Market Discipline and EU Corporate Governance Reform in the Banking Sector: Merits, Fallacies, and Cognitive Boundaries

“… this paper argues that recent #eu #regulatory reform to #corporategovernance, as a means to improve #financialstability is a large-scale intellectual fallacy. Absent EU-wide structural reform to control #risktaking in large and complex #financialinstitutions, the stability of the EU #bankingsector will remain compromised. Smaller and less interconnected #banks will both improve bank corporate governance and create a safer and more stable #financialsector.” Lire

Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the European Banking Sector

This paper proposes a #credit #portfolio approach for evaluating #systemicrisk and attributing it across #financialinstitutions. The proposed model can be estimated from high-frequency credit default swap (#cds) data and captures risks from publicly traded #banks, privately held institutions, and coöperative banks. The approach overcomes limitations of earlier studies by accounting for correlated losses between institutions and also offers a modeling extension to […]

Risk Aggregation, Tail Risk, Correlation: Capital Allocation Efficiency and Regulator-Set Standard Models for Bank Capital

“… model uncertainty is a vital component of the current challenges in risk measurement, and therefore the regulator should design risk measures encouraging well-understood prudent decisions over (less understood) risky ones. From this perspective robust regulation should be a desirable goal. To achieve such an objective, simple – but not simpler – rules are needed.” Lire

Macroprudential Regulation: A Risk Management Approach

Proposes a set of novel modeling mechanisms to regulate the size of banks’ macroprudential capital buffers by using market-based estimates of systemic risk combined with a structural framework for credit risk assessment. It applies the model to the European banking sector and finds differences with the capital buffers currently assigned by national regulators, which have […]

Reinventing Operational Risk Regulation for a World of Climate Change, Cyberattacks, and Tech Glitches

Proposes a new framework for regulating operational threats such as damage to physical assets, business disruption, and system failures. It suggests replacing rwa regulation with simple buffers of equity and outlines what a “macro-operational” approach to banking supervision might look like. It also acknowledges the limitations of macro-operational supervision and considers what new types of […]

The Information Value of Past Losses in Operational Risk

“We show that past operational losses are informative of future losses, even after controlling for a wide range of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of operational risk controls, the risk culture, and the risk appetite of the bank.” Lire

The Bayesian approach to analysis of financial operational risk

“The article provides a short overview of methods for constructing mathematical models in the form of Bayesian Networks for modeling operational risks under conditions of uncertainty. Let’s provide the sequence of actions necessary for creating a model in the form of the network, methods for computing a probabilistic output in BN, and give examples of […]

International Banking Regulation and Climate Change

” The global climate crisis and the economy’s green transition are giving rise to new types of risks for banks. This paper analyses some of the key international bank regulatory standards, namely disclosure, risk management, governance and regulatory capital. “ Lire

Climate Risk, ESG Performance, and ESG Sentiment for U.S. Commercial Banks

“Climate risk is positively associated with the environmental, social, and governance (ESG) performance of banks and negatively associated with the stakeholder ESG sentiment towards them. Negative sentiment due to such exposure is associated with worse financial performance and lower stock returns, but stronger ESG performance mitigates these adverse effects.” Lire

The ECB Single Supervisory Mechanism: Effects on Bank Performance and Capital Requirements

“Under the Single Supervisory Mechanism (SSM) introduced in 2014, the European Central Bank directly supervises significant euro area banks, which hold about 82% of total banking assets. We find that this important supervisory change has positive effects on the return on assets and the return on risk-weighted assets of SSM banks without increasing the risk weights used to […]

Estimating German Bank Climate Risk Exposure using the EU Emissions Trading System

” We focus on German banks and measure their exposure to climate risk using CO2 emissions reported for German firms in the European Union Emissions Trading System (EU ETS). … Overall, our approach accounts for 61.25% of the German emissions covered under the EU ETS. We document that only 19 German banks concentrate 95.88% of the total CO2 […]