Stress Testing Banks Schuermann, Til
IDEAS Working Paper Series from RePEc,
01/2013
Paper
Odprti dostop
How much capital and liquidity does a bank need - to support its risk taking activities? During the recent (and still ongoing) financial crisis, answers to this question using standard approaches, ...e.g. regulatory capital ratios, were no longer credible, and thus broad-based supervisory stress testing became the new tool. Bank balance sheets are notoriously opaque and are susceptible to asset substitution (easy swapping of high risk for low risk assets), so stress tests, tailored to the situation at hand, can provide clarity by openly disclosing details of the results and approaches taken, allowing trust to be regained. With that trust re-established, the cost-benefit of stress testing disclosures may tip away from bank-specific towards more aggregated information. This paper lays out a framework for the stress testing of banks: why is it useful and why has it become such a popular tool for the regulatory community in the course of the recent financial crisis; how is stress testing done - design and execution; and finally, with stress testing results in hand, how should one handle their disclosure, and should it be different in crisis vs. "normal" times.
Extreme value theory (EVT) holds promise for advancing the assessment and management of extreme financial risks. Recent literature suggests that the application of EVT generally results in more ...precise estimates of extreme quantiles and tail probabilities of financial asset returns. This article assesses EVT from the perspective of financial risk management. The authors believe that the recent optimism regarding EVT may be appropriate but exaggerated, and that much of its potential remains latent. They support their claim by describing various pitfalls associated with the current use of EVT techniques, and illustrate how these can be avoided. In conclusion, the article defines several specific research directions that may further the practical and effective application of EVT to risk management.
The fraud/uncollectible debt problem in the telecommunications industry presents two technical challenges: the detection and the treatment of the account given the detection. In this paper, we focus ...on the first problem of detection using Bayesian network models, and we briefly discuss the application of a normative expert system for the treatment at the end. We apply Bayesian network models to the problem of fraud/uncollectible debt detection for telecommunication services. In addition to being quite successful at predicting rare event outcomes, it is able to handle a mixture of categorical and continuous data. We present a performance comparison using linear and non-linear discriminant analysis, classification and regression trees, and Bayesian network models
It is analyzed how a central government allocates resources to states in the education sector. In particular, two relevant criteria in the decision-making process are used: the equity-efficiency ...trade-off and unequal concern with respect to the characteristics of the states. The authors performed empirical tests of Mexican state-level education expenditure by the Federal Government and examined changes in allocation patterns by comparing 1980 and 1990 cross sections. A two-sector model is considered in a welfare maximizing context, which allows for a theoretical as well as econometric solution for jointly determined educational expenditure and production. ... It was found that the Federal Government trades some efficiency for gains in equity, but in doing so treats states differently, and that results have changed over time. (DIPF/orig.)
Global Business Cycles and Credit Risk Treutler, Björn-Jakob; Schuermann, Til; Pesaran, M. Hashem
The Risks of Financial Institutions,
2019
Book Chapter
In a sharp turnaround from their fortunes in the 1990-91 recession, banks came through the 2001 recession reasonably well. A look at industry and economy-wide developments in the intervening years ...suggests that banks fared better largely because of more effective risk management. In addition, they benefited from a decline in short-term interest rates and the relative mildness of the 2001 downturn.
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