1,720,976 research outputs found
Leverage Ratio, Risk-Based Capital Requirements, and Risk-taking in the United Kingdom
Full text linkWe assess the impact of the leverage ratio capital requirements on the risk-taking behaviour of banks both theoretically and empirically. We use a difference-in-differences (DiD) setup to compare the behaviour of UK banks subject to the leverage ratio requirements (LR banks) to otherwise similar banks (non-LR banks). Conceptually, introducing binding leverage ratio requirements into a regulatory framework with risk-based capital requirements induces banks to re-optimise, shifting from safer to riskier assets (higher asset risk). Yet, this shift would not be one-for-one due to risk-weight differences, meaning the shift would be associated with a lower level of leverage (lower insolvency-risk). The interaction of these two changes determines the impact on the aggregate level of risk. Empirically, we show that LR banks did not increase asset risk, and slightly reduced leverage levels, compared to the control group after the introduction of leverage ratio in the UK. As expected, these two changes lead to a lower aggregate level of risk. Our results show that credit default swap spreads on the 5-year subordinated debt of LR banks fell relative to non-LR banks post leverage ratio introduction
Liquidity Costs and Tiering in Large-Value Payment Systems
No full textThis paper develops and simulates a model of the emergence of networks in an interbank, RTGS payment system. A number of banks, faced with random streams of payment orders, choose whether to link directly to the payment system, or to use a correspondent bank. Settling payments directly on the system imposes liquidity costs which depend on the maximum liquidity overdraft incurred during the day. On the other hand, using a correspondent entails paying a flat fee, charged by the correspondent to recoup liquidity costs and to extract a profit. We specify a protocol whereby one bank in each period can revisit its choice whether to link directly to the system, or to become clients of other banks, thus generating a dynamic client-correspondent network. We simulate this protocol, observing the emergence of different network structures. The liquidity pricing regime chosen by a central bank is found to affect the tiering process and the network structures it produces. A calibration exercise on data from the UK CHAPS system suggests that the model is able to generate realistic predictions, i.e., a network topology similar to that observed in reality, driven solely by the underlying pattern of payments and the structure of liquidity costs
Carbon Emissions Announcements and Market Returns
Full text linkThe paper investigates the impact of carbon emissions on stock price returns of European listed firms. This relationship is assessed across all three emissions scopes, as well as using expecta-tions to detect if future emissions impact contemporary returns. Our findings show that firms with higher expected future emissions deliver contemporary lower returns, after controlling for market capitalization, profit, and other known return predictors. This result is statistically sig-nificant in the post Paris Agreement period with a two to three years expectation on scope 2 emissions. However, there is marginal to no significant negative relationship between current emissions and current returns. Overall, the results suggest that more Environment-minded in-vestors look further ahead and would expect lower returns from a polluting firm compared to a firm with no carbon emissions after the Paris Agreement
Multi-Agent Financial Network (MAFN) Model of US Collateralized Debt Obligations (CDO)
No full textA database driven multi-agent model has been developed with automated access to US bank level FDIC Call Reports that yield data on balance sheet and off balance sheet activity, respectively, in Residential Mortgage Backed Securities (RMBS) and Credit Default Swaps (CDS). The simultaneous accumulation of RMBS assets on US banks' balance sheets and also large counterparty exposures from CDS positions characterized the $2 trillion Collateralized Debt Obligation (CDO) market. The latter imploded at the end of 2007 with large scale systemic risk consequences. Based on US FDIC bank data, that could have been available to the regulator at the time, the authors investigate how a CDS negative carry trade combined with incentives provided by Basel II and its precursor in the US, the Joint Agencies Rule 66 Federal Regulation No. 56914, which became effective on January 1, 2002, on synthetic securitization and Credit Risk Transfer (CRT), led to the unsustainable trends and systemic risk. The resultant market structure with heavy concentration in CDS activity involving 5 US banks can be shown to present too interconnected to fail systemic risk outcomes. The simulation package can generate the financial network of obligations of the US banks in the CDS market. The authors aim to show how such a Multi-Agent Financial Network (MAFN) model is well suited to monitor bank activity and to stress test policy for perverse incentives on an ongoing basis
Quantitative easing and the functioning of the gilt repo market
No full textWe assess the impact of quantitative easing (QE) on the provisioning of liquidity and the pricing in the UK gilt repo market. We compare the behaviour of banks that received reserves injections via QE operations to other similar banks in terms of the amounts lent and pricing. We also investigate whether leverage ratio capital requirements affected the amounts of liquidity supplied by broker-dealers and the spreads they charged. We find that QE interventions can improve liquidity provision, and that their size determines how this is attained. QE can also reduce the cost of borrowing in the repo market unless it was associated with spikes in demand for liquidity. Our findings further indicate that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged. However, the larger capital charge repo transactions attract under the leverage ratio requirement is reflected in their spreads
Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK
No full textWe investigate the impact of the asset purchase program (APP) introduced by the Bank of England (BOE) in 2009 on the composition of assets of UK banks, and the implications for bank lending to the real economy, using a unique database on the program. Knowing the identity of the banks that receive reserves injections through the BOE’s APP (QE banks) provides us with an ideal empirical design for a difference-in-differences exercise.
