Capital and resolution policies: The US interbank market

Capponi, Agostino; Dooley, John M.; Oet, Mikhail V.; Ong, Stephen J.

doi:10.1016/j.jfs.2016.04.010

Cited by 5 publications

(7 citation statements)

References 25 publications

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“…Also, another finding of Capponi et al. (2017), in addition to what was mentioned before, was that the default mitigation effect increases (i.e., the probability of default decreases) as the fraction of assets resolved increases (i.e., the bank size increases). Recently, in quantitative research on the macro‐prudential regulation for the Chinese IMM, Gao and Fan (2020) concluded that bank size is the critical factor for banks’ basic default.…”

Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 64%

“…The empirical simulation study developed by Capponi et al. (2017) to test mitigation policies targeting default resolution revealed that capital buffers reduce both the number of defaults and the resulting losses.…”

Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 99%

“…As this ratio is obtained by dividing the tiers 1 and 2 capital on risk assets, it can be inferred that the higher the capital, the lower the risk of failure. The empirical simulation study developed by Capponi et al (2017) to test mitigation policies targeting default resolution revealed that capital buffers reduce both the number of defaults and the resulting losses.…”

Section: Capital Requirementmentioning

confidence: 99%

See 2 more Smart Citations

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Alaeddini

Madiès

Reaidy

et al. 2022

Journal of Economic Surveys

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As the reallocator of liquidity from banks with excess to banks with a deficit, the interbank money market (IMM) plays a fundamental role in the proper functioning of the banking system and the economy as a whole. The aggregate uncertainty derived from stochasticity of the overall level of the demand for short-term liquidity and the likelihood of domino failures of tightly connected competitors who lend themselves vast amounts of liquidity explains the complexity of decisions in this environment. To identify the most significant factors influencing actors' strategies, we first present the five underlying patterns discovered through a bibliometric analysis of 609 scientific documents in this field: contagion and systemic risk, stability, market structure, relationship and trust, and default and failure. Then, our detailed study findings on 160 recent works indicate elements that affect central banks' strategies in reducing systemic risk and preventing financial contagion, as well as managing the interbank network in a way that makes it more stable and resilient to shocks to conserve market confidence. Furthermore, they address factors that influence banks' strategies to maintain their lending relationships and mitigate default risk. In addition toThis is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

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Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 64%

Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 99%

Section: Capital Requirementmentioning

confidence: 99%

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Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Alaeddini

Madiès

Reaidy

et al. 2022

Journal of Economic Surveys

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“…For example, 130 show that limits on exposures often, but not always, reduce systemic risk and 131 develop a toolkit to test the impact of bail-ins. Several studies focus on the impact on public finances: in 132 it is shown that resolution frameworks can be effective in reducing bail-out, 133 investigates centrality-based bail-outs, while 134 and 135 determine conditions for optimal bail-outs. Closely related are the studies on the controllability of financial networks 136,137 , aimed at reducing systemic risk, e.g.…”

Section: Direct Contagion: Solvency and Liquiditymentioning

confidence: 99%

The physics of financial networks

et al. 2021

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As the total value of the global financial market outgrew the value of the real economy, financial institutions created a global web of interactions that embodies systemic risks. Understanding these networks requires new theoretical approaches and new tools for quantitative analysis. Statistical physics contributed significantly to this challenge by developing new metrics and models for the study of financial network structure, dynamics, and stability and instability. In this Review, we introduce network representations originating from different financial relationships, including direct interactions such as loans, similarities such as co-ownership and higher-order relations such as contracts involving several parties (for example, credit default swaps) or multilayer connections (possibly extending to the real economy). We then review models of financial contagion capturing the diffusion and impact of shocks across each of these systems. We also discuss different notions of 'equilibrium' in economics and statistical physics, and how they lead to maximum entropy ensembles of graphs, providing tools for financial network inference and the identification of early-warning signals of system-wide instabilities.

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“…Therefore, because of the Basel 3 reform, the externalities and the potential for contagion should decline. Capponi et al (2017) evaluated two types of policies designed to control systemic risk, specifically, capital requirements and mitigation policies applied in the case of bank default. The authors found that the conservation and countercyclical capital buffers introduced by Basel 3 reduce the number of defaults and the average loss per default.…”

Section: Literature Reviewmentioning

confidence: 99%

“The Crooked Smile of TCR”: Banks’ Solvency and Restructuring Costs in the European Banking Industry

2021

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In this study, we analyze the probability of bank failure, the expected losses, and the costs of bank restructuring with the application of a lognormal distribution probability function for three categories of European banks, that is, small, medium, and large, over the post-crisis period from 2012 to 2016. Our goal was to determine whether the total capital ratio (TCR) properly reflects banks’ solvency under stress conditions. We identified a phenomenon that one can call the “crooked smile of TCR”. Medium-sized banks with relatively high TCRs performed poorly in stress tests; however, the probability of bank failure increases slightly with the size of the bank, while the TCR decreases. We claim that the focus on capital adequacy measures is not sufficient to achieve the goal of improving banks’ stability and reducing their restructuring costs. Our results are of special importance for medium-sized banks, as these banks are not regularly subjected to publicly available stress tests.

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Capital and resolution policies: The US interbank market

Cited by 5 publications

References 25 publications

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

The physics of financial networks

“The Crooked Smile of TCR”: Banks’ Solvency and Restructuring Costs in the European Banking Industry

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