CoMargin

2017 ◽  
Vol 52 (5) ◽  
pp. 2183-2215 ◽  
Author(s):  
Jorge A. Cruz Lopez ◽  
Jeffrey H. Harris ◽  
Christophe Hurlin ◽  
Christophe Pérignon
Keyword(s):  
Systemic Risk ◽  
Market Participant ◽  
Tail Risk ◽  
Central Counterparties ◽  
The Stability

We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that include daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses.

MACRO- AND MICROPRUDENTIAL POLICIES: SWEET AND LOWDOWN IN A CREDIT NETWORK AGENT-BASED MODEL

2019 ◽  
pp. 1-20
Author(s):  
Ermanno Catullo ◽  
Federico Giri ◽  
Mauro Gallegati
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Agent Based Model ◽  
Agent Based ◽  
Macroprudential Policies ◽  
The Stability ◽  
The Individual ◽  
The Cost ◽  
Individual Choices ◽  
Credit Network

The paper presents an agent-based model reproducing a stylized credit network that evolves endogenously through the individual choices of firms and banks. We introduce in this framework a financial stability authority in order to test the effects of different prudential policy measures designed to improve the resilience of the economic system. Simulations show that a combination of micro- and macroprudential policies reduces systemic risk but at the cost of increasing banks’ capital volatility. Moreover, the agent-based methodology allows us to implement an alternative meso regulatory framework that takes into consideration the connections between firms and banks. This policy targets only the more connected banks, increasing their capital requirement in order to reduce the diffusion of local shocks. Our results support the idea that the mesoprudential policy is able to reduce systemic risk without affecting the stability of banks’ capital structure.

Greek and Italian ‘Lessons’ on Bank Restructuring: Is Precautionary Recapitalisation the Way Forward?

2017 ◽  
Vol 19 ◽  
pp. 144-164 ◽  
Author(s):  
Marco BODELLINI
Keyword(s):  
Systemic Risk ◽  
State Aid ◽  
Financial Instability ◽  
External Financing ◽  
The European Union ◽  
Public Intervention ◽  
External Resources ◽  
The Stability ◽  
Bank Restructuring ◽  
The Eu

AbstractEven though the bail-in tool is potentially helpful in resolving banks in crisis, it may still create the same issues that resolution is meant to prevent and/or avoid, namely contagion, financial instability and also systemic risk. Recent cases of bank restructuring have demonstrated that there are situations in which the use of the bail-in tool could end up being dangerous for the stability of the financial system. Obviously in such cases, the write down and/or conversion into equity of the bank’s liabilities must be avoided. At the same time, however, the disapplication of bail-in makes the provision of external resources necessary to rescue effectively the bank in crisis.The EU legislator was aware of these potential issues and for this reason introduced a number of rules allowing, in certain situations, both the disapplication of the bail-in tool and the provision of external financing. Nevertheless, when the provision of external financing comes from the Member States, it has to comply with the rules of the State aid framework set by the Treaty on the Functioning of the European Union (TFEU) and applied by the European Commission. In this article, it is argued that despite the strict rules on State aid, there is still room to manage even difficult banking crisis situations in which the application of the bail-in tool could be counterproductive and therefore public intervention should take place through the so-called precautionary recapitalisation instead. However, in this regard, it is crucially important that the authorities intervene before the bank in trouble ‘crosses the line’ of insolvency, as some recent cases of Greek and Italian banks have demonstrated.

scholarly journals Systemic risk and banking regulation: Some facts on the new regulatory framework

2015 ◽  
Vol 12 (2) ◽  
pp. 52-63 ◽  
Author(s):  
Michele Bonollo ◽  
Irene Crimaldi ◽  
Andrea Flori ◽  
Fabio Pammolli ◽  
Massimo Riccaboni
Keyword(s):  
Systemic Risk ◽  
Banking Regulation ◽  
Regulatory Framework ◽  
Data Availability ◽  
Relevant Role ◽  
Recent Financial Crisis ◽  
The Stability ◽  
Derivatives Markets ◽  
Shed Light

The recent financial crisis highlighted the relevant role of the systemic effects of banks’ defaults on the stability of the whole financial system. In this work we draw an organic picture of the current regulations, moving from the definitions of systemic risk to the issues concerning data availability. We show how a more detailed flow of data on traded deals might shed light on some systemic risk features taken into account only partially in the past. In particular, we analyse how the new regulatory framework allows regulators to describe OTC derivatives markets according to more detailed partitions, thus depicting a more realistic picture of the system. Finally, we suggest to study sub-markets illiquidity conditions to consider possible spill over effects which might lead to a worsening for the entire system

scholarly journals Retrospectives: Regulating Banks versus Managing Liquidity: Jeremy Bentham and Henry Thornton in 1802

2020 ◽  
Vol 34 (4) ◽  
pp. 195-209
Author(s):  
John Berdell ◽  
Thomas Mondschean
Keyword(s):  
Systemic Risk ◽  
Financial Crises ◽  
Financial System ◽  
Jeremy Bentham ◽  
Credit System ◽  
Lender Of Last Resort ◽  
Financial Systems ◽  
Bank Regulations ◽  
Systemic Crisis ◽  
The Stability

