Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR / Dale Gray.

Format:

Book

Government document

Author/Creator:

Gray, Dale.

Series:

IMF Working Papers; Working Paper ; No. 2013/218

IMF working paper ; WP/13/218

IMF Working Papers

Language:

English

Subjects (All):

Banks and banking--Econometric models.

Banks and banking.

Financial risk--Forecasting.

Financial risk.

Regression analysis.

Macroeconomics--Mathematical models.

Macroeconomics.

Physical Description:

1 online resource (63 p.)

Place of Publication:

Washington, D.C. : International Monetary Fund, 2013.

Language Note:

English

Summary:

The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.

Contents:

Cover; Contents; I. Introduction and Overview of CCA-GVAR Framework; A. Overview; Figures; 1. CCA-GVAR Model Framework; B. Motivation and Relationship to the Literature; II. Contingent Claims Analysis for Banks, Banking Systems, Corporate Sector and Sovereigns; A. Expected Loss Ratios for Banks and Non-Financial Corporations; 2. Relationships between CCA Capital Ratio, EDF, FVCDS and EL for a Typical Bank; Box; 1. Relationships between CCA Capital Ratio, EDF, FVCDS and Expected Loss Ratio for a Typical Bank; 3. Comparison of Ratings, Spreads and EDFs

B. Aggregating Expected Loss Ratios for Banking Systems and the Non-Financial Corporate SectorC. Sovereign CCA Expected Loss Ratio; III. GVAR Model; A. Local Models; B. Weight Matrices; C. Global Solution of the Model; IV. Macro and CCA Data Inputs; V. Shock Scenario Analysis; 4. Italy: Sovereign, Banking System, and Corporate Sector EL, Real GDP Growth, and Credit Growth; Tables; 1. Shock Scenarios; A. Shock Scenario One-Adverse Shock to Sovereigns in Italy and Spain; B. Shock Scenario Two-Adverse Shock to Banking Systems in Italy and Spain

5. Shock Scenario One-Sovereign Versus Banks' Maximum Cumulative Fair-Value Spread ResponsesC. Shock Scenario Three-Positive Shock to Sovereigns in Italy and Spain; 6. Shock Scenario Two-Sovereign Versus Banks' Maximum Cumulative Fair-Value Spread Responses; D. Shock Scenario Four-Positive Shock to Banking Systems in Italy and Spain; 7. Shock Scenario Three-Sovereign Versus Banks' Minimum Cumulative Fair-Value Spread Responses; VI. Further Extensions and Applications; 8. Shock Scenario Four-Sovereign Versus Banks' Minimum Cumulative Fair-Value Spread Responses; 2. Risk Mitigation Policies

VII. ConclusionsAppendices; I. Contingent Claims Analysis; A. Contingent Claims Analysis: Merton Model; B. Moody's Model Overview; 9. Example Bank FVCDS, and Markit CDS (bps); 10. Observed CDS Versus FVCDS Showing Spillover from Sovereign; 11. Spillovers from the Sovereign to the Banks and Banks to Sovereign; II. Weight Matrices; III. Input Data for the CCA-GVAR Model; IV. Scenario Profiles on Impact at T=1; V. Dynamic Scenario Responses; VI. Maximum Cumulative Impulse Responses Along Two-Year Horizon; VII. Significance of Scenario Responses; References

Notes:

Description based upon print version of record.

Includes bibliographical references.

Description based on online resource; title from PDF title page (ebrary, viewed January 07, 2014).

ISBN:

9781484328996

148432899X

9781484387207

1484387201

9781484331262

1484331265