Exchange rate flexibility and credit during capital inflow reversals: Purgatory … not paradise

We identify periods of capital inflows reversals—looking at both gross and net capital flows—and document the behavior of macro and credit variables in economies with different degrees of exchange rate flexibility. We find that more exchange rate flexibility moderates credit swings during capital flow cycles, mainly because it is associated with milder credit growth during the boom. Flexibility, however, cannot completely shield the economy from a credit reversal. We observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress potential complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surcharges and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits.     

Measuring Integrated Market and Credit Risk in Bank Portfolios: An Application to a Set of Hypothetical Banks Operating in South Africa

The banking crises of the ‘90s emphasize the need to model the connections between financial environment volatility and the potential losses faced by financial institutions resulting from correlated market and credit risks. Due to the number of variables that must be modeled and the complexity of the relationships an analytical solution is not feasible. We present here a numerical solution based on a simulation model that explicitly links changes in the relevant variables that characterize the financial environment and the distribution of possible future bank capital ratios. This forward looking quantitative risk assessment methodology allows banks and regulators to identify potential risks before they materialize and make appropriate adjustments to bank portfolio credit qualities, sector and region concentrations, and capital ratios on a bank by bank basis. It also has the potential to be extended so as to assess the risks of correlated failures among a group of financial institutions (i.e., systemic risk analyses). This model was applied by the authors to the study of the risk profile of the largest South African Banks in the context of the Financial System Stability Assessment program undertaken by the IMF in 1999. In the current study, we apply the model to various hypothetical banks operating in the South African financial environment and assess the correlated market and credit risks associated with business lending, mortgage lending, asset and liability maturity matches, foreign lending and borrowing, and direct equity, real estate, and gold investments. It is shown to produce simulated financial environments (interest rates, exchange rates, equity indices, real estate price indices, commodity prices, and economic indicators) that match closely the assumed parameters, and generate reasonable credit transition probabilities and security prices. As expected, the credit quality and diversification characteristics of the loan portfolio, asset and liability maturity mismatches, and financial environment volatility, are shown to interact to determine bank risk levels. We find that the credit quality of a bank's loan portfolio is the most important risk factor. We also show the risk reduction benefits of diversifying the loan portfolio across various sectors and regions of the economy and the importance of accounting for volatility shocks that occur periodically in emerging economies. Banks with high credit risk and concentrated portfolios are shown to have a high risk of failure during periods of financial stress. Alternatively, banks with lower credit risk and broadly diversified loan portfolios across business and mortgage lending are unlikely to fail even during very volatile periods. Asset and liability maturity mismatches generally increase bank risk levels. However, because credit losses are positively correlated with interest rate increases, banks with high credit risk may reduce overall risk levels by holding liabilities with longer maturities than their assets. Risk assessment methodologies which measure market and credit risk separately do not capture these various interactions and thus misestimate overall risk levels.     

Banks’ procyclical behavior: Does provisioning matter?

A panel of 186 European banks is used for the period 1992–2004 to determine if banking behaviors, induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. We find that poorly capitalized banks are constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover expected future loan losses (non-discretionary LLP) amplify credit fluctuations. By contrast, LLP used for management objectives (discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of a dynamic provisioning system in Europe.     

Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure

I build a dynamic capital structure model that demonstrates how business cycle variation in expected growth rates, economic uncertainty, and risk premia influences firms' financing policies. Countercyclical fluctuations in risk prices, default probabilities, and default losses arise endogenously through firms' responses to macroeconomic conditions. These comovements generate large credit risk premia for investment grade firms, which helps address the credit spread puzzle and the under‐leverage puzzle in a unified framework. The model generates interesting dynamics for financing and defaults, including market timing in debt issuance and credit contagion. It also provides a novel procedure to estimate state‐dependent default losses.     

FX Intervention in the New Keynesian Model

We develop an open-economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator and shocks to risk appetite in international capital markets. We obtain closed-form solutions for optimal monetary and FX intervention policies assuming the central bank cannot commit to future policies, and we compare the solution to that under policy commitment. We show how FX intervention can help reduce the volatility of the exchange rate, of inflation, and of the output gap, thus mitigating welfare losses associated with shocks in the international capital markets. We also show that, when the financial accelerator is strong, there is a risk of indeterminacy (self-fulfilling currency and inflation movements) although FX intervention can reduce this risk and thus reinforce the credibility of the inflation targeting regime. Model simulations match well the impact of a VIX shock obtained by local projections on a panel of inflation targeting emerging markets.     

Credit risk in the leasing industry

This paper is devoted to the credit risk modeling issues of retail lease portfolios. Using a re-sampling method, I estimate the probability density function of losses and VaR measures in a portfolio of 46,732 leases issued between 1990 and 2000 by a major European financial institution. My results show that physical collaterals play a major role in reducing the credit risk associated with lease portfolios. However, because of insufficient recognition of such collaterals under the new regulatory capital framework (Basel II), significant differences are observed between the estimated capital requirements and those calculated in accordance with the various Basel II approaches.     

