Journal Sciences News
Transactions of the Royal Society of Tropical Medicine and Hygiene
June 2018
Interest rate risk management with debt issues: Evidence from Europe
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Fr
June 2018
Interest rate pass-through in the euro area: Financial fragmentation, balance sheet policies and negative rates
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Roman Horvath, Jana Kotlebova, Maria Siranova We examine interest rate pass-through in the euro area over the 2008–2016 period and investigate the effects of financial market fragmentation, European Central Bank balance sheet policies and negative rates on the nature of pass-through. We use heterogeneous panel cointegration methods and bank interest rates for four different loan categories: small and large firm loans, housing loans and consumer loans. We find that interest rate pass-through is complete only for small firm loans; it is thus incomplete for other loan categories. Our results suggest that while interest rate pass-through has been weakened by higher sovereign credit risk, the European Central Bank's balance sheet policies helped curb these adverse effects on pass-through. Lower financial market fragmentation translated into lower lending rates. In addition, we fail to find evidence that bank interest rates became less responsive to market rates when market rates became negative.
June 2018
Does Islamic banking offer a natural hedge for business cycles? Evidence from a dual banking system
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Ahmet F. Aysan, Huseyin Ozturk We examine the lending patterns in the Turkish Islamic banking over business cycles. We find that, similar to conventional banks, Islamic banks in Turkey exhibit procyclical lending pattern. We also find that Islamic bank lending does not show significant difference from conventional bank lending. The results conflict with some of the findings that indicate Islamic banks as natural stabilizers in the banking systems. We emphasize that regulatory amendments of the last decade that are effective on Islamic banks could induce these banks to lend procyclically. To test the validity of this conjecture, we empirically examine how the state of competition in the Turkish banking system affects bank lending across business cycles by disentangling the effects separately for Islamic and conventional banks. The results suggest that the degree of competition spur bank lending procyclicality at the same magnitude, confirming the convergence between Islamic and conventional banks in their lending patterns. We also discuss several other issues in Islamic banking which may lead to the procyclicality of lending.
June 2018
The effect of the financial crisis on default by Spanish households
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Carlos Aller, Charles Grant We analyse the default behaviour of Spanish households immediately before and after the recent financial crisis. Using several waves of the Survey of Household Finances (a tri-annual survey of financial position of Spanish households), we show that younger, poorer and less well educated households are most likely to default. A key contribution is to explain the change in arrears since the onset of the crisis. Using information on credit applications and acceptances we decompose the change in arrears among all households into a contribution from four parts: (i) changes in characteristics; (ii) changes in applications; (iii) changes in acceptances; (iv) changes in arrears among borrowers. We show the last is the most important contribution.
June 2018
Can bubble theory foresee banking crises?
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Timo Virtanen, Eero T
June 2018
Fixed costs and capital regulation: Impacts on the structure of banking markets and aggregate loan quality
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Enzo Dia, David VanHoose We analyze the interaction among market competition, capital regulation, fixed regulatory compliance costs, and the portfolio and monitoring decisions of banks. We examine how the interplay among the effects of changes in the degree of competition and capital requirements regulation influence optimal bank choices and market outcomes. Furthermore, we evaluate how ratcheting up the Basel regulatory regime is likely to influence both the competitive structure of banking markets and the overall quality of bank loans. Higher capital requirements and increased fixed costs reduce the degree of competition in banking markets. The weight of these changes can fall more heavily on banks that choose to expend resources to monitor their loans to address loan losses.
June 2018
The consequences of liquidity imbalance: When net lenders leave interbank markets
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Aneta Hryckiewicz, Lukasz Kozlowski The level as well as fluency of capital supply on the interbank market is crucial for banking sector liquidity. However, the dominance of individual players on this market leads to liquidity imbalance and, thus, might increase the risk for other banks. We test how different bank exposures in interbank market translates into other bank liquidity risk and credit supply. To this end, we use 207 bank exits from interbank markets between 1997 and 2013 in 52 emerging and developed countries. We find that the withdrawal of a bank with high net exposure on interbank market leads to a statistically significant drop in the liquidity position of the remaining banks. The effect is also economically significant. Finally, we find that a liquidity imbalance adversely affects the bank credit supply. Our findings suggest that the consequences are more severe for banks heavily relying on the local interbank market, for emerging countries and surprisingly in pre-crisis periods.
