Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR PDF Download

Author: Mr.Dale F. Gray
Publisher: International Monetary Fund
ISBN: 1484322185
Category : Business & Economics
Languages : en
Pages : 62

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Book Description
The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.

Author: Mr.Dale F. Gray
Publisher: International Monetary Fund
ISBN: 1484387201
Category : Business & Economics
Languages : en
Pages : 62

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Book Description
The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.

Author: International Monetary Fund. Monetary and Capital Markets Department
Publisher: International Monetary Fund
ISBN: 1484369599
Category : Business & Economics
Languages : en
Pages : 94

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Book Description
This technical note consists of five chapters focusing on various aspects of systemic risk analysis across the euro area financial system. The chapters cover bank profitability, balance sheet- and market-based interconnected analysis, contingent claims analysis, and a brief discussion of data gaps in the nonbank, non-insurance (NBNI) financial sector. The ongoing economic recovery will support euro area bank profitability in general, but it is unlikely to resolve the structural challenges faced by the least profitable banks despite some recent improvements. This is important because persistently weak bank profitability is a systemic financial stability concern. Empirical analysis of 109 major euro area banks over 2007–2016 reveals that real GDP growth and the NPL ratio are the most reliable determinants of profitability, after accounting for other factors. Although higher growth would raise profits, a large swath of banks with the weakest profitability would most likely continue to struggle even with a robust recovery. Therefore, banks should take advantage of the current upswing by resolutely addressing their NPL stocks—such a strategy holds the most promise for weak banks’ profitability prospects.

Author: Mr.Charles Enoch
Publisher: International Monetary Fund
ISBN: 148438766X
Category : Business & Economics
Languages : en
Pages : 524

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Book Description
From Fragmentation to Financial Integration in Europe is a comprehensive study of the European Union financial system. It provides an overview of the issues central to securing a safer financial system for the European Union and looks at the responses to the global financial crisis, both at the macro level—the pendulum of financial integration and fragmentation—and at the micro level—the institutional reforms that are taking place to address the crisis. The emerging financial sector management infrastructure, including the proposed Single Supervisory Mechanism and other elements of a banking union for the euro area, are also discussed in detail.

Author: David Aikman
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 50

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Book Description
In this paper, we survey the rapidly developing literature on macroprudential stress-testing models. The scope of the survey includes models of contagion between banks, models of contagion within the wider financial system including non-bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is two-fold: first, to provide a reference guide of the state-of-the-art for those developing such models; second, to distil insights from this endeavour for policy-makers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policy-makers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions' capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash, and (c) the topology of the financial network.

Author: Mr.Ivo Krznar
Publisher: International Monetary Fund
ISBN: 1484307100
Category : Business & Economics
Languages : en
Pages : 49

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Book Description
Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model. The framework has numerous applications that can strengthen stress testing and macro financial analysis. Moreover, it provides an avenue for many extensions that address the challenges of incorporating other second-round effects important for comprehensive systemic risk analysis, such as interactions between solvency, liquidity and contagion risks. To this end, the paper presents some preliminary simulations of feedback effects arising from the link between the liquidity and solvency risk.

Author: E. Porras
Publisher: Springer
ISBN: 1137358769
Category : Social Science
Languages : en
Pages : 303

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Book Description
Understanding the formation of bubbles and the contagion mechanisms afflicting financial markets is a must as extreme volatility events leave no market untouched. Debt, equity, real estate, commodities... Shanghai, NY, or London: The severe fluctuations, explained to a large extent by contagion and the fear of new bubbles imploding, justify the newly awaken interest in the contagion and bubble dynamics as yet again the world brazes for a new global economic upheaval. Bubbles and Contagion in Financial Markets explores concepts, intuition, theory, and models. Fundamental valuation, share price development in the presence of asymmetric information, the speculative behavior of noise traders and chartists, herding and the feedback and learning mechanisms that surge within the markets are key aspects of these dynamics. Bubbles and contagion are a vast world and fascinating phenomena that escape a narrow exploration of financial markets. Hence this work looks beyond into macroeconomics, monetary policy, risk aggregation, psychology, incentive structures and many more subjects which are in part co-responsible for these events. Responding to the ever more pressing need to disentangle the dynamics by which financial local events are transmitted across the globe, this volume presents an exhaustive and integrative outlook to the subject of bubbles and contagion in financial markets. The key objective of this volume is to give the reader a comprehensive understanding of all aspects that can potentially create the conditions for the formation and bursting of bubbles, and the aftermath of such events: the contagion of macro-economic processes. Achieving a better understanding of the formation of bubbles and the impact of contagion will no doubt determine the stability of future economies – let these two volumes be the starting point for a rational approach to a seemingly irrational phenomena.

Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 1498342434
Category : Business & Economics
Languages : en
Pages : 88

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Book Description
This paper explores how banking sector developments and characteristics influence the propagation of risks from the banking sector to sovereign debt, including how they affect the extent of fiscal costs of banking crises when those occur. It then proposes practices and policies for the fiscal authorities to help manage the risks and enhance crisis preparedness.

Author: International Monetary Fund. Monetary and Capital Markets Department
Publisher: International Monetary Fund
ISBN: 1484316835
Category : Business & Economics
Languages : en
Pages : 114

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Book Description
This Technical Note reviews the stability of Luxembourg’s financial system. The financial soundness indicators for Luxembourg’s financial system, which plays a key role in the intermediation of financial capital, have remained relatively robust in recent years. Household stress test results suggest that households’ solvency would be significantly affected by a drop in income and housing prices and a rise in unemployment. Bank liquidity displays broad resilience, but would be weakened should wholesale funding dry up or funding stress emerge in foreign currencies. Banks were found to be less vulnerable to direct contagion risk through bilateral exposure; however, most banks have considerable cross-border exposure.

Author: International Monetary Fund. Monetary and Capital Markets Department
Publisher: International Monetary Fund
ISBN: 1475564929
Category : Business & Economics
Languages : en
Pages : 85

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Book Description
This Technical Note discusses the results of stress testing of Finland’s banking system. Despite high capitalization levels, there are important vulnerabilities in the Finnish banking system. Near-term risks are largely tilted to the downside, stemming from both external and domestic sources. A sharper-than-expected global growth slowdown would be a drag on Finland’s export and GDP growth. Although so far high compared with the rest of the euro area banks, Finnish banks’ profitability is facing challenges from the low interest rate environment and the low economic growth. Vulnerabilities include funding risks, contagion risks, and challenges related to long-term profitability.