Systemic risk in the European sovereign and banking system

We investigate the systemic risk of the European sovereign and banking system during 2008–2013. We utilize a conditional measure of systemic risk that reflects market perceptions and can be intuitively interpreted as an entity’s conditional joint probability of default, given the hypothetical default of other entities. The measure of systemic risk is applicable to high dimensions and not only incorporates individual default risk characteristics but also captures the underlying interdependent relations between sovereigns and banks in a multivariate setting. In empirical applications, our results reveal significant time variation in systemic risk spillover effects for the sovereign and banking system. We find that systemic risk is mainly driven by risk premiums coupled with a steady increase in physical default risk.     

The nexus of macroprudential supervision,monetary policy,and financial stability

I discuss changes to bank supervision and regulation since the financial crisis. Microprudential supervision promotes the safety and soundness of individual institutions, while macroprudential supervision focuses on emerging risks to financial system stability. I highlight tools for implementing this macroprudential approach to promoting financial stability, and discuss the interactions and proper relationship between monetary policy and financial stability. While macroprudential tools should be the first line of defense against emerging financial imbalances, in cases where those tools proved to be inadequate to limit risks to financial stability, monetary policy should be considered as a possible defense.     

Managing price and financial stability objectives in inflation targeting economies in Asia and the Pacific

Many central banks have adopted explicit objectives for financial stability, raising the possibility of trade-offs between price and financial stability objectives. Based on structural vector autoregressions that incorporate both monetary and macroprudential policy shocks for four inflation targeting economies in Asia and the Pacific, we analyse the role of each policy shock in explaining deviations from the other policy’s objective, by applying historical decompositions. The macroprudential measures used in the study affect credit extended to the private sector. We find that there are periods when macroprudential policy shocks have contributed to pushing inflation away from the central bank’s inflation target and when monetary policy shocks have contributed to buoyant credit, suggesting that there have been short-term trade-offs between price and financial stability objectives. However, we also find periods when macroprudential policy shocks helped stabilise inflation and monetary policy shocks contributed to financial stability.     

A comprehensive approach to measuring the relation between systemic risk exposure and sovereign debt

Using an integrated model to control for simultaneity, as well as new risk measurement techniques such as Adapted Exposure CoVaR and Marginal Expected Shortfall (MES), we show that the aggregate systemic risk exposure of financial institutions is positively related to sovereign debt yields in European countries in an episodic manner, varying positively with the intensity of the financial crisis facing a particular nation. We find evidence of a simultaneous relation between systemic risk exposure and sovereign debt yields. This suggests that models of sovereign debt yields should also include the systemic risk of a country's financial system in order to avoid potentially important mis-specification errors. We find evidence that systemic risk of a country's financial institutions and the risk of sovereign governments are inter-related and shocks to these domestic linkages are stronger and longer lasting than international risk spillovers. Thus, the channel in which domestic sovereign debt yields can be affected by another nation's sovereign debt is mostly an indirect one in that shocks to a foreign country's government finances are transmitted to that country's financial system which, in turn, can spill over to the domestic financial system and, ultimately, have a destabilizing effect on the domestic sovereign debt market.     

Macroprudential policies,capital flows,and the structure of the banking sector

Using a large sample of advanced and emerging market economies over the period 1999–2012, we examine the effectiveness of macroprudential policies (MPPs) in managing cross-border bank flows. Conditioning on the structure of the banking sector in the MPP-implementing country, we find that higher regulatory quality and a higher credit-to-deposit ratio increase the effectiveness of MPPs, while a higher cost-to-income ratio has the opposite effect. If all three financial variables are evaluated at the median, the marginal effect of our preferred MPP measure leads to a reduction of international bank inflows in percent of GDP by around half a percentage point and is only marginally significant. However, when the more enhanced 25th (10th) percentiles of their respective distributions are considered, we observe, as a response to the same MPP measure, a reduction of bank inflows by 3.44 (5.39) percentage points that is highly statistically and economically significant. Additionally, we find that the structure of the domestic banking sector determines spillovers from MPPs across asset classes, while spillovers from MPPs across countries are a function of banking sector conditions both at home and abroad.     

Banks and sovereign risk: A granular view

We investigate the determinants of sovereign bond holdings of German banks and the implications of such holdings for bank risk. We use granular information on all German banks and all sovereign debt exposures in the years 2005–2013. As regards the determinants of sovereign bond holdings of banks, we find that these are larger for weakly capitalized banks, banks that are active on capital markets, and for large banks. Yet, only around two thirds of all German banks hold sovereign bonds. Macroeconomic fundamentals were significant drivers of sovereign bond holdings only after the collapse of Lehman Brothers. With the outbreak of the sovereign debt crisis, German banks reallocated their portfolios toward sovereigns with lower debt ratios and bonds with lower yields. With regard to the implications for bank risk, we find that low-risk government bonds decreased the risk of German banks, especially for savings and cooperative banks. Holdings of high-risk government bonds, in turn, increased the risk of commercial banks during the sovereign debt crisis.     