June 2018
Do institutions trade ahead of false news? Evidence from an emerging market
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Qian Li, Jiamin Wang, Liang Bao Many studies examine the use of false news as a method of stock price manipulation. Empirical research shows, for example, that false news generates persistent abnormal returns and affects trading volume. Studies also show that institutions often know about news before it breaks. However, the role institutions play in false news events is still unclear. To understand that role, we track institutional order flow around the release of false news in the Chinese stock market. We find that institutions seem to have early information about false news releases. Their prerelease order flows predict false news sentiments and market reactions. We further find that the early information may come from the media outlets reporting the false news. We also find evidence that institutions reverse their positions several days after the denial releases rather than when the news breaks. In turn, our evidence shows which trading patterns could bring more potential profits than reversing right on the news breaks. Our results provide unique insights into price movements and institutional reactions on false news, as well as evidence regarding regulating institutions, media platforms, and information manipulation in the stock market.
June 2018
The effect of the political connections of government bank CEOs on bank performance during the financial crisis
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Hung-Kun Chen, Yin-Chi Liao, Chih-Yung Lin, Ju-Fang Yen This study investigates how the political connections of government bank CEOs affected their banks’ performance during the 2007–2009 financial crisis. Examination of global data shows that government banks with politically connected CEOs experienced significantly higher loan default rates and worse operating performance during the crisis than those without politically connected CEOs. However, these politically connected CEOs were less likely than others to be penalized for the poor performance of their banks. Our evidence suggests that politically connected CEOs of government banks can influence a bank’s lending decisions by using their political power and influence to relax lending standards and to reap private benefits that thus raise their banks’ sensitivity to a crisis.
June 2018
The impact of loan loss provisioning on bank capital requirements
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Steffen Kr
June 2018
Credit risk and monetary pass-through—Evidence from Chile
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Michael Pedersen This study presents a novel way to measure changes in commercial banks’ credit risk based on higher-order moments of the interest rate distribution. These measures are employed as control variables to investigate the pass-through of changes in the monetary policy rates (MPR) to retail banks’ lending rates to firms. Applying a multivariate framework it is shown that the introduced credit risk measures are statistically significant and have the expected signs. In this context, the pass-through is symmetric and complete in the short run. No evidence indicates that expectations of MPR changes matter for banks’ lending rates in Chile and robustness analyses indicate that neither do macroeconomic factors. The results suggest that credit risk should be taken into account when evaluating changes in banks’ lending rates and higher-order moments of the interest rate distribution are suitable for measuring changes in this risk.
June 2018
CMBS market efficiency: The crisis and the recovery
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Andreas D. Christopoulos, Robert A. Jarrow This paper presents a reduced form credit risk model to study CMBS pricing and CMBS market efficiency during and after the credit crisis with a comprehensive loan, bond and deal level data set. Using a model determined fair value, an automated trading strategy based on a newly determined risk ratio buys undervalued and sells overvalued CMBS. These strategies result in substantial trading profits between November 2007 and June 2015. Controlling for CMBS sector risk factors, we reject CMBS market efficiency over the entire sample period. When we split the sample into the Crisis and Recovery periods, we observe persistent abnormal returns over both subperiods, which is consistent with an inefficient CMBS market. Because the CMBS market appears to be inefficient, our results suggest that the approach presented in this paper may facilitate the increased financial stability of the CRE sector through the better pricing and risk management of CMBS.
June 2018
Divestitures and the financial conglomerate excess value
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Claudia Curi, Maurizio Murgia We study a sample of the world’s largest financial conglomerates from 15 countries and we track their largest divestitures over the period 2005–2016. We develop a novel market-based metric to analyse the impact of divestitures on financial conglomerate excess value, and our findings point to divestitures having a significant impact on financial conglomerate valuation, contributing to a reduced conglomerate discount. Our results are driven by sales of financial service assets. Selling assets unrelated to the financial sector has no significant effect on conglomerate excess value. These results are robust with the inclusion of multiple control variables and alternative econometric model specifications. Altogether these results cast doubts on the existence of large benefits for financial conglomerates from combining financial service activities. This study has implications both for financial conglomerate boards who might direct their strategies to downsize their firms, and for regulators who address issues related to financial stability.
