From stress testing to systemic stress testing: The importance of macroprudential regulation

Vodenska, Irena; Aoyama, Hideaki; Becker, Alexander P.; Fujiwara, Yoshi; Iyetomi, Hiroshi; Lungu, Eliza-Olivia

doi:10.1016/j.jfs.2020.100803

Cited by 12 publications

(5 citation statements)

References 36 publications

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“…The restructuring that the banking industry implemented after the GFC, the regulatory changes promoting market discipline, and the imposition of the high capital and liquidity requirements have all played a role in promoting sound practices and the reduction of excessive risk taking (e.g., Aikman et al, 2019;Cerutti & Schmieder, 2014;Meuleman & Vander Vennet, 2020;Vodenska et al, 2021). So how much do we know about the effectiveness of the remuneration reforms on increasing stability, reducing systemic risk, and lowering risk taking?…”

Section: Have the Remuneration Regulations Strengthened The Banking S...mentioning

confidence: 99%

Bankers' remuneration reforms and new challenges

Zalewska

2022

Corporate Governance

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Research Question/Issue The desire to structure bankers' remuneration in a way that it is risk sensitive and aligned with the long‐term incentives of their institutions was at the center of the post Global Financial Crisis (GFC) regulatory reforms. A decade later, it is unclear whether the reforms achieved what they were intended for and whether they have resulted in some unintended consequences. The issue of unintended consequences is particularly important given that the banking sector needs to embrace technological innovation (Fintech) and the sustainable banking agenda. Research Findings/Insights We are still far from understanding the real costs and benefits of the remuneration reforms because it is difficult to isolate the impact of remuneration restrictions from the impact other regulations and policies had on restricting risk taking, banking structures and bonus culture. However, even if it is questionable whether the remuneration reforms contributed significantly towards improving the stability of the banking sector, they seem unsuitable for promoting Fintech and the sustainable banking agenda. Theoretical/Academic Implications The post‐GFC remuneration reforms may not sufficiently align bankers with stakeholders' interests which is essential to promote adoption of Fintech and sustainable banking agenda. Practitioner/Policy Implications The lack of in‐depth understanding of the effects of the remuneration reforms creates a barrier to understand the impact of the reforms on how banks innovate to adopt Fintech and the sustainable banking agenda. If the existing remuneration regulation limits the openness to innovation and strategic change, then the regulation needs to be revisited and modified.

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Section: Have the Remuneration Regulations Strengthened The Banking S...mentioning

confidence: 99%

Bankers' remuneration reforms and new challenges

Zalewska

2022

Corporate Governance

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“…Researchers have used bipartite network models to study systemic risk propagation in different economic scenarios, including the Japanese banking crisis in the 1990s (Sakamoto and Vodenska [6]), the 2007-2008 U.S. financial system distress (Huang et al [7], Garas et al [8]), and the 2011 Eurozone sovereign debt crisis (Vodenska et al [9]). To identify systemically important banks in the U.S., Battiston et al [10] introduced a novel centrality measure known as DebtRank.…”

Section: Literature Reviewmentioning

confidence: 99%

Socio-Economic Impact of the Covid-19 Pandemic in the U.S.

Barlow

Vodenska

2021

Entropy

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This paper proposes a dynamic cascade model to investigate the systemic risk posed by sector-level industries within the U.S. inter-industry network. We then use this model to study the effect of the disruptions presented by Covid-19 on the U.S. economy. We construct a weighted digraph G = (V,E,W) using the industry-by-industry total requirements table for 2018, provided by the Bureau of Economic Analysis (BEA). We impose an initial shock that disrupts the production capacity of one or more industries, and we calculate the propagation of production shortages with a modified Cobb–Douglas production function. For the Covid-19 case, we model the initial shock based on the loss of labor between March and April 2020 as reported by the Bureau of Labor Statistics (BLS). The industries within the network are assigned a resilience that determines the ability of an industry to absorb input losses, such that if the rate of input loss exceeds the resilience, the industry fails, and its outputs go to zero. We observed a critical resilience, such that, below this critical value, the network experienced a catastrophic cascade resulting in total network collapse. Lastly, we model the economic recovery from June 2020 through March 2021 using BLS data.

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“…The propagation of systemic risk and cascading failures in bank networks can be captured by simulating exogenous and endogenous shocks affecting the entire system's performance, i.e., systemic stress testing. Studies have investigated banking and sovereign debt crises in the U.S., Europe, and Japan [10,23,26,29] using networks and have extracted better understanding of the system dynamics contributing to such crises.…”

Section: Literature Reviewmentioning

confidence: 99%