A study on risk retention regulation in asset securitization process

We study the impacts of the recently proposed risk retention regulation for asset securitization, i.e. the issuer has to retain a certain proportion of securitized assets. We also consider the frequently discussed measure to require the issuer disclose certain information of the securitized assets. In a dynamic model with asymmetric information between a risk-averse originating bank and a continuum of risk-averse investors, we find that it is impossible for a flat-rate retention requirement to be optimal for all asset types. Although both risk retention and information disclosure regulations are effective in reducing investors’ informational loss, neither can unconditionally enhance social welfare upon the unregulated case. For both measures, there are associated regulatory cost: risk retention regulation aggravates adverse selection problem because it undermines the channel of informational revelation by the choice of securitization intensity, and information disclosure requirement incurs a signalling cost by distorting banks’ securitization intensity in sending signals. Under an appropriate set of conditions we find that information disclosure requirement complements risk retention regulation when investors are sufficiently risk averse.     

对产业集群的信贷风险分析与控制

本文通过对产业集群潜在风险及案例分析,剖析银行对产业集群贷款的风险特征与分析方法,指引商业银行把握对产业集群的贷款政策,探究规避风险的措施。文章认为,如果银行对产业集群的风险状况不能很好把握,盲目投放贷款,无异于高风险的聚集。因此,商业银行应从把握贷款规模,限制授信总量;根据产业集群生命周期把握贷款投放期限,有效进行结构调整;严密监控,严防地区性金融风险等方面规避和防范这类风险。     

Liquidity and transparency in bank risk management

Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constrained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks’ transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.     

Monetary Policy,Bank Lending,and the Risk‐Pricing Channel

This paper identifies a monetary policy channel through the risk pricing of bank debt in the market for jumbo certificates of deposit (jumbo CDs). Adverse policy shocks increase debt holder perceptions of bank default, increasing the risk premia for some banks, thereby decreasing their external funding of loans. The results show that contractionary policy increases the sensitivity of jumbo‐CD spreads to leverage and asset risk for small banks, and to leverage for large banks. The results also show a distributional and aggregate effect on banking system jumbo CDs and total loans, producing a risk‐pricing (or market discipline) channel. This channel has implications for monetary and regulatory policies, and financial stability.     

Hedge fund leverage

We investigate the leverage of hedge funds in the time series and cross-section. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities predict future increases in leverage.     

Risk shifting and regulatory arbitrage: Evidence from operational risk

We document a robust negative relation between operational risk exposure and bank capital levels for a sample of large U.S. banks under the Basel I Capital Accords. The results are consistent with the notion that capital-constrained banks increased operational risk exposure at the time when Basel I regulations did not require an explicit capital charge for operational risk. More broadly, our results show new channel by which financial regulations incentivize banks to shift their risk taking to less regulated risk areas. We focus on the case of operational risk because it went from a largely unregulated risk type to a major risk that accounts for about 25% of large U.S. banks’ risk-weighted assets.     

Capital regulation and monetary policy with fragile banks

Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements amplify the cycle and are welfare detrimental. Within a class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.     

The dark side of liquidity regulation: Bank opacity and funding liquidity risk

We evaluate how the liquidity coverage rule affects US banks’ opacity and funding liquidity risk. Banks subject to the rule become significantly more opaque and funding liquidity risk increases by $245 million per quarter. Higher funding liquidity risk is more pronounced among banks that are subject to the rule’s more stringent liquidity buffers, and systemically riskier banks. Rising opacity reflects an increase in banks’ holdings of complex assets whose value is difficult to communicate to investors. The evidence highlights the unintended consequences of liquidity regulation and is consistent with theoretical models’ predictions of a trade-off between liquidity buffers and bank opacity that exacerbates funding liquidity risk.     

The fragile capital structure of hedge funds and the limits to arbitrage

During a financial crisis, when investors are most in need of liquidity and accurate prices, hedge funds cut their arbitrage positions and hoard cash. The paper explains this phenomenon. We argue that the fragile nature of the capital structure of hedge funds, combined with low market liquidity, creates a risk of coordination in redemptions among hedge fund investors that severely limits hedge funds' arbitrage capabilities. We present a model of hedge funds' optimal asset allocation in the presence of coordination risk among investors. We show that hedge fund managers behave conservatively and even abstain from participating in the market once coordination risk is factored into their investment decisions. The model suggests a new source of limits to arbitrage.     

The impact of state and foreign ownership on banking risk: Evidence from the MENA countries

This paper investigates the impact of foreign and state ownership on banking risk. Panel data regression analysis is applied to a sample of 171 commercial banks from the MENA region during the 2006–2012 period. Two-stage least-squares analysis is conducted. Our results show that State ownership encourages banks to take more risks while foreign ownership reduces risk-taking. In addition, state-owned banks tend to increase capital adequacy ratio to hedge against high level of risk. Our finding also indicates that all categories of shareholders take a prudent attitude that influences risk reduction after the 2008 crisis.     

On the exposure of insurance companies to sovereign risk—Portfolio investments and market forces

A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm level panel dataset that covers large insurance companies, banks and non-financial firms from nine countries over the time period from 1 January 2008–1 May 2013. We find significant and robust transmission effects from sovereign risk to domestic insurers. The impact on insurers is not significantly different from that on banks but larger than for non-financial firms. We find that systemically important insurers are more closely linked to the domestic sovereign. Based on European data, we show that risks in sovereign bond portfolios are an important driver of insurer risk, which is not reflected in current insurance regulation (incl. Solvency II in Europe).     