Available online 22 April 2018
Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions
Publication date: June 2018
Source:Journal of Financial Stability, Volume 36 Author(s): Abhishek Srivastav, Seth Armitage, Jens Hagendorff, Tim King Widespread bank losses during the financial crisis have raised concerns that equity-based compensation for bank CEOs causes excessive risk-taking. Debt-based compensation, so-called inside debt, aligns the interests of CEOs with those of external creditors. We examine whether inside debt induces CEOs to pursue less risky acquisitions. Consistent with this, we show that acquisitions announced by CEOs with high inside debt incentives are associated with a wealth transfer from equity to debt holders. After the completion of a deal, banks where acquiring CEOs have high inside debt incentives display lower market measures of risk and lower loss exposures for taxpayers.
Available online 13 April 2018
Corporate Bond Clawbacks as Contingent Capital for Banks
Publication date: Available online 22 April 2018
Source:Journal of Financial Stability Author(s): Fernando D
Available online 10 April 2018
Bank Value and Geographic Diversification: Regional vs Global
Publication date: Available online 13 April 2018
Source:Journal of Financial Stability Author(s): Canan Yildirim, Georgios Efthyvoulou This paper analyzes the impact of geographic diversification on bank value by employing a data set comprising the largest banks across the world, originating from both developed and emerging countries. The findings suggest that the value impact of international diversification depends on a bank's home country: higher levels of diversification are associated with changes in valuations only for banks originating from emerging countries. In addition, the locus of destination of the diversification efforts matters for the direction of effects: while higher levels of intra-regional diversification lead to value enhancement, higher levels of inter-regional diversification seem to induce a negative (but statistically less robust) effect on the valuation of emerging country banks.
Available online 7 April 2018
Persistent Liquidity Shocks and Interbank Funding
Publication date: Available online 10 April 2018
Source:Journal of Financial Stability Author(s): Marcel Bluhm I develop a theory of multiple maturity segments on the interbank market based on the persistence of liquidity shocks and banks’ liquidity management. The developed framework is embedded in a micro-founded network model, which features interbank funding as an over-the-counter phenomenon and replicates financial system phenomena of network formation, monetary policy transmission, and endogenous money creation. This setup is used to shed light on the interbank market's role for allocation and stability in the financial system. I show that the amount of interbank funding depends on the persistence and magnitude of liquidity shocks, as well as banks’ liquidity requirement. Optimal monetary policy experiments show that while interbank funding allows for considerably higher loan provision to the real economy, its term segment, by increasing the size of the interbank market, reduces that effect. Furthermore, the central bank's interest rate policy can effectively mitigate systemic risk and allow for higher sustainable loan supply of the real economy in regimes with lenient capital requirements. However, it is less effective in stimulating loan provision in more restrictive regulatory regimes.
April 2018
ASSESSING MACROPRUDENTIAL TOOLS IN OECD COUNTRIES WITHIN A COINTEGRATION FRAMEWORK
Publication date: Available online 7 April 2018
Source:Journal of Financial Stability Author(s): Oriol Carreras, E. Philip Davis, Rebecca Piggott Whereas macroprudential policy has come to the fore since the Global Financial Crisis, with many regulators being given responsibility for such policy, the appropriate tools and the effectiveness of such tools remain open questions. We suggest that existing work on effectiveness of macroprudential policy may be vulnerable to bias due to omission of long run cointegration effects. This paper seeks to offer a fresh baseline for work in this area by adopting a cointegration framework which is robust to a variety of alternative techniques and compares favourably with non-cointegrated alternatives. We assess the impact of typical macroprudential policy interventions on house price and household credit growth in up to 19 OECD countries, using three datasets from the IMF and BIS, thus giving both a wider range of control variables and broader coverage of instruments than in most extant work. We find evidence that macroprudential polices remain effective in both short- and long-run at curbing house price and household credit growth even within a cointegration framework, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions, general capital requirements, strict loan-to-value ratios and debt-to-income ratio limits.
