Measuring contribution to systemic risk

Transcription

1 Measuring contribution to systemic risk a discussion Iman van Lelyveld 1 1 DNB - Supervisory Policy Systemically important financial institutions and systemic risk: methodological issues and regulatory challenges Santiago de Chile 11 January 2013

2 Outline Discussion of two complementary papers Common risk exposures in the Chilean banking system Diego Avanzini and Alejandro Jara Systemic importance of banks in Chile Points to talk about Rodrigo Cifuentes and Rubén Poblete-Cazenave

3 Outline Discussion of two complementary papers Common risk exposures in the Chilean banking system Diego Avanzini and Alejandro Jara Systemic importance of banks in Chile Points to talk about 1. Behaviour Rodrigo Cifuentes and Rubén Poblete-Cazenave

4 Outline Discussion of two complementary papers Common risk exposures in the Chilean banking system Diego Avanzini and Alejandro Jara Systemic importance of banks in Chile Points to talk about 1. Behaviour 2. Prediction Rodrigo Cifuentes and Rubén Poblete-Cazenave

5 Outline Discussion of two complementary papers Common risk exposures in the Chilean banking system Diego Avanzini and Alejandro Jara Systemic importance of banks in Chile Points to talk about 1. Behaviour 2. Prediction 3. Risk contributions Rodrigo Cifuentes and Rubén Poblete-Cazenave

6 Networks: a visualisation of the Dutch interbank market Movie produced by Richard Heuver based on joint work with Ronald Heijmans Iman van Lelyveld Clément Levallois

7 25 words or less Common risk exposures in the Chilean banking system Avanzini and Jara Principal components analysis of profits and interest margins. Produces a measure of (contributions to) systemic risk. Systemic risk is cyclical. Unfortunately, a black box. Systemic importance of banks in Chile Cifuentes and Poblete-Cazenave Counterfactual analysis of bank defaults using a network of interbank exposures. Allows for stress tests.

8 Networks: Cifuentes and Poblete-Cazenave Builds on a long tradition (Cifuentes et al. (2005), van Lelyveld and Liedorp (2006), Upper (2011))

9 Networks: Cifuentes and Poblete-Cazenave Builds on a long tradition (Cifuentes et al. (2005), van Lelyveld and Liedorp (2006), Upper (2011)) Consensus of this literature is that defaults have only limited effects 1. Only a single market analysed 2. Single country 3. Behaviour fixed

10 1. Multiple markets and Countries Theory still in its infancy: Co-Pierre Georg, others Overview of the multi-layer banking system µn f w if µn i,j,k banks f firms, h households µ1 w ik µ1 µi network layers wµ ij link weights µ0 i h w hj µ0 j k Co-Pierre Georg (UC3M & Oxford) Multilayer Financial Networks Barcelona, 04 May / 27

11 1. Multiple markets and Countries Theory still in its infancy: Co-Pierre Georg, others Overview of the multi-layer banking system µn f w if µn i,j,k banks f firms, h households µ1 w ik µ1 µi network layers wµ ij link weights µ0 i h w hj µ0 j k Co-Pierre Georg (UC3M & Oxford) Multilayer Financial Networks Barcelona, 04 May / 27 More data becoming available: Senior Supervisors Group, EBA, ESRB, UK (Langfield et al. (2012)), Mexico (Martínez-Jaramillo et al. (2012)) Also cross border (cf de Haas and van Lelyveld (2010) JFI, de Haas and van Lelyveld (2013) JMCB)

12 2. Behaviour Scenario # 3 aims at incorporating behaviour (i.e., a run)

13 2. Behaviour Scenario # 3 aims at incorporating behaviour (i.e., a run) Conditioning on states of the world Funding conditional on rating (cf. RAMSI, Aikman et al. (2009)) Run off rates (cf. Liquidity Stress Tester, Van den End (2008))

