Modeling Correlated Systemic Liquidity And Solvency Risks In A Financial Environment With Incomplete Information
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Modeling Correlated Systemic Liquidity And Solvency Risks In A Financial Environment With Incomplete Information
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Author : MissLiliana Schumacher
language : en
Publisher: International Monetary Fund
Release Date : 2011-11-01
Modeling Correlated Systemic Liquidity And Solvency Risks In A Financial Environment With Incomplete Information written by MissLiliana Schumacher and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-11-01 with Business & Economics categories.
This paper proposes and demonstrates a methodology for modeling correlated systemic solvency and liquidity risks for a banking system. Using a forward looking simulation of many risk factors applied to detailed balance sheets for a 10 bank stylized United States banking system, we analyze correlated market and credit risk and estimate the probability that multiple banks will fail or experience liquidity runs simultaneously. Significant systemic risk factors are shown to include financial and economic environment regime shifts to stressful conditions, poor initial loan credit quality, loan portfolio sector and regional concentrations, bank creditors' sensitivity to and uncertainties regarding solvency risk, and inadequate capital. Systemic banking system solvency risk is driven by the correlated defaults of many borrowers, other market risks, and inter-bank defaults. Liquidity runs are modeled as a response to elevated solvency risk and uncertainties and are shown to increase correlated bank failures. Potential bank funding outflows and contractions in lending with significant real economic impacts are estimated. Increases in equity capital levels needed to reduce bank solvency and liquidity risk levels to a target confidence level are also estimated to range from 3 percent to 20 percent of assets. For a future environment that replicates the 1987-2006 volatilities and correlations, we find only a small risk of U.S. bank failures focused on thinly capitalized and regionally concentrated smaller banks. For the 2007-2010 financial environment calibration we find substantially elevated solvency and liquidity risks for all banks and the banking system.
Measuring Systemic Risk Adjusted Liquidity Srl
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Author : Andreas Jobst
language : en
Publisher: International Monetary Fund
Release Date : 2012-08-01
Measuring Systemic Risk Adjusted Liquidity Srl written by Andreas Jobst and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-08-01 with Business & Economics categories.
Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.
Measuring Systemic Liquidity Risk And The Cost Of Liquidity Insurance
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Author : Tiago Severo
language : en
Publisher: International Monetary Fund
Release Date : 2012-07-01
Measuring Systemic Liquidity Risk And The Cost Of Liquidity Insurance written by Tiago Severo and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-07-01 with Business & Economics categories.
I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost.
Integrating Solvency And Liquidity Stress Tests The Use Of Markov Regime Switching Models
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Author : Mr.Fei Han
language : en
Publisher: International Monetary Fund
Release Date : 2019-11-15
Integrating Solvency And Liquidity Stress Tests The Use Of Markov Regime Switching Models written by Mr.Fei Han and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-11-15 with Business & Economics categories.
The paper presents a framework to integrate liquidity and solvency stress tests. An empirical study based on European bond trading data finds that asset sales haircuts depend on the total amount of assets sold and general liquidity conditions in the market. To account for variations in market liquidity, the study uses Markov regime-switching models and links haircuts with market volatility and the amount of securities sold by banks. The framework is accompanied by a Matlab program and an Excel-based tool, which allow the calculations to be replicated for any type of traded security and to be used for liquidity and solvency stress testing.
A Simple Macroprudential Liquidity Buffer
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Author : Mr. Daniel C. Hardy
language : en
Publisher: International Monetary Fund
Release Date : 2014-12-22
A Simple Macroprudential Liquidity Buffer written by Mr. Daniel C. Hardy and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-12-22 with Business & Economics categories.
A mechanism is proposed that aims to reduce the risk of a banking sector liquidity crisis—which is a quintessentially systemic event and thus the object of macroprudential policy—and moderate the effects of a crisis should one occur. The instrument would give banks more incentive to build up buffers of systemically liquid assets as a proportion of their total liabilities, yet these buffers would be usable in times of stress. The modalities of the instrument are considered with a view to making it effective, efficient, and robust.
Advances In Financial Risk Management
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Author : Jonathan A. Batten
language : en
Publisher: Springer
Release Date : 2013-11-07
Advances In Financial Risk Management written by Jonathan A. Batten and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-11-07 with Business & Economics categories.