April 2018
Editorial Board
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35

April 2018
Network models, stress testing, and other tools for financial stability monitoring and macroprudential policy design and implementation
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Manuel Ramos-Francia
April 2018
Financial networks and stress testing: Challenges and new research avenues for systemic risk analysis and financial stability implications
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Stefano Battiston, Serafin Martinez-Jaramillo Network models, stress testing methods and early warning systems are attracting growing interest both among scholars and practitioners. In this short paper, we illustrate some of the insights they have to offer both in terms of new fundamental scientific understanding of the emergence systemic risk and in terms of concrete applications to the policy areas of financial stability and macro-prudential policy. Finally, we discuss new research pathways to address the challenging questions still open, including multiplex networks, big financial data, and climate-finance.
April 2018
Multiplex interbank networks and systemic importance: An application to European data
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): I
April 2018
Stressed to the core: Counterparty concentrations and systemic losses in CDS markets
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Jill Cetina, Mark Paddrik, Sriram Rajan U.S. supervisory stress tests to date have focused on the resilience of large banks to withstand the direct effects of credit and trading shocks. Using data from Depository Trust & Clearing Corporation (DTCC), we apply the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) supervisory scenarios to evaluate the default of a bank's largest counterparty. We find that indirect effects of this default, through the bank's other counterparties, may be larger than the direct impact on the bank. Further, when taken as a whole, the core banking system has a higher exposure concentration to a single counterparty than does any individual bank holding company. We find that the U.S. banking system's counterparty exposure concentration has risen over the 2013–2015 period. Under the 2015 CCAR this corresponds to a market diversity with just over three counterparties under stress. Our results are the first to evaluate the U.S. credit derivatives market under stress and underscore the importance of a macroprudential perspective on stress testing.
April 2018
How does risk flow in the credit default swap market?
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Marco D’Errico, Stefano Battiston, Tuomas Peltonen, Martin Scheicher We develop a framework to analyse the credit default swap (CDS) market as a network of risk transfers among counterparties. From a theoretical perspective, we introduce the notion of flow-of-risk and provide sufficient conditions for a bow-tie network architecture to endogenously emerge as a result of intermediation. This architecture shows three distinct sets of counterparties: (i) Ultimate Risk Sellers (URS), (ii) Dealers (indirectly connected to each other), (iii) Ultimate Risk Buyers (URB). We show that the probability of widespread distress due to counterparty risk is higher in a bow-tie architecture than in more fragmented network structures. Empirically, we analyse a unique global dataset of bilateral CDS exposures on major sovereign and financial reference entities in 2011–2014. We find the presence of a bow-tie network architecture consistently across both reference entities and time, and that the flow-of-risk originates from a large number of URSs (e.g. hedge funds) and ends up in a few leading URBs, most of which are non-banks (in particular asset managers). Finally, the analysis of the CDS portfolio composition of the URBs shows a high level of concentration: in particular, the top URBs often show large exposures to potentially correlated reference entities.
April 2018
Identifying central bank liquidity super-spreaders in interbank funds networks
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Carlos Le
April 2018
Interconnectedness as a source of uncertainty in systemic risk
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Tarik Roukny, Stefano Battiston, Joseph E. Stiglitz Financial networks have shown to be important in understanding systemic events in credit markets. In this paper, we investigate how the structure of those networks can affect the capacity of regulators to assess the level of systemic risk. We introduce a model to compute the individual and systemic probability of default in a system of banks connected in a generic network of credit contracts and exposed to external shocks with a generic correlation structure. Even in the presence of complete knowledge, we identify conditions on the network for the emergence of multiple equilibria. Multiple equilibria give rise to uncertainty in the determination of the default probability. We show how this uncertainty can affect the estimation of systemic risk in terms of expected losses. We further quantify the effects of cyclicality, leverage, volatility and correlations. Our results are relevant to the current policy discussions on new regulatory framework to deal with systemic events of distress as well as on the desirable level of regulatory data disclosure.
April 2018
The missing links: A global study on uncovering financial network structures from partial data
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Kartik Anand, Iman van Lelyveld,
April 2018
Financial stability in networks of financial institutions and market infrastructures
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Ron J. Berndsen, Carlos Le
April 2018
How did the Greek credit event impact the credit default swap market?
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Grzegorz Ha
April 2018
Information contagion and systemic risk
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Toni Ahnert, Co-Pierre Georg We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint bank default. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank, triggering information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases overall systemic risk. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios, thereby reducing systemic risk.
