against this general background, two scenarios have been elaborated which differ mainly by the time of occurrence of oil peaking.¹ The differences between the scenario hypotheses are therefore differences of context in relation to exogenous factors. Policies are also considered in the scenarios, but they are not at the forefront and their impact is considered as limited in relation to that of exogenous factors.The first scenario “Europe in a context of high energy price” assumes that the process of oil peaking will not take place before 2030, but that oil price increase will nevertheless be sustained and substantial until then. Numerous adjustments will have to be made in the economy and their territorial impacts will be significant (less polycentricity, more compact cities, decline of the importance of road and air transport). The second scenario “Europe after oil production peaking” assumes that oil production will peak around the mid-2010s (followed by gas production peaking around 2025), despite significant investments to increase production. In a context of steadily growing oil and gas demand, Europe will be confronted with serious economic difficulties. The territorial impacts will be different from those suggested by the first scenario, with stronger pressure put on rural areas and a loss of attractiveness of large cities related to increasing unemployment and social tensions. In both scenarios, the countries of central and eastern Europe will be more severely hit by the new energy context.The scenarios were elaborated in 2005 and slightly reviewed in 2009 in order to take account of the impacts of the economic recession in Europe and of the growing concerns about climate change.     

How far, and how fast? Population, culture, and carrying capacity in Aruba

Our paper outlines the preparation of a Framework for Sustainable Tourism on the Caribbean Island of Aruba from the standpoint of futurists involved in public policy. Despite remarkable success with tourism over nearly half-a century, Arubans have become periodically concerned about the long-run sustainability of their major industry, their culture, and their Island. The paper explains the historic industrial epochs that have led to the demographic layering and cultural division of labor, the development of tourism from its beginnings in the 1950s, and to present-day concerns about over-development and migration behind the setting up of a National Tourism Council (NTC) in 2001. The basic issues confronted by the NTC were set within the overarching question of “how far and how fast” tourism in Aruba could or should expand. Following on from three exploratory scenarios, the Framework prepared by the authors makes proposals for expansion of tourism in distinctive culture regions and corresponding tourism products over the next two generations of Arubans at a pace that matches emerging needs, but below the carrying capacity of the Island. The paper explains the historic context, pragmatic assumptions made, empirical evidence used, and connects the approach to other papers in this issue.     

Accounting for Intangibles: A Theoretical Perspective

This paper uses a transactions theory approach to analyse some of the measurement and disclosure issues involved in accounting for goodwill and other intangibles. The recent professional and academic literature is reviewed and the traditional economic theory approach to interpreting accounting issues in these areas is criticised. A form of transactions theory called ‘Statistical Transactions Theory’ is then used to investigate several conceptual problem areas, notably: the definition of goodwill and fair values; the distinction between goodwill and other intangibles; and capitalisation, amortisation and valuation issues. The authors conclude that the most fruitful course of action in dealing with these issues would be a substantial research effort designed to investigate the distributional properties of accounting numbers relating to the subject of intangibles measurement, including goodwill as defined in this paper. They call for more analytic and empirical work in this field.     

ESG for All? The Impact of ESG Screening on Return,Risk, and Diversification

A large body of research has documented a positive relationship between different measures of sustainability—such as indicators of employee satisfaction and effective corporate governance—and corporate financial performance. Nevertheless, many investors still struggle to quantify the value of ESG to investment performance. To address this issue, the authors tested the effects of using different ESG filters on an investable universe that serves as the starting point for a fund manager. In this way, they attempted to determine the extent to which ESG data can add value to any investment approach, regardless of preferences towards sustainable investing. The authors report “an unequivocally positive” contribution to risk‐adjusted returns when using a 10% best‐in‐class ESG screening approach (one that effectively removes companies with the lowest 10% of ESG rankings), both on a global and a developed markets universe. More specifically, as a result of such screening, both the global and developed markets portfolios show higher returns, lower (tail) risk, and no significant reduction of diversification potential despite the reduction in the number of companies. Use of a 25% screening filter was also found to add value, especially by reducing tail risks, but with a larger deviation from the unscreened universe. Overall, then, the authors’ finding is that the incorporation of ESG information contributes to better decision‐making in every investment approach, with the optimal configuration depending on a fund manager's preferences and willingness to deviate from an unscreened benchmark.     