The Monetary Policy Committee (MPC) didn’t expect there to be strong transmission of the APP’s impact through the bank lending channel. In line with that, we find no evidence that suggests that QE directly boosted bank lending to the real economy, even when controlling fully for demand-side effects. The overall reduction of retail lending is more pronounced for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk-weighted investments, such as government securities, as suggested by the increased sensitivity of their equity returns to peripheral EU bond returns. Overall, our findings suggest that, if banks are not adequately capitalised, risk-based capital constraints can limit the transmission of expansionary unconventional monetary policies via the bank lending channel, and provide incentives for carry trade activities
Leverage ratio and risk-taking: theory and practice
No full textWe assess the impact of the leverage ratio capital requirements on the risk‐taking behaviour of banks both theoretically and empirically. We use a difference‐in‐differences (DiD) setup to compare the behaviour of UK banks subject to the leverage ratio requirements (LR banks) to otherwise similar banks (non‐LR banks). Conceptually, introducing binding leverage ratio requirements into a regulatory framework with risk-based capital requirements induces banks to reoptimise, shifting from safer to riskier assets (higher asset risk). Yet, this shift would not be one‐for‐one due to risk‐weight differences, meaning the shift would be associated with a lower level of leverage (lower insolvency risk). The interaction of these two changes determines the impact on the aggregate level of risk. Empirically, we show that LR banks did not increase asset risk, and slightly reduced leverage levels, compared to the control group after the introduction of leverage ratio in the UK. As expected, these two changes lead to a lower aggregate level of risk. Our results show that credit default swap spreads on the five‐year subordinated debt of LR banks dropped relative to non‐LR banks post leverage ratio introduction
Marginal contribution, reciprocity and equity in segregated groups: Bounded rationality and self-organization in social networks
No full textWe study the formation of social networks that are based on local interaction and simple rule following. Agents evaluate the profitability of link formation on the basis of the Myerson-Shapley principle that payoffs come from the marginal contribution they make to coalitions. The NP-hard problem associated with the Myerson-Shapley value is replaced by a boundedly rational 'spatially' myopic process. Agents consider payoffs from direct links with their neighbours (level 1), which can include indirect payoffs from neighbours' neighbours (level 2) and up to M-levels that are far from global. Agents dynamically break away from the neighbour to whom they make the least marginal contribution. Computational experiments show that when this self-interested process of link formation operates at level 2 neighbourhoods, agents self-organize into stable and efficient network structures that manifest reciprocity, equity and segregation, reminiscent of hunter gather groups. A large literature alleges that this is incompatible with self-interested behaviour and market oriented marginality principle in the allocation of value. We conclude that it is not this valuation principle that needs to be altered to obtain segregated social networks as opposed to global components, but whether it operates at level 1 or 2 of social neighbourhoods. Remarkably, all M>2 neighbourhood calculations for payoffs leave the efficient network structures identical to the case when M=2. © 2007
Going Beyond Counting First Authors in Author Co-citation Analysis
Full text linkThe present study examines one of the fundamental aspects of author co-citation analysis (ACA) - the way co-citation
counts are defined. Co-citation counting provides the data on which all subsequent statistical analyses and mappings
are based, and we compare ACA results based on two different types of co-citation counting - the traditional type that
only counts the first one among a cited work's authors on the one hand and a non-traditional type that takes into
account the first 5 authors of a cited work on the other hand. Results indicate that the picture produced through this non-traditional author co-citation counting contains more coherent author groups and is therefore considerably clearer. However, this picture represents fewer specialties in the research field being studied than that produced through the traditional first-author co-citation counting when the same number of top-ranked authors is selected and analyzed. Reasons for these effects are discussed
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