April 2018
Is trouble brewing for emerging market economies? An empirical analysis of emerging market economies’ bond flows
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Manuel Ramos-Francia, Santiago Garcia-Verdu This paper explores the bond flows dynamics for a set of emerging market economies. It documents that these flows have, in general, positive co-movements, and exhibit risk-reversals, and negative feedback with their associated risk premiums. A number of mechanisms could explain these features. However, we find evidence that lends support to the presence of the risk-taking channel. In particular, we find indications that unexpected changes in US monetary policy affect such dynamics, and that their effects seem to have grown with the size of the international investors’ position in emerging market economies’ bonds. The main results are robust to different measures of the US monetary policy stance, and to the use of macroeconomic and financial variables as controls. Our broader interest is the potential financial stability risks building up, which could materialize as US monetary policy normalizes.
April 2018
Liquidity and default in an exchange economy
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Juan Francisco Mart
April 2018
Identifying excessive credit growth and leverage
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Lucia Alessi, Carsten Detken Unsustainable credit developments lead to the build-up of systemic risks to financial stability. While this is an accepted truth, how to assess whether risks are getting out of hand remains a challenge. To identify excessive credit growth and aggregate leverage we propose an early warning system, which aims at predicting banking crises. In particular, we use a modern classification tree ensemble technique, the “Random Forest”, and include (global) credit as well as real estate variables as predictors.
Available online 20 March 2018
Network linkages to predict bank distress
Publication date: April 2018
Source:Journal of Financial Stability, Volume 35 Author(s): Andreea Constantin, Tuomas A. Peltonen, Peter Sarlin Building on the literature on systemic risk and financial contagion, the paper introduces estimated network linkages into an early-warning model to predict bank distress among European banks. We use multivariate extreme value theory to estimate equity-based tail-dependence networks, whose links proxy for the markets’ view of bank interconnectedness in case of elevated financial stress. The paper finds that early warning models including estimated tail dependencies consistently outperform bank-specific benchmark models without networks. The results are robust to variation in model specification and also hold in relation to simpler benchmarks of contagion. Generally, this paper gives direct support for measures of interconnectedness in early-warning models, and moves toward a unified representation of cyclical and cross-sectional dimensions of systemic risk.
Available online 19 March 2018
Post-crisis regulatory reform in banking: Address insolvency risk, not illiquidity!
Publication date: Available online 20 March 2018
Source:Journal of Financial Stability Author(s): Anjan V. Thakor An extensive review of the evidence related to the 2007–09 crisis reveals that it was an insolvency risk crisis, not a liquidity crisis. The appropriate post-crisis regulatory reform should therefore focus on increasing capital requirements. The Basel III liquidity requirements do not serve a useful economic purpose in dealing with the root causes of the stresses that led to the 2007–09 crisis, and unnecessarily constrain the asset transformation and liquidity creation roles of banks to the detriment of economic growth.
Available online 17 March 2018
Debt, recovery rates and the Greek dilemma
Publication date: Available online 19 March 2018
Source:Journal of Financial Stability Author(s): C.A.E. Goodhart, M.U. Peiris, D.P. Tsomocos Most discussions of the Greek debt overhang have focussed on the implications for Greece. We show that when additional funds released to the debtor (Greece), via debt restructuring, are used efficiently in pursuit of a practicable business plan, then both debtor and creditor can benefit. We examine a dynamic two country model calibrated to Greek and German economies and support two-steady states, one with endogenous default and one without, depending on creditors’ expectations. In the default steady state, debt forgiveness lowers the volatility of both German and Greek consumption whereas demanding higher recovery rates has the opposite effect. In a second order approximation of the model, conditional welfare analysis shows that a policy of immediate leniency followed by harsher terms as the economy grows is beneficial to both creditors and debtors.