At nearly the same moment, Jeremy Bentham and Henry Thornton adopted diametrically opposed approaches to stabilizing the financial system. Henry Thornton eloquently defended the Bank of England’s actions as the lender of last resort and saw its discretionary management of liquidity as the key stabilizer of the credit system. In contrast, Jeremy Bentham advocated the imposition of strict bank regulations and examinations, without which, he predicted, Britain would soon experience a systemic crisis—which he called “universal bankruptcy.” There are strong parallels but also dramatic differences with our recent attempts to reduce systemic risk within financial systems. The Basel III bank regulatory framework effectively intertwines Bentham’s and Thornton’s diametrically opposed approaches to stabilizing banks. Yet Bentham’s and Thornton’s concerns regarding the stability of the wider financial system remain alive today due to financial innovation and the politics of responding to financial crises.

scholarly journals Inflation Propensity of Collatz Orbits: A New Proof-of-Work for Blockchain Applications

2018 ◽  
Author(s):  
Fabian Bocart
Keyword(s):  
Sample Size ◽  
Systemic Risk ◽  
Geometric Distribution ◽  
Electronic Payment ◽  
Payment Systems ◽  
Work System ◽  
New Class ◽  
The Stability

Cryptocurrencies like Bitcoin rely on a proof-of-work system to validate transactions and prevent attacks or double-spending. Reliance on a few standard proofs-of-work such as hashcash, Ethash or Scrypt increases systemic risk of the whole crypto-economy. Diversification of proofs-of-work is a strategy to counter potential threats to the stability of electronic payment systems. To this end, another proof-of-work is introduced: it is based on a new metric associated to the algorithmically undecidable Collatz algorithm: the inflation propensity is defined as the cardinality of new maxima in a developing Collatz orbit. It is numerically verified that the distribution of inflation propensity slowly converges to a geometric distribution of parameter $0.714 \approx \frac{(\pi - 1)}{3}$ as the sample size increases. This pseudo-randomness opens the door to a new class of proofs-of-work based on congruential graphs.

scholarly journals Systemic Risk in the Interbank Market with Overlapping Portfolios

Complexity ◽  
2019 ◽  
Vol 2019 ◽  
pp. 1-12 ◽  
Author(s):  
Shanshan Jiang ◽  
Hong Fan
Keyword(s):  
Interest Rate ◽  
Systemic Risk ◽  
Banking System ◽  
Bipartite Network ◽  
Investment Risk ◽  
Interbank Market ◽  
Operating Rules ◽  
Proposed Model ◽  
The Stability ◽  
The Impact

The increasing frequency and scope of the financial crisis have attracted more attention in the research of the systemic risk of banking system. A new model for the interbank market with overlapping portfolios is proposed to simulate a banking system in this work. The proposed model uses a bipartite network of banks and their assets to analyze the impact of bank investment on the stability of the banking system. In addition, this model introduces investment risk and allows banks to make up for liquidity by selling devaluated assets, which reflects the operating rules of the banking system more realistically. The results show that allowing banks to sell devaluated assets to make up for liquidity can improve the stability of the banking system and the interbank market can also improve the stability of the banking system. For the investment of banks, the investment risk is an uncertain factor that affects the stability of the banking system. The proposed model further analyzes the impact of average investment interest rate, savings interest rate, deposit reserve ratio, and investment asset diversity on the stability of the banking system. The model provides a tool for policy-makers and supervision agencies to prevent the systemic risk of banking system.

The Myth of Diversification: The Destabilizing Impact of Diversification on Financial Institutions

2019 ◽  
Vol 5 (2) ◽  
pp. 179-219
Author(s):  
Kwon-Yong Jin
Keyword(s):  
Risk Management ◽  
Theoretical Model ◽  
Financial Institutions ◽  
Systemic Risk ◽  
Positive Element ◽  
Mitigation Measures ◽  
Financial Conglomerates ◽  
Failure Risk ◽  
The Stability ◽  
The Impact

Abstract This article analyses the impact of asset and activity diversification on the stability of major financial institutions. Diversification is typically viewed as a positive element in risk management. However, examining recent examples concerning diversified multinational financial institutions and a theoretical model of failure risk facing them, this article demonstrates that under certain conditions, diversification can actually increase systemic risk. Financial conglomerates can be ‘too big to manage’, they can become too similar to each other and susceptible to coordinated failure, and, most importantly, catastrophic losses in one part of the firm can overwhelm the whole firm. Based on this finding, this article proposes a number of mitigation measures to limit intra-firm spillover and to make the resolution of troubled financial institutions smoother.

Impact of Crypto-Asset Trade on Financial Stability

2020 ◽  
pp. 210-232
Author(s):  
Nader Trabelsi
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Financial System ◽  
System Stability ◽  
Copula Model ◽  
Copula Approach ◽  
The Stability ◽  
The Empirical Analysis ◽  
Global Financial System

The chapter attempts to test the hypothesis that cryptocurrencies are real independent financial instruments that pose no danger to global financial system stability. For the empirical analysis, the authors use data related to bitcoin and widely traded asset classes. They also utilize the copula approach as well as the CoVaR model. The results show a significant role of crypto-asset market in the stability of global markets. Precisely, they find a dependence between bitcoin and oil prices defined by a normal copula model. The empirical results regarding the systemic risk show that extreme changes in bitcoin prices may have an adverse effect on equity and gold markets. There are positive and significant effects of EUR, JPY, and WTI markets when bitcoin goes down. The authors have also shown that after 2016 the virtual market sudden changes are more likely to raise the whole regular financial system losses, except the energy market. These results are important for policymakers and investors.

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