Systemic stress test model for shared portfolio networks

AbstractWe propose a dynamic model for systemic risk using a bipartite network of banks and assets in which the weight of links and node attributes vary over time. Using market data and bank asset holdings, we are able to estimate a single parameter as an indicator of the stability of the financial system. We apply the model to the European sovereign debt crisis and observe that the results closely match real-world events (e.g., the high risk of Greek sovereign bonds and the distress of Greek banks). Our model could become complementary to existing stress tests, incorporating the contribution of interconnectivity of the banks to systemic risk in time-dependent networks. Additionally, we propose an institutional systemic importance ranking, BankRank, for the financial institutions analyzed in this study to assess the contribution of individual banks to the overall systemic risk.

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Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks

The American Economic Review ◽

10.1257/aer.102.3.59 ◽

2012 ◽

Vol 102 (3) ◽

pp. 59-64 ◽

Cited By ~ 477

Author(s):

Viral Acharya ◽

Robert Engle ◽

Matthew Richardson

Keyword(s):

Financial Crisis ◽

Sovereign Debt ◽

Debt Crisis ◽

Stress Tests ◽

New Approach ◽

The Past ◽

Systemic Risks ◽

Reliable Interpretation ◽

Available Information ◽

Financial Firm

The financial crisis of 2007-2009 has given way to the sovereign debt crisis of 2010-2012, yet many of the banking issues remain the same. We discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis. This measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by US and European regulators. We argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises.

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Systemic Risk in the Interbank Market with Overlapping Portfolios

Complexity ◽

10.1155/2019/5317819 ◽

2019 ◽

Vol 2019 ◽

pp. 1-12 ◽

Cited By ~ 1

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.

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Bank stockholders’ vs bank bondholders’ market discipline during crisis time: an investigation based on supervisory stress test information disclosure

Journal of Financial Economic Policy ◽

10.1108/jfep-11-2019-0215 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Moustapha Daouda Dala

Keyword(s):

Financial Distress ◽

Information Disclosure ◽

Sovereign Debt ◽

Debt Crisis ◽

Stress Test ◽

Abnormal Returns ◽

Market Discipline ◽

Content Type ◽

European Sovereign Debt Crisis ◽

European Banking

Purpose This paper aims to investigate how stockholders and bondholders react to the information disclosed on the financial markets during crisis periods. This paper considers the 2011 European Banking Authority’s stress test as it disclosed detailed information about banks. Design/methodology/approach It was conducted during the European sovereign debt crisis, and this paper uses an event study methodology. This paper analyzes the average cumulative abnormal returns for different subsamples of banks. This paper compares the reactions of stockholders and bondholders to the stress test by considering pre-results announcements (signal generating process) to the publication of the results on the disclosure date, using quantitative data for each individual bank that participated in the stress test (the signal provided to the financial market). Findings This paper finds that stockholders’ reaction is more sensitive to idiosyncratic components of the disclosed information, whereas bondholders are more influenced by systematic risk. A deeper investigation shows that subordinated bondholders tend to behave quite similarly to stockholders. This specific reaction of stockholders during financial distress may make them more likely than bondholders to impose market discipline during troubled periods. Originality/value This paper brings several new insights to the behavior of stock and bond holders during times of financial distress and makes recommendations to regulators that may serve to refine communication to markets to reduce the shock of negative news.

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The Assessment of Systemic Risk in the Kenyan Banking Sector

Complexity ◽

10.1155/2018/8767836 ◽

2018 ◽

Vol 2018 ◽

pp. 1-15 ◽

Cited By ~ 2

Author(s):

Hong Fan ◽

Allan Alvin Lee Lukaya Amalia ◽

Qian Qian Gao

Keyword(s):

Systemic Risk ◽

Banking Sector ◽

Stress Test ◽

Banking System ◽

Financial Data ◽

Annual Reports ◽

Centrality Measures ◽

Network Centrality ◽

Regulatory Body ◽

Stress Tests

The present paper aims to assess the systemic risk of the Kenyan banking system. We propose a theoretical framework to reveal the time evolution of the systemic risk using sequences of financial data and use the framework to assess the systemic risk of the Kenyan banking system that is regarded as the largest in the East and Central African region. Firstly, we estimate the bilateral exposures matrix using aggregate financial data on loans and deposits from annual reports and analyze the interconnectedness in the market using network centrality measures. Next, we extend the Eisenberg–Noe method to a multiperiod setting to the systemic risk of the Kenyan banking system, in which the multiperiod includes the dynamic evolutions of the Kenyan banking system of every bank and the structure of the interbank network system. We apply this framework to assess dynamically the systemic risk of the Kenyan banking system between 2009 and 2015. The main findings are the following. The theoretical network analysis using network centrality measures showed several banks displaying characteristics of systematically important banks (SIBs). The theoretical default analysis showed that a bank suffering a basic default will trigger a contagious default that caused several other banks in the sector to go bankrupt. Further stress test proved that the KCB bank theoretically caused a few contagious defaults due to an unusually high interconnectedness. This methodology can contribute by being part of monitoring system of the Central Bank of Kenya (regulatory body) as well as the implementation of policies (such as bank-internal stress tests) that assist in preventing default contagion.

