Long-term bank balance sheet management: Estimation and simulation of risk-factors

We propose a dynamic framework which encompasses the main risks in balance sheets of banks in an integrated fashion. Our contributions are fourfold: (1) solving a simple one-period model that describes the optimal bank policy under credit risk; (2) estimating the long-term stochastic processes underlying the risk factors in the balance sheet, taking into account the credit and interest rate cycles; (3) simulating several scenarios for interest rates and charge-offs; and (4) describing the equations that govern the evolution of the balance sheet in the long run. The models that we use address momentum and the interaction between different rates. Our results enable simulation of bank balance sheets over time given a bank’s lending strategy and provides a basis for an optimization model to determine bank asset–liability management strategy endogenously.     

Capital regulation and bank balance sheet adjustments: a simultaneous approach

This study examines the balance sheets of banks in 15 Asian countries from 2004 to 2016 to explore how they respond to stricter capital regulation. We consider the simultaneity of balance sheet adjustments. Employing a normalisation method, the study found that Asian banks increased regulatory capital, primarily through retained earnings, and expanded assets over the study period. However, the two-step system Generalised Method of Moments results do not support the positive effect of capital regulation on regulatory capital components adjustments. In addition, stricter capital regulation even induces banks to reduce lending.     

When does a central bank׳s balance sheet require fiscal support?

Using a simple, general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance sheet support — a within-government transaction — is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank׳s balance sheet is merged with that of the rest of the government.     

Fair value accounting,fragile bank balance sheets and crisis: A model

A topic of recent interest in accounting research has been the investigation of the role of fair value accounting (FVA) in the global financial crisis. This research focused on finding a link during the crisis time-period and often states that “accounting is only a messenger”. The model presented in this paper emphasises finding the link before the crisis and “accounting as money.” Use is made of an accounting model of the economy due to the inability of standard models of monetary transmission to incorporate global financial crisis characteristics such as feedback effects, systemic risk and the centrality of the financial sector in the crisis. The model shows FVA in banks to be an accelerator that amplifies the financial cycle upswing. Feedback effects noted in the model include changes in the demand for financial instruments and changes in demand in the real economy. Minsky-like, crisis is shown to be endogenous to the model, working through the fragility of balance sheets in the real sector as well as in the financial sector. Bank balance sheet fragility is caused by bad capital driving out good capital, banks reaching for yield and the inversion of the yield curve. The model shows that the practice of not meeting rising credit demand with increasing credit supply is an essential control mechanism in the financial cycle.     

A model of a systemic bank run

This paper provides a model of the view that the 2008 financial crisis is reminiscent of a bank run, focussing on six stylized key features. In particular, core financial institutions have invested their funds in asset-backed securities rather than committed to long-term projects: in distress, these can potentially be sold to a large pool of outside investors at steep discounts. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version. Therefore, the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities.     

Implications of bank regulation for loan supply and bank stability: a dynamic perspective

ABSTRACT

We show that internal funds play a particular role in the regulation of bank capital, which has not received much attention, yet. A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and its future vulnerability to bankruptcy risks. Using a partial equilibrium model, we study how internal funds affect these intra- and intertemporal links. Moreover, our positive analysis identifies the effects of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of internal funds and thus loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.     

Financial capital movements and central bank behavior in a two-country,short-run portfolio balance model

This paper analyzes financial capital movements in a two-country, short-run, portfolio balance model which includes two securities that are imperfect substitutes. Following a disturbance, equilibrium is, in general, reattained, but the effects on interest rates, money supplies, and international reserve holdings depend on the monetary and reserve asset management policies of the two central banks. Special attention is focused on the case in which one central bank holds its international reserves in the form of ‘key currency’ securities, thereby sterilizing for the ‘key currency’ country. There are several applications of the central result that, for any disturbance, the less changes in international reserves are allowed to affect money supplies, the larger the change in reserves required to reestablish equilibrium.     

A dynamic model of active portfolio management with benchmark orientation

This paper studies optimal dynamic portfolios for investors concerned with the performance of their portfolios relative to a benchmark. Assuming that asset returns follow a multi-linear factor model similar to the structure of Ross (1976) [Ross, S., 1976. The arbitrage theory of the capital asset pricing model. Journal of Economic Theory, 13, 342–360] and that portfolio managers adopt a mean tracking error analysis similar to that of Roll (1992) [Roll, R., 1992. A mean/variance analysis of tracking error. Journal of Portfolio Management, 18, 13–22], we develop a dynamic model of active portfolio management maximizing risk adjusted excess return over a selected benchmark. Unlike the case of constant proportional portfolios for standard utility maximization, our optimal portfolio policy is state dependent, being a function of time to investment horizon, the return on the benchmark portfolio, and the return on the investment portfolio. We define a dynamic performance measure which relates portfolio’s return to its risk sensitivity. Abnormal returns at each point in time are quantified as the difference between the realized and the model-fitted returns. Risk sensitivity is estimated through a dynamic matching that minimizes the total fitted error of portfolio returns. For illustration, we analyze eight representative mutual funds in the U.S. market and show how this model can be used in practice.     