14 2. Behaviour Scenario # 3 aims at incorporating behaviour (i.e., a run) Conditioning on states of the world Funding conditional on rating (cf. RAMSI, Aikman et al. (2009)) Run off rates (cf. Liquidity Stress Tester, Van den End (2008)) Interaction of solvency and liquidity See for instance Krause and Giansante (2012) Assets (A i) Cash (R i = ρ ia i) Excess cash (R excess = ρ excessa i) Minimum cash (R min = ρ mina i) Deposits (D i = γ ia i) Liabilities Loans (C i = β ia i) Interbank borrowing (L i) Interbank loans (B i) Excess equity (E excess= α excessa i) Minimum equity (E min = α mina i) Equity (E i = α ia i) Figure 2: Stylized balance sheet of individual banks the minimum capital requirements α min, common for all banks, and the capital held in addition to the minimum capital excess min excess Ri

15 Crisis seems unpredictable... N, L t c, ccore, cperiphery Crisis t Figure: Left: observed number of vertices (black) and links (gray). Right: observed density of the whole network (black), of the core (red) and of the periphery (brown). The y-scale is logarithmically spaced in both cases. Joint work with Tiziano Squartini and Diego Garlaschelli (Squartini et al. (2013))

16 Triadic Motifs Figure: The 13 possible triadic motifs involving three connected vertices.

17 But given right network model... Pre-crisis Crisis 4 Pre-crisis Crisis zscore zscore zscore zscore t t t Pre-crisis Pre-crisis Pre-crisis t Crisis Crisis Crisis t t t t Pre-crisis Pre-crisis Pre-crisis Crisis Crisis Crisis Figure: Temporal evolution of the z-score for motifs number 2, 5, 10 and 12 under the DCM (left) and the RCM (right).

18 Risk contributions PCA is essentially a black box More common exposures Common shocks

19 Risk contributions PCA is essentially a black box More common exposures Common shocks Systemic risk arises when financial sector losses create externalities for the real economy

20 Risk contributions PCA is essentially a black box More common exposures Common shocks Systemic risk arises when financial sector losses create externalities for the real economy Shapley value (cf. Drehmann and Tarashev (2012), Garratt et al (2012))

21 The Intuition behind Shapley

22 Bibliography I Aikman, D., Alessandri, P. G., Eklund, B., Gai, P., Kapadia, S., Martin, E., Mora, N., Sterne, G., Willison, M., Funding Liquidity Risk in a Quantitative Model of Systemic Stability. Bank of England Working Paper. Cifuentes, R., Ferrucci, G., Shin, H. S., Liquidity Risk and Contagion. Journal of the European Economic Association 3, de Haas, R., van Lelyveld, I., Jan Internal capital markets and lending by multinational bank subsidiaries. Journal of Financial Intermediation 19 (1), URL de Haas, R., van Lelyveld, I., Multinational Banks and the Global Financial Crisis. Weathering the Perfect Storm? Journal of Money, Credit and Banking. Drehmann, M., Tarashev, N., Measuring the Systemic Importance of Interconnected Banks. Working Paper 8089 (March). Krause, A., Giansante, S., Liquidity and Solvency Shocks in a Network Model of Systemic Risk : The Impact of Minimum Capital and Reserve Requirements. Working Paper. Langfield, S., Liu, Z., Ota, T., Mapping the UK interbank system (1). Martínez-Jaramillo, S., Alexandrova-Kabadjova, B., Bravo-Benítez, B., Solórzano-Margain, J. P., An Empirical Study of the Mexican Banking Systems Network and its Implications for Systemic Risk. Banco de Mexico Working Paper Squartini, T., Van Lelyveld, I., Garlaschelli, D., Early-warning signals of topological collapse in interbank networks. Mimeo. Upper, C., Aug Simulation methods to assess the danger of contagion in interbank markets. Journal of Financial Stability 7 (3), URL Van den End, J. W., Liquidity Stress-Tester: A macro model for stress-testing banks liquidity risk. DNB Working Paper (175). van Lelyveld, I., Liedorp, F., Interbank Contagion in the Dutch Banking Sector : A Sensitivity Analysis. International Journal of Central Banking 31,