预期信用损失模型对银行资本计提的结构性影响研究——基于50家上市商业银行的实证分析

预期信用损失模型是一项新的贷款损失准备计提方法,对其经济后果的评估非常重要.关于预期信用损失模型的实施对我国商业银行资本计提的具体影响,目前还缺乏深入系统的研究.本文结合我国50家上市商业银行的公开数据,从监管资本、会计损益和资本计提前瞻性的角度分析了预期信用损失模型对我国商业银行资本计提的影响.研究结果表明:总体影响上,商业银行的贷款损失准备计提金额显著增加,利润波动增强,对资本充足率带来一定冲击;从不同特征商业银行看,小型商业银行、使用权重法商业银行、城市商业银行和H股上市商业银行受到的影响更为严重;从资本计提的前瞻性看,贷款损失准备的前瞻性得到加强,顺周期性效应得到一定程度缓解,但并不能完全消除.     

World market risk,country-specific risk and expected returns in international stock markets

This paper determines whether the world market risk, country-specific total risk, and country-specific idiosyncratic risk are priced in an international capital asset pricing model (ICAPM). Portfolio-level analyses, country-level cross-sectional regressions, stacked time-series, and pooled panel regressions indicate that the world market risk is not, but country-specific total and idiosyncratic risks are significantly priced in an ICAPM framework with partial integration. This result is robust to different methods for estimating risk measures, different investment horizons, and after controlling for the countries’ aggregate dividend yield, earnings-to-price ratios, inflation risk, exchange rate uncertainties, aggregate volatility risk, and past return characteristics. The main findings turn out to be insensitive to the choice of one-factor vs. multifactor models used to estimate systematic and idiosyncratic risk measures.     

The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability

This paper examines the interaction of the International Financial Reporting Standard (IFRS) 9 expected credit loss (ECL) model with supervisory rules and discusses potential implications for financial stability in the European Union. Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model incorporates earlier and larger impairment allowances and is more closely aligned with regulatory expected loss. The earlier recognition of credit losses will reduce the build-up of loss overhangs and the overstatement of regulatory capital. In addition, extended disclosure requirements are likely to contribute to more effective market discipline. Through these channels IFRS 9 might enhance financial stability. However, due to the reliance on point-in-time estimates of the main input parameters (probability of default and loss given default) IFRS 9 ECLs will increase the volatility of regulatory capital for some banks. Furthermore, the ECL model provides significant room for managerial discretion. Bank supervisors might play an important role in the implementation of IFRS 9, but too much supervisory intervention bears the risk of introducing a prudential bias into loan loss accounting that compromises the integrity of financial reporting. Overall, the potential benefits of the standard will crucially depend on its proper and consistent application across jurisdictions.     

CECL: Timely Loan Loss Provisioning and Bank Regulation

We investigate how provisioning models interact with bank regulation to affect banks' risk-taking behavior. We study an accuracy versus timeliness trade-off between an incurred loss model (IL) and an expected loss model (EL) such as current expected credit loss model or International Financial Reporting Standards 9. Relative to IL, even though EL improves efficiency by prompting earlier corrective action in bad times, it induces banks to originate either safer or riskier loans. Trading off ex post benefits versus ex ante real effects, we show that more timely information under EL enhances efficiency either when banks are insufficiently capitalized or when regulatory intervention is likely to be effective. Conversely, when banks are moderately capitalized and regulatory intervention is sufficiently costly, switching to EL impairs efficiency. From a policy perspective, our analysis highlights the roles that regulatory capital and the effectiveness of regulatory intervention play in determining the economic consequences of provisioning models. EL spurs credit supply and improves financial stability in economies where intervening in banks' operations is relatively frictionless and/or regulators can tailor regulatory capital to incorporate information about credit losses.     

Forecasting bank loans loss-given-default

With the advent of the new Basel Capital Accord, banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach. In order to be compliant with this approach, institutions must estimate the loss-given-default, the fraction of the credit exposure that is lost if the borrower defaults. This study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses. The out-of-sample predictive ability of these models is evaluated at several recovery horizons after the default event. The out-of-time predictive ability is also estimated for a recovery horizon of 1 year. The performance of the models is benchmarked against recovery estimates given by historical averages. The results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss-given-default.     

A cost-benefit analysis of capital requirements adjusted for model risk

Capital adequacy is the key microprudential and macroprudential tool of banking regulation. Financial models of capital adequacy are subject to errors, which may prevent from estimating a sufficient capital base to absorb bank losses during economic downturns. In this paper, we propose a general method to account for model risk in capital requirements calculus related to market risk. We then evaluate and compare our capital requirements values with those obtained under Basel 2.5 and the new Basel 4 regulation. Capital requirements adjusted for model risk perform well in containing losses generates in normal and stressed times. In addition, they are as conservative as Basel 4 capital requirements, but they exhibit less fluctuations over time.     