Multiple pasts, converging presents, and alternative futures

This paper introduces a variant of scenario planning, supported by some related new concepts in futures studies. The traditional snapshot and chain portrayals of scenarios are replaced by a network, which enables the consideration of multiple views of the present and the past, occurring in multiple systems (e.g. global and local). A fractal “leaf of goals” metaphor is developed, illustrating the argument that activities, events and objectives lie on a continuum: any one event is itself a composite of an indefinite number of component events.Using this concept, network scenarios are developed, consisting of nodes (representing events) and links (representing influences). Because events are socially constructed, each node can be seen as an end-state summary of a smaller network scenario. The networks are created (typically in workshops with participants from the systems being studied) using modified versions of the futures wheel and backcasting, as well as a new variant entitled middlecasting. By working iteratively between past and future events, the networks are steadily refined.A further departure from conventional scenario planning is that scenario networks do not begin at the present time, but extend about as far into the past as they do into the future. By beginning in the past, the roots of network fragments can be identified more clearly in the context of their multiple presents.The method is illustrated with an example of a project to democratize public radio in Indonesia. A scenario network was successfully created, but the delineation of multiple pasts and presents turned out to need further clarification.     

E. J. Moorhead (1910 – 2004)

Abstract

As is well known in actuarial practice, excess claims (outliers) have a disturbing effect on the ratemaking process. To obtain better estimators of premiums, which are based on credibility theory, Künsch and Gisler and Reinhard suggested using robust methods. The estimators proposed by these authors are indeed resistant to outliers and serve as an excellent example of how useful robust models can be for insurance pricing. In this article we further refine these procedures by reducing the degree of heuristic arguments they involve. Specifically we develop a class of robust estimators for the credibility premium when claims are approximately gamma-distributed and thoroughly study their robustness-efficiency trade-offs in large and small samples. Under specific datagenerating scenarios, this approach yields quantitative indices of estimators’ strength and weakness, and it allows the actuary (who is typically equipped with information beyond the statistical model) to choose a procedure from a full menu of possibilities. Practical performance of our methods is illustrated under several simulated scenarios and by employing expert judgment.     

Equity and Liabilities – A Discussion of IAS 32 and a Critique of the Classification

Abstract

It is a traditional convention in accounting to distinguish between two classes of claims, liabilities and equity. The International Accounting Standards Board and the Financial Accounting Standards Board have been using a dichotomous classification approach, adhering to this convention. However, over the recent years, this approach has been put under stress. First, there is an ever-growing variety of hybrid financial instruments, some of which designed to exploit this classification approach (accounting arbitrage). Second, the adoption of IFRS in Europe and elsewhere has brought scenarios to light in which the classification approach does not result in decision-useful information. These issues arise when IFRS are applied by entities in legal forms other than a private or public limited company. This essay discusses IAS 32 in the light of the historic origins of the dichotomous classification approach, the recent standard-setting activities and a review of the empirical research. This essay suggests that a reconsideration of the traditional dichotomous classification might be a way forward.     

Simulación de la tasa de reciclaje de productos electrónicos Un modelo de dinámica de sistemas para la red de logística inversa

Current trends in the development and innovation of information technologies and shorter life cycles of electronic products have resulted in the generation of large amounts of waste (e-waste) which can potentially cause environmental problems due to the toxicity of some of their components. The e-waste problematic has attracted the attention of governments, companies and consumers that look to identify strategies for the management and proper disposal of e-waste with the goal to protect the environment. This work uses the methodology of system dynamics to simulate how the rate of products returned by individuals and the amount of computers recovered in an open-loop reverse supply chain, varies under different scenarios. The simulated scenarios correspond to the possible combinations of five macro factors: rate of innovation and product life cycle, information available to consumers about e-waste recycling, legislation, e-waste programs structure along with diffusion and publicity efforts. The results of the simulation are relevant to identify over which factors it is convenient to intervene to increase the amount of recycled computers because this amount represents a reduction in the volume of e-waste and an enterprise opportunity to generate earnings from recycling computers.     

Dynamic simulation of forest management normative scenarios: the case of timber plantations in the southern Chile

Accounting for spatial issues (spatially explicit simulation, geographical amenities and advantages of land use and cover changes, etc.) to build prospective scenarios is a crucial issue for better assessment of possible impacts on the environment. Such spatialized scenarios and their implications allow societies to reduce the uncertainty of the future by exploring various strategies for land use changes. Despite the wide diversity in existing scenario-building techniques, two different approaches can be distinguished (exploratory vs. normative) for their methodological implications. The originality in this study comes from the use of a relevant exploratory (dynamic) approach to map normative scenarios which, in most cases, are represented throughout the combination of narratives and synchronic land use and cover maps. The objective of the article is to apply this dynamic exploratory simulation approach to spatialize normative scenarios within the framework of forest management in southern Chile. In the results, two contrasting images of the future are compared, with the preservation of native forests on one hand and the spread of exotic timber plantations on the other.     