Available online 17 March 2018
Financial stability in Europe: Banking and sovereign risk
Publication date: Available online 17 March 2018
Source:Journal of Financial Stability Author(s): Jan Br
Available online 17 March 2018
Challenges for financial stability in Europe
Publication date: Available online 17 March 2018
Source:Journal of Financial Stability Author(s): Kamil Galuscak, Roman Horvath
Available online 17 March 2018
Central bank communication and financial markets: New high-frequency evidence
Publication date: Available online 17 March 2018
Source:Journal of Financial Stability Author(s): Pavel Gertler, Roman Horvath This paper examines the financial market impact of intermeeting communication of the members of the European Central Bank’s Governing Council (GC) using high frequency data between July 2008 and January 2014. Constructing a rich dataset of GC members’ public statements (speeches, conference discussions and media interviews) between monetary policy meetings allows us to investigate a detailed pattern of market responses to the ad-hoc communication of central bankers. Using least squares and quantile regressions, we document the impact of policymakers’ public statements on interest rates and the stock market with very little or no impact on exchange rates. In general, we find little evidence that the timing, sequencing or content of communication matters in immediate response. On the contrary, the results suggest that the market concentrates on the communication of key members of the committee.
Available online 16 March 2018
Measuring systemic vulnerability in European banking systems
Publication date: Available online 17 March 2018
Source:Journal of Financial Stability Author(s): Heather D. Gibson, Stephen G. Hall, George S. Tavlas We construct a measure of systemic vulnerability in selected EU banking systems using an indirect, time-varying measure of the system covariance. Systemic vulnerability indicates the extent to which a banking system as a whole is sensitive to a negative shock. We proceed to examine to what extent the resulting measures of systemic vulnerability provide a convincing narrative of events during the period January 2000 to April 2016. The results provide evidence of: (i) rising vulnerability prior to the outbreak of the international financial crisis in 2007/08 in countries with banks exposed to toxic assets; (ii) vulnerability associated with the euro area sovereign debt crisis from 2009/10; and (iii) continued concerns from 2013 onwards regarding the need for euro area banks to improve their balance sheets and raise new capital at a time of sluggish profitability.
Available online 15 March 2018
Mortgage default, lending conditions and macroprudential policy: Loan-level evidence from UK buy-to-lets
Publication date: Available online 16 March 2018
Source:Journal of Financial Stability Author(s): Robert Kelly, Conor O’Toole Using a unique sample of mortgage loans for the UK buy-to-let market, we estimate a “double trigger” default model which links originating debt service and loan-to-value ratios to ex post default. We investigate whether the relationship between these ratios and default can be informative in the calibration of macro-prudential limits. We find default increasing with originating loan-to-value and falling in the origination debt service ratio. A non-linear cubic spline model is used to identify threshold effects and we identify clear turning points in these relationships. This analysis could provide one input into supervisory considerations when setting limits in a macro prudential context. In addition, we investigate how multiple loan portfolios interact with these thresholds with strong evidence to support tighter macroprudential restrictions on loans for second and subsequent properties.
Available online 16 February 2018
Crisis, contagion and international policy spillovers under foreign ownership of banks
Publication date: Available online 15 March 2018
Source:Journal of Financial Stability Author(s): Micha
February 2018
Bank capital buffers around the world: Cyclical patterns and the effect of market power
Publication date: Available online 16 February 2018
Source:Journal of Financial Stability Author(s): Oscar Carvallo Valencia, Alberto Ortiz Bola
February 2018
Editorial Board
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34

February 2018
Measuring systemic risk across financial market infrastructures
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34 Author(s): Fuchun Li, Hector Perez-Saiz We measure systemic risk in the network of financial market infrastructures (FMIs) as the probability that two or more FMIs have a large credit risk exposure to a common FMI participant. We construct indicators of credit risk exposures in three main Canadian FMIs and use multivariate extreme value methods to estimate this probability. We find large differences in the levels of systemic risk across participants. Conditional on the participant being distressed, we re-estimate these probabilities and find that some participants create large exposures to FMIs, resulting in a larger level of systemic risk than the rest of the participants. Our results suggest that an appropriate oversight of FMIs may benefit from an in-depth system-wide analysis, which may have useful implications for the macroprudential regulation of the financial system.
February 2018
A contemporary survey of islamic banking literature
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34 Author(s): M. Kabir Hassan, Sirajo Aliyu This article reviews empirical studies on Islamic banking and concentrates on their main findings while highlighting future research directions. The earlier literature on Islamic banking built a foundation using normative judgment, descriptive analysis, theoretical development, and appraisal of country experiences. The paper discusses scholars’ concerns that have led to a paradigm shift in the system and highlight practitioners’ disquiet about recent practices. Subsequent research focuses on empirical investigations without extensive analytical and theoretical exploration in the area. Recent studies focus on the financial crisis, solvency, maqasid, disclosure and financial inclusion, and regulations. Even with the spillover effect on the Islamic banks after the crisis, a few pieces of evidence show that the system performs below its conventional counterpart. The paper discusses issues that are relevant to Islamic banking and identifies other avenues for future research.