The systemic risk of European banks during the financial and sovereign debt crises

European banks became a source of risk to global financial markets during the financial crisis and attention to the European banking sector increased during the sovereign debt crisis. To measure the systemic risk of European banks, we calculate a distress insurance premium (DIP), which integrates the characteristics of bank size, probability of default, and correlation. Based on this measure, the systemic risk of European banks reached its height in late 2011 around €500 billion. We find that this was largely due to sovereign default risk. The DIP methodology is also used to measure the systemic contribution of individual banks. This approach identifies the large systemically important European banks, but Italian and Spanish banks as a group notably increased in systemic importance during the sample period. Bank-specific fundamentals like capital-asset ratios predict the one-year-ahead systemic risk contributions.     

Evaluating the sovereign and household credit risk in Singapore: A contingent claims approach

This study evaluates the credit risk of the household and government (sovereign) sectors in Singapore using the contingent claims approach (CCA). The CCA model estimates the default probability of both sectors based on the market value of the assets and liabilities of the sectors. Compared to the traditional credit rating system, this model is able to provide numerical estimates of the exposures and default probabilities. We find that from the year 2000 to 2013, variations in the credit risk measures correspond to the economic growth of Singapore. In addition, we suggest that the main factor affecting the credit risks in the government and household sectors in Singapore is the volatility of the assets held by both sectors, given that the asset-to-distress barrier ratios are relatively stable over the past 14 years for both sectors.     

Banking systemic vulnerabilities: A tail-risk dynamic CIMDO approach

This study proposes a novel framework which combines marginal probabilities of default estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology and the generalized dynamic factor model (GDFM) supplemented by a dynamic t-copula. The framework models banks’ default dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures banking systemic credit risk in the three forms categorized by the European Central Bank: (1) credit risk common to all banks; (2) credit risk in the banking system conditional on distress on a specific bank or combinations of banks; and (3) the buildup of banking system vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the banking sector short-term and conditional forward default measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. Finally, the framework produces robust out-of-sample forecasts of the banking systemic credit risk measures. This paper advances the agenda of making macroprudential policy operational.     

Target firms’ characteristics and the effects of sovereign wealth funds’ investments: Does cultural context of SWFs matter?

This paper investigates whether the determinants and effects of sovereign wealth fund (SWF) investments vary across SWFs' countries of origin. We classify SWFs based on the national culture of their home countries. On the side of investment motives, our findings show different nuances across SWFs classified by cultural origins. Furthermore, the post-investment approach varies among SWFs distinguished on the basis of the cultural traits of their home country. As a whole, these findings confirm that the heterogeneity of the cultural origin of SWFs matters in terms of selection criteria and effects.     

Euro area banking and monetary policy shocks in the QE era

This paper assesses the effects of monetary policy shocks on the macroeconomy and the euro area banking sector after the global financial crisis. First, financial risk-return indicators of the banking sector based on a compound option-based structural credit risk model are embedded in a large macro-financial quarterly database covering the period 2008Q4–2019Q4. Second, a SFAVAR identifies and estimates the shocks’ responses relating them to the endogenous build-up of banks’ vulnerabilities which are consistent with the internally coherent structure of the credit risk model. By introducing structure in the understanding of banks’ asset-liability management behavior following monetary policy shocks, the research strategy contributes to disentangling results that are often mixed in the empirical literature. The study finds that unconventional monetary policy, in particular the Asset Purchase Program of the European Central Bank, seems to have been more successful than conventional monetary policy in raising output and inflation. The desired boost to bank lending has been muted and loan cyclicality has varied across countries and loan types. The performance of the banking sector following monetary policy shocks can be characterized by a drop in expected return on equity and assets, a relaxation of lending conditions and increased correlation between banks’ assets return and the market return, a mechanism pointing to enhanced risk-taking. While banks’ probabilities of default fall following monetary policy shocks, the price of risk increases. Banks’ net worth rises via higher market capitalization and implied assets value together with lower volatility, despite often incurring more debt. Risk-taking in the banking sector may pose a risk to financial stability, especially if its effects on banks’ vulnerability spread and increase systemic risk. The unintended endogenous build-up of macro-financial vulnerabilities may need to become part of monetary policymaking.     

Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence

This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty; more specifically, it examines the relationship between bank systemic risk and changes and disruptions in economic conditions. Adopting the methodology of Beaudry et al. (2001), we introduce a new estimation procedure based on EGARCH to refine the framework developed by Baum et al., 2002, Baum et al., 2004, Baum et al., 2009 and Quagliariello, 2007, Quagliariello, 2009, and we analyze the relationship in the current industry context—i.e., in the context of market-based banking. Our results confirm that banks tend to behave more homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that both the cross-sectional dispersion of loans-to-assets and the cross-sectional dispersion of non-interest income share shrink during slow growth episodes, and particularly during financial crises, when the resilience of the banking system is at its lowest. More importantly, our main findings indicate that the cross-sectional dispersion of loans-to-assets has increased in the last decade, whereas the cross-sectional dispersion of non-interest income share appears to be more volatile and sensitive to macroeconomic shocks.     

