Adding Fuel to the Fire Sales: Banks, Capital Regulation, and Systemic Risk

2018 ◽  
Author(s):  
Samuel Rosen
Keyword(s):  
Systemic Risk ◽  
Capital Regulation ◽  
Fire Sales

scholarly journals Systemic Risk Modeling

2020 ◽  
Vol 20 (54) ◽  
Author(s):  
Raphael Espinoza ◽  
Miguel Segoviano ◽  
Ji Yan
Keyword(s):  
Theoretical Model ◽  
Empirical Model ◽  
Systemic Risk ◽  
Empirical Models ◽  
Equity Returns ◽  
Counterparty Risk ◽  
Risk Modeling ◽  
Cross Sectional ◽  
Fire Sales ◽  
Multivariate Density

We propose a framework to link empirical models of systemic risk to theoretical network/ general equilibrium models used to understand the channels of transmission of systemic risk. The theoretical model allows for systemic risk due to interbank counterparty risk, common asset exposures/fire sales, and a “Minsky" cycle of optimism. The empirical model uses stock market and CDS spreads data to estimate a multivariate density of equity returns and to compute the expected equity return for each bank, conditional on a bad macro-outcome. Theses “cross-sectional" moments are used to re-calibrate the theoretical model and estimate the importance of the Minsky cycle of optimism in driving systemic risk.

scholarly journals Optimization of Fire Sales and Borrowing in Systemic Risk

2019 ◽  
Vol 10 (1) ◽  
pp. 68-88 ◽  
Author(s):  
Maxim Bichuch ◽  
Zachary Feinstein
Keyword(s):  
Systemic Risk ◽  
Fire Sales

scholarly journals Capital regulation and systemic risk in the insurance sector

2018 ◽  
Vol 10 (2) ◽  
pp. 237-263 ◽  
Author(s):  
Thomas Gehrig ◽  
Maria Chiara Iannino
Keyword(s):  
Systemic Risk ◽  
Banking Sector ◽  
Financial System ◽  
Solvency Ii ◽  
Insurance Companies ◽  
Capital Regulation ◽  
Content Type ◽  
Insurance Sector ◽  
Main Challenge ◽  
European Insurance

Purpose This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016. Design/methodology/approach With the help of multivariate regressions, the main drivers of systemic risk are identified. Findings The paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter. Practical implications These findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors. Originality/value This paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II.

Deregulating Wall Street

2018 ◽  
Vol 10 (1) ◽  
pp. 199-217 ◽  
Author(s):  
Matthew Richardson ◽  
Kermit L. Schoenholtz ◽  
Lawrence J. White
Keyword(s):  
United States ◽  
Consumer Protection ◽  
Systemic Risk ◽  
The United States ◽  
Capital Regulation ◽  
Wall Street ◽  
Trade Off ◽  
Consumer Protection Act ◽  
Volcker Rule ◽  
Regulatory Reforms

We argue that implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has contributed significantly to the reduction of systemic risk in the United States. However, Dodd-Frank also introduced burdensome rules that have little to do with systemic risk. This article evaluates the trade-off between capital regulation and regulation of scope in the context of Dodd-Frank, with a particular emphasis on the Volcker Rule. Recent regulatory reforms aimed at rolling back Dodd-Frank are evaluated and discussed.

scholarly journals Illiquidity and All Its Friends

2011 ◽  
Vol 49 (2) ◽  
pp. 287-325 ◽  
Author(s):  
Jean Tirole
Keyword(s):  
Adverse Selection ◽  
Systemic Risk ◽  
Information Acquisition ◽  
Asset Prices ◽  
Balance Sheet ◽  
Market Value ◽  
Capital Adequacy ◽  
Fire Sales ◽  
Liquidity Provision

The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistic, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity, and analyzes how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyzes optimal combinations thereof; it stresses the need for macro-prudential policies. (JEL E44, G01, G21, G28, G32, L51)

What Drives Global Lending Syndication? Effects of Cross-Country Capital Regulation Gaps*

2020 ◽  
Author(s):  
Janet Gao ◽  
Yeejin Jang
Keyword(s):  
Systemic Risk ◽  
Capital Regulation ◽  
Syndicated Loans ◽  
Access To Credit ◽  
Default Rates ◽  
Country Differences ◽  
Cross Country ◽  
Capital Regulations

Abstract We examine how cross-country differences in capital regulations shape the structure of global lending syndicates. Using globally syndicated loans extended by banks from forty-four countries, we find that strictly regulated banks participate more in syndicates originated by lead lenders facing less stringent capital regulations. The resulting lending syndicates extend loans to riskier borrowers, charge higher spreads, forego covenants more frequently, and incur higher default rates. Such syndication activity also facilitates the access to credit by riskier corporations and exposes both participants and lead arrangers to greater systemic risk. Overall, our finding is consistent with the explanation that strictly regulated banks rely on the expertise of loosely regulated banks to procure risky deals outside the border.

The Missed Opportunity and Challenge of Capital Regulation

2016 ◽  
Vol 235 ◽  
pp. R4-R14 ◽  
Author(s):  
Anat R. Admati
Keyword(s):  
Systemic Risk ◽  
Conflicts Of Interest ◽  
Capital Regulation ◽  
Basel Iii ◽  
The Public ◽  
Missed Opportunity

Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, a complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists.

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