外汇风险传染网络测度与影响机制分析--基于静态和动态的双重视角

国际争端频发及不确定性风险增加的外部环境,叠加经济下行压力增大的内部环境,致使汇率波动变得更加敏感,外汇风险传染危害性提升。基于1999-2018年全球50种主要货币,本文引入复杂网络模型以及静态与动态两类相关系数算法,分析了汇率网络的总体关联性及各货币风险吸收效应和外溢效应。同时,本文采用混合效应面板回归研究了资本账户开放、汇率制度改革等政策因素的作用,在此基础上,分析了外汇风险传染的影响机制。研究发现,考察期内,各货币波动溢出比收益率溢出更平稳,收益率溢出关系稳定性相对较弱、变动幅度更大,这与金融危机和欧债危机爆发有关。全球主要货币总体关联性具有明显的时变特征和区制特征,且波动溢出与收益率溢出存在区制同步性。资本账户开放和汇率制度是外汇风险传染的重要影响因素,汇率市场化改革有助于缓释外汇风险传染,而资本账户开放将扩大外汇风险传染效应。     

《新资本协议》对商业银行信贷运行的影响——兼论其宏观经济效应

《新资本协议》的出台和实施是银行监管历史上一个具有里程碑意义的事件。本文认为,《新资本协议》特别是内部评级法极大地提高了资本监管的风险敏感度,将对商业银行的信贷增长方式、信贷结构调整和贷款损失准备计提、以及宏观经济运行产生一定的影响。按照目前我国商业银行资本充足水平和资产质量,无论是实施标准法还是内部评级法都将强化信贷扩张的资本约束效应。我国应慎重选择《新资本协议》的实施时机,避免由此对信贷供给和宏观经济运行造成的负面冲击。     

Why is credit-to-GDP a good measure for setting countercyclical capital buffers?

We examine banks’ loan losses in Europe in 1982–2012 using a nonlinear three-factor model that takes into account output growth, real interest rate, and the ratio of private credit to GDP relative to its trend (i.e., “excessive indebtedness”). We find that a drop in output has an intensified impact on loan losses if the private sector is excessively indebted. Because increased bank credit risk should be matched with higher bank capital, the result motivates the Basel III's countercyclical capital buffers as a function of private indebtedness relative to its trend. The result also helps to explain differences in the amount of loan losses in different recessions across time and across countries. The model also indicates that low interest rates during the recent recession have clearly mitigated loan losses.     

The Global CAPM and a Firm's Cost of Capital in Different Currencies

In an integrated global market, a firm's cost of capital expressed in one currency should be consistent with its cost of capital expressed in another currency. This article presents and illustrates a process for estimating consistent costs of capital in different currencies for a U.K. based multinational. In so doing, it uses a simple, easy-to-use version of the global CAPM that attempts to incorporate the effect of uncertain exchange rates by calculating exchange rate "betas." As argued in the previous article, at least part of a company's currency exposure is systematically related to the global market and thus should be treated as a component of the firm's systematic equity risk.
For example, the U.K. firm featured in this article is shown to have an exchange rate beta of 0.20 from the perspective of a U.S. investor. This implies that a 10% return on the global market in U.S. dollars tends to be associated with a 2% change in the U.S. dollar value of the British pound. One interesting consequence of incorporating exchange risk in this fashion is that two firms with identical U.S. global betas and costs of equity will have different expected returns expressed in another currency if they have different exposures to that currency.     

A portfolio view of consumer credit

To compute risk-adjusted returns and gauge the volatility of their portfolios, lenders need to know the covariances of their loans’ returns with aggregate returns. We use unique credit bureau data to measure individuals’ ‘covariance risk’, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the distribution of credit, including the effects of credit scores. We find significant heterogeneity in covariance risk across consumers. Also, the amount of credit they obtain significantly increases with their credit scores, and decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller.     

不同资本账户开放程度下汇率波动对经济增长的非线性效应--基于面板门限模型的分析

文章利用50个国家1997~2015年的年度数据,基于面板门限模型分析了不同资本账户开放度下汇率波动与经济增长之间的非线性效应。研究发现:第一,汇率波动与经济增长之间存在门限效应,具体表现为低汇率波动促进经济增长,高汇率波动抑制经济增长;第二,资本账户开放能够弱化汇率波动对经济增长的不利影响,且不同资本账户开放度存在异质性;第三,不同汇率波动幅度下,汇率波动与资本账户开放度的交互项对经济增长的影响存在门限效应。     

Foreign portfolio equity holdings and capital gains taxation

Using panel data from 23 developed countries over the 2001–2011 period and employing the Arellano-Bover/Blundell-Bond dynamic panel estimation technique, this paper shows that the source country capital gains tax has a negative and statistically significant impact on foreign portfolio equity holdings. On average, a 1 percentage point increase in capital gains tax rate leads to 0.018% decrease in foreign equity holdings. The negative relationship between the capital gains tax and foreign equity holdings is found to be robust to alternative measures of the source country capital gains tax, inclusion of the dividend imputation tax rate, foreign dividend tax withheld rate, dividend tax credit and other control variables (the source and host country financial wealth, trade, exchange rate volatility, foreign listing and institutional quality). We find that a 1% increase in financial wealth of the source (host) country leads to, on average, a 0.428% (0.427%) increase in foreign equity holdings. An improvement in institutional quality has a positive effect on foreign equity holdings but an increase in the exchange rate volatility has the opposite effect.