BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org).
Tools that attribute system-wide risk to individual institutions are key elements of an operational macroprudential approach to financial stability. We propose to measure institutions' systemic importance via an attribution methodology that is based on a game theoretic construct: the Shapley value. This methodology has a number of appealing features. First, owing to weak underlying assumptions, it can be used in conjunction with all popular risk measures. Second, it provides an exact allocation of risk that satisfies a concrete fairness criterion. Third, it accommodates easily uncertainty about model parameters and, more generally, uncertainty about the validity of the risk model.We apply this methodology to a number of stylised banking systems and two risk metrics, value-at-risk and expected shortfall. This allows us to study the interaction of different drivers of systemic importance: size, risk profile and common-risk-factor exposures of individual institutions. We also prove a theorem that, under mild conditions, the systemic importance of an institution increases more than proportionately with its size. An implication of this finding is that a policy intervention calibrated to be proportional to the size of an institution would understate the systemic importance of large firms relative to that of small ones. In addition, we demonstrate how the Shapley value attribution methodology can be used for the calibration of macroprudential capital requirements that have an objective defined at the level of the overall system but are applied at the level of individual institutions. Finally, we argue that different policy tools call for using different applications of the general Shapley value methodology.
BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS.
This paper presents an overview of the impact of the introduction of the euro on Europe's financial structure over the first four years since the start of EMU. It analyzes changes in money markets, bond markets, equity markets and foreign exchange markets. Euro's role in originating or catalyzing trends has been uneven across the spectrum of financial markets. From the supply side, banks and investors in fixed income markets have become more focused on the characteristics of individual borrowers rather than the nationality of the issuer and have built up expertise to evaluate credit risk. European equity markets have also been affected by the enhanced ability of investors to build strategies with a pan‐European perspective as prices increasingly reflected risk factors specific to industrial sectors rather than individual countries. On the borrower side, EMU has increased the attractiveness of market‐based financing methods by allowing debt issuers to tap institutional portfolios across the euro area. Lower barriers to cross‐border financial transactions have also increased the contestability of the market for financial services, be it at the wholesale or the retail level. The introduction of the euro has also highlighted the shortcomings of existing institutional structures and areas where excessive focus on narrowly defined interests may stand in the way of realizing the full potential benefits from the new environment. Diverging legal and institutional infrastructures and market practices can impede further financial market development and deepening. Hence, the euro has put a premium on cooperation between national authorities and institution as a means of achieving a more harmonized financial environment. The impact of EMU on depth in foreign exchange markets has been less clear‐cut, as volatility, spreads, trading volumes and liquidity appear not to have changed in a substantial way. Overall, it seems that the new currency has made some progress towards the goal of becoming a currency of international stature that would rival that of the US dollar. However, a number of the necessary next steps towards achieving this goal are also among the trickiest to implement.
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