February 2018
Reputational shocks and the information content of credit ratings
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34 Author(s): Mascia Bedendo, Lara Cathcart, Lina El-Jahel We investigate how shocks to the reputation of credit rating agencies and the subsequent introduction of stricter regulation affect investors’ reaction to rating signals. We focus on three major episodes of reputational distress: the Enron/WorldCom scandals, the subprime crisis and the lawsuit against Standard & Poor's. We document a stronger response of stock investors to downgrades in the aftermath of reputational shocks, which is not, however, accompanied by an improvement in rating quality. Our results are consistent with a scenario where, following evidence of misrating, market investors conclude that ratings are generally overstated and infer greater negative information from downgrades. The effect is stronger for the investment-grade segment, where rating errors have a wider reputational impact. The introduction of new regulatory measures such the SOX Act, the CRA Reform Act and the Dodd-Frank Act, seems instead to improve rating quality and soften investors’ response.
February 2018
To be bailed out or to be left to fail? A dynamic competing risks hazard analysis
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34 Author(s): Nikolaos I. Papanikolaou During the global financial crisis, a large number of banks worldwide either failed or received financial aid thus inflicting substantial losses on the system. We contribute to the early warning literature by constructing a dynamic competing risks hazard model that explores the joint determination of the probability of a distressed bank to face a licence withdrawal or to be bailed out. The underlying patterns of distress are analysed based on a broad range of bank-level and environmental factors. We find that institutions with inadequate capital, illiquid and risky assets, poor management, low levels of earnings and high sensitivity to market conditions have a higher probability to go bankrupt. Bailed out banks, on the other hand, face both capital and liquidity shortages, experience low earnings, and are highly exposed to market products; however, neither the managerial expertise, nor the quality of assets is relevant to the odds of bailout. We further document that large and complex banks are less likely to fail and more likely to be bailed out and also that authorities are more prone to provide support to a distressed bank, which is well-connected with politicians and political parties and less prone to let it go bankrupt. Importantly, our model outperforms the commonly used logit model in terms of forecasting power in all the in- and out-of-sample tests we conduct.
February 2018
Flexible and mandatory banking supervision
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34 Author(s): Alessandro De Chiara, Luca Livio, Jorge Ponce The implementation of tighter regulation and more powerful supervision may impose large social costs due to the strong reliance on supervisory information that requires direct assessment by a supervisor (i.e. Mandatory Supervision). We show that by introducing a Flexible Supervision contract, which is designed to be chosen by those banks that have incentives to capture the supervisor and allows them to bypass Mandatory Supervision, the most efficient regulation under asymmetric information may be implemented. Benevolent regulators should introduce Flexible Supervision regimes for the less risky, more capitalized and transparent banks in addition to the traditional Mandatory Supervision regime.

Syndication, interconnectedness, and systemic risk
Publication date: February 2018
Source:Journal of Financial Stability, Volume 34 Author(s): Jian Cai, Frederik Eidam, Anthony Saunders, Sascha Steffen Syndication increases the overlap of bank loan portfolios and makes them more vulnerable to contagious effects. We develop a novel measure of bank interconnectedness using syndicated corporate loan portfolios, overlap based on industry and region, and different weights such as equal weights, size and relationships. We find that interconnectedness is driven mainly by bank diversification, less by bank size or overall loan market size. Interconnectedness is positively correlated with different bank-level systemic risk measures including SRISK, DIP and CoVaR, and such a positive correlation mainly arises from an elevated effect of interconnectedness on systemic risk during recessions. Overall, our results highlight that institution-level risk reduction through diversification ignores the negative externalities of an interconnected financial system.
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Start: 18 Aug 2017 | End: 01 May 2018

Mobile Offer January Coupon! $10 Off $95 or more! Code: MO15USCJJAN

Code: MO15USCJJAN

Stay 2 nights in 3* Bear of Rodborough Hotel and recieve dinner on 1st night and breakfast both mornings.

Start: 13 Jun 2017 | End: 30 Apr 2018

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