Fiscal adjustment in EU countries: A balance sheet approach

Several European Union countries have recently implemented or are envisaging fiscal operations which improve budgetary figures but have no structural impact on government finances. We evaluate some of these measures using a balance sheet approach. In particular, we examine the degree to which reductions in government debt in EU countries has been accompanied by a decumulation of government assets. In the runup to Maastricht we find a strong correlation between changes in government liabilities and government assets, and larger declines in government assets in countries starting from higher public debt levels.     

A model of green bank marketing

In the light of current market conditions, the financial services industry has been reshaped, requiring new marketing knowledge to provide guidelines for successful practice. To that end, corporate social responsibility, green marketing and a green brand image (GBI) have attracted considerable interest in the banking sector, although no framework has yet been established relating these constructs to one another. In this article, the authors present exploratory research as a basis for developing a model of green bank marketing. The model was tested to confirm the dimensions of green bank marketing and investigate its impact on a GBI, thus providing statistical evidence of the relationship between the two variables.     

Comment on: “When does a central bank’s balance sheet require fiscal support?” by Marco Del Negro and Christopher A. Sims

A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.     

Interbank: A bank management simulation exercise

Management games and management simulation exercises can be used as extremely effective educational tools. As they grow in sophistication, their application in high-level education and management development is spreading. While a variety of company simulation exercises have been available for many years, very few are intended specifically for use in banking applications. This article reviews the use of management games in banking, and analyses one particular exercise — InterBank.     

An instantaneous control model of bank reserves and Federal funds management

Empirical evidence indicates that large banks are generally net buyers of Federal funds, while small banks tend to be net sellers. Asymmetric information, bank monopoly power, or risk-aversion arguments have been offered for this phenomenon. However, these models do not address the close link between bank reserves and Federal funds purchases as alternative means of liquidity management. Our stochastic control model focuses on this link and has three main implications: (1) it analyzes interaction between the above-mentioned influences; (2) it identifies three additional reasons for banks' Federal funds activity; and (3) it examines the transmission of monetary policy in a dynamic framework.     

A theory of bank regulation and management compensation

We show that concentrating bank regulation on bank capital ratiosmay be ineffective in controlling risk taking. We propose, instead,a more direct mechanism of influencing bank risk-taking incentives,in which the FDIC insurance premium scheme incorporates incentivefeatures of top-management compensation. With this scheme, weshow that bank owners choose an optimal management compensationstructure that induces first-best value-maximizing investmentchoices by a bank's management. We explicitly characterize theparameters of the optimal management compensation structureand the fairly priced FDIC insurance premium in the presenceof a single or multiple sources of agency problems.     

华夏银行为中关村企业量身定制金融服务新模式

3月18日,由中国人民银行营业管理部、北京银监局、北京市金融工作局、北京市国资委、中关村管委会、海淀区政府与华夏银行联合推出的“龙舟计划闪耀科技金融”信贷创新推广活动,标志着华夏银行为中关村国家自主创新示范区高科技型企业量身定制的金融服务模式全面启动。     

基于AHP法的银行信贷风险管理绩效评价模型的构建

随着以雷曼兄弟银行破产保护和全球最大保险公司AIG严重财务危机为代表的华尔街金融风暴的出现,全球商业银行都提出了相应的对策,但是,效果如何,还需要通过科学的方法进行评价,以便发现不足之处,然后再继续完善对策,达到对银行信贷风险的最优管理.我国在信贷风险管理绩效评价方面与国际银行相比还比较落后,正处于起步阶段.为此,作者在借鉴国际银行业信贷风险管理绩效已有的方法和经验的基础上,结合我国当前信贷风险管理绩效评价的实践,用层次分析法(AHP)确定评定指标权重;采用模糊综合评判对信贷管理的绩效进行评价,以期建立一套比较可行的信贷管理业绩评价体系.     

A multicriteria model for portfolio management

The paper presents a new model to support the selection of a portfolio of stocks based on the results of the fieldwork undertaken with fund managers and using direct rating, MACBETH and optimisation techniques. The model consists of defining a benchmark portfolio (in this case, the Dow Jones Eurostoxx50) and scoring its different stocks according to several expected return criteria. Based on this multicriteria value analysis, a procedure is proposed to suggest adjustments to the proportions of the stocks in the portfolio. Finally, the risk of this modified portfolio is taken into consideration in an optimization module that includes constraints concerning the limits of variation for the proportion of each stock.