The latest research on measuring, managing and pricing financial risk. Three broad perspectives are considered: financial risk in non-financial corporations; in financial intermediaries such as banks; and finally within the context of a portfolio of securities of different credit quality and marketability.
Macroprudential Liquidity Stress Testing In Fsaps For Systemically Important Financial Systems
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Author : Mr.Andreas A. Jobst
language : en
Publisher: International Monetary Fund
Release Date : 2017-05-01
Macroprudential Liquidity Stress Testing In Fsaps For Systemically Important Financial Systems written by Mr.Andreas A. Jobst and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-05-01 with Business & Economics categories.
Bank liquidity stress testing, which has become de rigueur following the costly lessons of the global financial crisis, remains underdeveloped compared to solvency stress testing. The ability to adequately identify, model and assess the impact of liquidity shocks, which are infrequent but can have a severe impact on affected banks and financial systems, is complicated not only by data limitations but also by interactions among multiple factors. This paper provides a conceptual overview of liquidity stress testing approaches for banks and discusses their implementation by IMF staff in the Financial Sector Assessment Program (FSAP) for countries with systemically important financial sectors over the last six years.
The Risks Of Financial Institutions
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Author : Mark Carey
language : en
Publisher: University of Chicago Press
Release Date : 2007-11-01
The Risks Of Financial Institutions written by Mark Carey and has been published by University of Chicago Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007-11-01 with Business & Economics categories.
Until about twenty years ago, the consensus view on the cause of financial-system distress was fairly simple: a run on one bank could easily turn to a panic involving runs on all banks, destroying some and disrupting the financial system. Since then, however, a series of events—such as emerging-market debt crises, bond-market meltdowns, and the Long-Term Capital Management episode—has forced a rethinking of the risks facing financial institutions and the tools available to measure and manage these risks. The Risks of Financial Institutions examines the various risks affecting financial institutions and explores a variety of methods to help institutions and regulators more accurately measure and forecast risk. The contributors--from academic institutions, regulatory organizations, and banking--bring a wide range of perspectives and experience to the issue. The result is a volume that points a way forward to greater financial stability and better risk management of financial institutions.
The Net Stable Funding Ratio Impact And Issues For Consideration
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Author : Jeanne Gobat
language : en
Publisher: International Monetary Fund
Release Date : 2014-06-12
The Net Stable Funding Ratio Impact And Issues For Consideration written by Jeanne Gobat and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-06-12 with Business & Economics categories.
As part of Basel III reforms, the NSFR is a new prudential liquidity rule aimed at limiting excess maturity transformation risk in the banking sector and promoting funding stability. The revised package has been issued for public consultation with a plan of making the rule binding in 2018. This paper complements earlier quantitative impact studies by discussing the potential impact of introducing the NSFR based on empirical analysis of end-2012 financial data for over 2000 banks covering 128 countries. The calculations show that a sizeable percentage of the banks in most countries would meet the minimum NSFR prudential requirement at end-2012, and, further, that larger banks tend to be more vulnerable to the introduction of the NSFR. Additionally, by comparing the NSFR to other structural funding mismatch indicators, we find that the NSFR is a relatively consistent regulatory measure for capturing banks’ funding risk. Finally, the paper discusses key policy issues for consideration in implementing the NSFR.
Stress Testing At The Imf
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Author : Mr.Tobias Adrian
language : en
Publisher: International Monetary Fund
Release Date : 2020-02-05
Stress Testing At The Imf written by Mr.Tobias Adrian and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020-02-05 with Business & Economics categories.
This paper explains specifics of stress testing at the IMF. After a brief section on the evolution of stress tests at the IMF, the paper presents the key steps of an IMF staff stress test. They are followed by a discussion on how IMF staff uses stress tests results for policy advice. The paper concludes by identifying remaining challenges to make stress tests more useful for the monitoring of financial stability and an overview of IMF staff work program in that direction. Stress tests help assess the resilience of financial systems in IMF member countries and underpin policy advice to preserve or restore financial stability. This assessment and advice are mainly provided through the Financial Sector Assessment Program (FSAP). IMF staff also provide technical assistance in stress testing to many its member countries. An IMF macroprudential stress test is a methodology to assess financial vulnerabilities that can trigger systemic risk and the need of systemwide mitigating measures. The definition of systemic risk as used by the IMF is relevant to understanding the role of its stress tests as tools for financial surveillance and the IMF’s current work program. IMF stress tests primarily apply to depository intermediaries, and, systemically important banks.