Benchmarking macroprudential policies: An initial assessment

In recognition of the severe consequences of the recent international financial crisis, the topic of macroprudential policy has elicited considerable research effort. The present study constructs, for 46 economies around the globe, an index of the capacity to deploy macroprudential policies. Building on elements that have been the subject of recent research, we develop an index that aims to represent the essence of what constitutes a macroprudential regime. Specifically, the index quantifies: (1) how existing macroprudential frameworks are organized; and (2) how far a particular jurisdiction is from reaching the goals established by the Group of Twenty (G20) and the Financial Stability Board (FSB). The latter is a benchmark that has not been considered in the burgeoning literature that seeks to quantify the role of macroprudential policies.     

Measuring bilateral spillover and testing contagion on sovereign bond markets in Europe

The global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries, with Belgium, Italy and Spain being key markets during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion.     

Bank systemic risk: An analysis of the sovereign rating ceiling policy and rating downgrades

We investigate the impact that the sovereign ceiling policy has on financial stability. In the event of a sovereign rating downgrade, we find that the rating agencies' sovereign ceiling policy leads to a disproportionate downgrade of the most creditworthy financial institutions in the economy and results in increased systemic risk. This asymmetric variation in bank ratings also impairs equity growth that further exacerbates bank insolvency. Our results are robust to several matching techniques, such as propensity score matching and entropy balancing, falsification tests, subsample analyses, alternative empirical proxies and model specifications.     

功能视角下投资银行组织模式变迁的回顾与前瞻

投资银行的核心功能是创造一个超越法律的信息市场和采用合约以及相应的自我实施机制,为经济主体提供与信息高敏感度证券资产相关的各种金融服务。历史地看,合伙制是投资银行实现这一功能的理想模式。随着信息通讯技术的变革和金融理论的发展,传统业务隐含技能的代码化推动投资银行从合伙制模式而转向公众化。次贷危机后,以放弃法人独立性为代价来换取联邦金融救助成为美国主要投资银行的惟一选择。尽管这种模式可在获得信息优势、范围经济等利益的同时,还可借助联邦安全网实现稳定,但与之伴随的严重利益冲突,不仅可能威胁金融安全和稳健性,而且可能压抑市场创新,导致其服务效率的下降,最终影响投资银行的机构功能地位。     

Credit default swaps and the market for sovereign debt

In this paper, we analyze the determinants and effects of credit default swap (CDS) trading initiation in the sovereign bond market. CDS trading initiation is associated with a 30–150 basis point reduction in sovereign bond yields, with greater yield reductions accruing to higher default risk economies. For countries with high default risk, rated B or lower by Standard and Poor’s, CDS initiation is also associated with significant price efficiency benefits in the underlying market. CDS trading initiation is more likely following increases in local equity index volatility, index spreads for regional and global CDS markets, or depreciation of the local currency relative to the US dollar, and decreases in a country’s ability to service foreign debt. Our results are robust to selection bias controls based on these factors.     

Bank use of sovereign CDS in the Eurozone crisis: Hedging and risk incentives

Using a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during the European sovereign debt crisis of 2008–2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to sovereign risk during this period. Lower loan exposure to sovereign risk is associated with greater protection selling in CDS, the effect being weaker when sovereign risk is high. Bank and country risk variables are mostly not associated with protection selling. The findings are driven by the actions of a few non-dealer banks which sold CDS protection aggressively at the onset of the crisis, but started covering their positions at its height while simultaneously shifting their assets towards sovereign bonds and loans. Our findings underscore the importance of accounting for derivatives exposure in building a complete picture and understanding fully the economic drivers of the bank-sovereign nexus of risk.     

Self-fulfilling dynamics: The interactions of sovereign spreads,sovereign ratings and bank ratings during the euro financial crisis

During the euro-area financial crisis, interactions among sovereign spreads, sovereign credit ratings, and bank credit ratings appeared to have been characterized by self-generating feedback loops. To investigate the existence of feedback loops, we consider a panel of five euro-area stressed countries within a three-equation simultaneous system in which sovereign spreads, sovereign ratings and bank ratings are endogenous. We estimate the system using two approaches. First we apply GMM estimation, which allows us to calculate persistence and multiplier effects. Second, we apply a new, system time-varying-parameter technique that provides bias-free estimates. Our results show that sovereign ratings, sovereign spreads, and bank ratings strongly interacted with each other during the euro crisis, confirming strong doom-loop effects.     

Conditional risk, return and contagion in the banking sector in asia

This paper investigates risk and return in the banking sector in three Asian markets of Taiwan, China and Hong Kong. The study focuses on the risk-return relation in a conditional factor GARCH-M framework that controls for time-series effects. The factor approach is adopted to incorporate intra-industry contagion and an analysis of spillovers between large banks and small banks. Finally, the study provides evidence on these relations before and after the Asian financial crisis of 1997. The results are generally consistent across the markets and with expectations.