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Avoiding the Inappropriate: The European Commission and Sanctions under the Stability and Growth Pact

Politics and Governance ◽

10.17645/pag.v9i2.3891 ◽

2021 ◽

Vol 9 (2) ◽

pp. 163-172

Author(s):

Martin Sacher

Keyword(s):

Sovereign Debt ◽

Debt Crisis ◽

Process Tracing ◽

Fiscal Rules ◽

Economic And Monetary Union ◽

Stability And Growth Pact ◽

Sovereign Debt Crisis ◽

Full Extent ◽

Growth Pact ◽

The Stability

Fiscal policy surveillance, including the possibility to impose financial sanctions, has been an important feature of Economic and Monetary Union since its inception. With the reform of fiscal rules in the aftermath of the financial and sovereign debt crisis, coercive provisions have been made stricter and the Commission has formally gained power vis-à-vis the Council. Nevertheless, sanctions under the Stability and Growth Pact for budgetary non-compliance have so far not been imposed. This article asks why the Commission has until now refrained from proposing such sanctions. Using minimalist process-tracing methods, three post-crisis cases in which the imposition of fines was possible, are analysed. Applying an adaptation of normative institutionalism, it is argued that the mechanism entitled “normative-strategic minimum enforcement” provides an explanation of why no sanctions are imposed in the cases studied: Given that the Commission does not perceive punitive action as appropriate, it strategically refrains from applying the enforcement provisions to their full extent.

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Fiscal Governance in the Eurozone: How Effectively Does the Stability and Growth Pact Limit Governmental Debt in the Euro Countries?

Political Science Research and Methods ◽

10.1017/psrm.2014.26 ◽

2014 ◽

Vol 3 (2) ◽

pp. 329-351 ◽

Cited By ~ 21

Author(s):

Sebastian Koehler ◽

Thomas König

Keyword(s):

Sovereign Debt ◽

Debt Crisis ◽

Government Debt ◽

Control Analysis ◽

Stability And Growth Pact ◽

Synthetic Control ◽

Sovereign Debt Crisis ◽

Growth Pact ◽

European Sovereign Debt Crisis ◽

The Stability

The European sovereign debt crisis continues to hold Europe and the world captive. Will the euro and the fiscal mechanism of the eurozone survive? And how effective is the Stability and Growth Pact (SGP)? Do the euro countries generally fail to comply with the rules of fiscal governance, or does the eurozone need a more member-specific fiscal mechanism? This article examines whether and how the SGP influenced the development of government debt making in the euro countries after the introduction of the common currency. While the SGP could not prevent euro countries from exceeding their deficits, this study’s synthetic control analysis reveals that the mechanism has effectively reduced the overall government debt of euro countries since 1999. In particular, donor countries were able to control governmental spending, while many recipient countries—including Greece, Portugal and Italy—have increased government debt ever since, resulting in the European sovereign debt crisis. This suggests that while the SGP effectively constrained overall government debt making, a more sophisticated mechanism is required for safeguarding compliance in large recipient countries.

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Testy warunków skrajnych jako element oceny bezpieczeństwa sektora bankowego

Kwartalnik Kolegium Ekonomiczno-Społecznego Studia i Prace ◽

10.33119/kkessip.2015.1.3.12 ◽

2015 ◽

Vol 1 (3) ◽

pp. 181-194

Author(s):

Marcin Mikołajczyk

Keyword(s):

Stress Testing ◽

Banking Sector ◽

Stress Test ◽

Good Condition ◽

Capital Adequacy ◽

The European Union ◽

Stress Tests ◽

Test Methodology ◽

The Stability

The article presents the latest approach to stress tests applied by the EuropeanBanking Authority and national supervisory authorities, including methodology,scenarios, key assumptions and results of a study. The results of stress testsindicate that the banking sector in Poland is in good condition as banks showedhigher level of capital adequacy than most of the banks from the European Union,reflecting the stability of the banking sector. Stress test methodology used by theEuropean Central Bank is also contained in the paper. The role of stress tests asan instrument for enhancing the stability of financial institutions and the needfor further work on stress testing are also discussed.

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Current account imbalances in the EMU: An assessment of official policy responses

Panoeconomicus ◽

10.2298/pan1502193d ◽

2015 ◽

Vol 62 (2) ◽

pp. 193-216 ◽

Cited By ~ 6

Author(s):

Nina Dodig ◽

Hansjörg Herr

Keyword(s):

Sovereign Debt ◽

Structural Adjustment ◽

Debt Crisis ◽

Adjustment Process ◽

Asymmetric Adjustment ◽

The Great Depression ◽

Growth Pact ◽

Macroeconomic Imbalances ◽

Fiscal Austerity ◽

The Stability

To handle the sovereign debt crisis in general and macroeconomic imbalances in particular the leading EU institutions and the Troika (European Central Bank, European Commission and International Monetary Fund) adopted two broad approaches: The short-term approach is based on enhancing the Stability and Growth Pact and to impose fiscal austerity on crisis countries. The medium- to long-term strategy consists of internal devaluation via reducing wage costs. Both approaches were combined with structural adjustment programs in the spirit of the Washington Consensus. The Troika?s policy implies an asymmetric adjustment process burdening only crisis countries. It led to the shrinking of demand and output in crisis countries comparable to the Great Depression and brought the European Monetary Union to the edge of deflation. These polices must be judged as mislead increasing the risk of Japanese disease with more than one lost decade.

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