Multi-scale interaction in local scenario-building: A methodological framework

Despite the recent popularity of multi-scale scenario exercises, a review of the literature reveals missing elements regarding local-scale scenario-building. Scenarios built at the local level are often downscaled from higher-scale scenarios or developed within the boundary conditions of global and national scales without taking local circumstances thoroughly into account. On this background, this paper discusses the issue of scale in local scenario development and develops a formal methodological approach for local-scale scenario-building in general. The paper underlines in particular the role of local agency in coupling the larger scale and the local scale. To better illustrate how the proposed approach helps in designing local scenarios, lessons drawn from two local scenario development practices are also employed. Hence, the paper contributes to the formalisation of local scenario-building, which is believed to enhance the validity and credibility of local scenario outputs in the policy sphere.     

Foresight analysis of agricultural sector at regional level

The objective of this paper is to carry out a foresight analysis of the agricultural sector in Castilla y León (Spain) for 2020. The methodology used to build the various scenarios is prospective analysis. We first performed a structural analysis in order to identify the key driving forces that characterize the evolution of the sector in this region (agricultural production, demand for agricultural products and institutional framework). We then carried out a morphological analysis that generated a range of “partial scenarios” from which we finally built four “global scenarios”. These last scenarios characterize the possible trends in the variables of change previously identified. Lastly, the common key parameters of each global scenario were quantified by means of the Delphi method. The characterization of scenarios has a double practical interest. First of all, they can explain the cause-effect relationships of the processes of change that affect agriculture in this region of Spain. Secondly, they are a powerful tool to stimulate an in-depth reflection of how the design and implementation of current agricultural policies will affect the already fragile agricultural sector of Castilla y León. This study thus aims to support decision-making processes at regional level.     

Making territorial scenarios for Europe

Three paradigmatic traditions of scenario-building can be seen to exist. The model approach with its roots in American military scenarios of the 1950s, the design approach in French urban and regional development of the 1960s, and the strategic conversation approach in scenarios made in the private sector since the 1970s. In theory, these traditions can be integrated by organising the scenario project in a cyclical way. The territorial scenarios for Europe were made by combining workshops, a literature review and modelling. Thematic scenarios were produced for various themes, like demography, the economy, energy, and climate change. These thematic scenarios were combined into four integrated scenarios. The robustness of the scenarios was tested by introducing several “wild cards” and by exploring their territorial impacts throughout Europe. This applied approach succeeded in combining important strengths from the different scenario traditions. Improvements, however, could still be made.     

A scenario discovery study of the impact of uncertainties in the global container transport system on European ports

The global container transport system is changing quickly. Ports can be severely affected by these changes; therefore, ports need insight into how the system might change and what the impact of this will be on their competitive position. Given the intrinsic complexity of the container transport system and the presence of a wide range of deeply uncertain factors affecting the system, we use an exploratory modeling approach to study future scenarios for the global container network. Using scenario discovery and worst-case discovery, we assess the implications of various uncertain factors on the competitive position of the port of Rotterdam. It is found that overall the competitive position of Rotterdam is quite robust with respect to the various uncertain factors. The main vulnerability is the quality of the hinterland connections. A modest deterioration of the quality of the hinterland connections, resulting in increased travel time, will result in a loss of throughput for Rotterdam.     

Future of Turkey-EU relations: a civilisational discourse

Should or can Turkey join the European Union (EU)? This paper argues that there are three alternative scenarios of the EU decision to grant membership to Turkey: ‘privileged relationship offer,’ ‘wait and see attitude,’ and ‘start of full membership negotiations.’ It then gauges each alternative path, and argues that the most likely scenario is a decision to start the negotiations, followed by the scenario of ‘wait and see.’ The EU decision will be conditioned by its future vision of global governance and the role foreseen for Turkey inside, outside or at the margin of it. The paper concludes that the EU decision will have significant implications for the future of relations between Europe and Turkey on the one hand, and Europe and the Islamic world on the other.