The liquidity risk of liquid hedge funds

This paper evaluates hedge funds that grant favorable redemption terms to investors. Within this group of purportedly liquid funds, high net inflow funds subsequently outperform low net inflow funds by 4.79% per year after adjusting for risk. The return impact of fund flows is stronger when funds embrace liquidity risk, when market liquidity is low, and when funding liquidity, as measured by the Treasury-Eurodollar spread, aggregate hedge fund flows, and prime broker stock returns, is tight. In keeping with an agency explanation, funds with strong incentives to raise capital, low manager option deltas, and no manager capital co-invested are more likely to take on excessive liquidity risk. These results resonate with the theory of funding liquidity by Brunnermeier and Pedersen (2009).     

Commodity futures hedging,risk aversion and the hedging horizon

This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion.     

Leveraged investor disclosures and concentrations of risk

We analyze a model where investors (e.g., hedge funds) need to borrow from lenders with heterogeneous risk-exposures and risk-management motives. Investors may obtain advantageous terms of borrowing by disclosing their investment strategy, thereby revealing its correlation to the lender's existing risk exposure. Investors risk being “front-run” by their lender if they disclose, however. We show that in the presence of front-running, the “unraveling” result of full disclosure may not hold. In addition, disclosure regulation results in a loss of welfare since investors compelled to disclose will mitigate front-running by choosing a lender with sufficiently high correlation, thus exacerbating concentrations of risk.     

Capital Regulation with Two Banking Sectors: Cyclicality and Implementation

We present a capital regulation policy in a model in which banks can choose to be unregulated, by operating in the shadow banking sector, when the cost of being regulated (restriction on portfolio risk) exceeds the benefit (cheaper funding/insurance). We show that the welfare maximizing capital requirement policy can be procyclical: lower requirement during booms and higher requirement during recessions. Our policy specifies the level of capital requirement as a function of the observed relative size of the unregulated and regulated banking sectors. This specification achieves the optimal aggregate risk exposure by obtaining the right mix of the two sectors.     

A Model of Shadow Banking

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry‐ups when investors neglect tail risks.     

货币政策、金融杠杆与银行风险承担

本文利用16家上市商业银行从2014年第四季度到2018年第三季度的季度面板数据,采用差分广义矩估计(DGMM)方法实证分析了货币政策和杠杆率对银行风险承担的影响。结果表明:第一,货币调控在金融稳定方面并非风险中性,它与银行风险承担呈现显著的负相关关系,即货币政策放松会相应提高银行的风险承担水平。第二,杠杆率作为资本充足率的有益补充是有效的,银行杠杆水平越低则其风险承担水平也越低,杠杆率监管会减缓或抑制货币政策对银行风险承担的影响,这也为2018年我国“宽货币紧信用”现象提供了合理解释。根据研究结论,本文就完善并协调货币调控、宏观审慎和微观监管提出政策建议。     

Bank funding structures and risk: Evidence from the global financial crisis

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with pre-crisis bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border (Global) banks were more vulnerable to solvency risk due to excessive leverage. In fact, a 3.5 percentage point increase in the pre-crisis capital buffers of Global banks would have caused a 48 percentage point in their probability of failure during the crisis. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.     

Climate policy uncertainty and risks taken by the bank: Evidence from China

This paper studies the relationship between three types of risk borne by banks and climate policy uncertainty (CPU). We use panel data for 210 commercial banks in China from 2009 to 2020. This paper has the following main conclusions: Firstly, climate policy uncertainty significantly reduce the passive and active risks borne by banks and increase the insolvency risks borne by banks; Secondly, the impact of CPU on the passive risks borne by listed banks is greater than that of unlisted banks, and the impact of CPU on the active and insolvency risks borne by listed banks is less than that of unlisted banks; Thirdly, the impact of CPU on the three types of risks borne by banks is most pronounced among rural banks and state-owned banks and least pronounced among joint-stock banks. After a series of robustness tests, such as the system GMM approach, different sample periods and controlling for endogeneity, the results of this paper remain robust. We also used the difference in difference (DID) method to study the policy dynamic effects of the 2016 Paris Agreement, and we passed a parallel trend test. Our results provide insights for policy makers and investors. Policy makers should formulate visionary policies in order to minimize the adverse effects of CPU; investors should keep an eye on the implementation of climate policies and pay attention to the impact of policies on the economy, so that they can adjust their investment strategies rationally.     

Firm-level political risk and corporate leverage decisions

This study examines the effects of firm-level political risk on firm leverage decisions and speed of adjustment. We uncover that firm-level political risk has a negative impact on a firm's total and long-term leverage. We also find that firms facing high political risk tend to prefer debts with short-term maturity. However, firm-level political risk is positively related to debt specialisation, suggesting that firms are more inclined to adopt fewer debt types when they face high political risk. Further analysis reveals that firms with high political risk are associated with a faster speed of adjustment to target than those with low political risk. Our results are robust to endogeneity concerns and the effects of financial crisis.