Syndication, Interconnectedness, and Systemic Risk

Cai, Jian; Saunders, Anthony; Steffen, Sascha

doi:10.2139/ssrn.1508642

Cited by 46 publications

(20 citation statements)

References 40 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The figure suggests that assigning capital based on a bank's degree supersedes assignment based on size further confirming recent findings reported by [16].…”

Section: Diversification Versus Sizesupporting

confidence: 88%

The Effect of Heterogeneity on Financial Contagion Due to Overlapping Portfolios

Banwo

Caccioli

Harrald

et al. 2016

Advs. Complex Syst.

View full text Add to dashboard Cite

We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system. Relative to the benchmark case of banks with homogeneous degrees and balance-sheet sizes, we find that if banks have a power-law degree distribution the system becomes less robust with respect to the initial failure of a random bank, and that targeted shocks to the most specialised banks (i.e. banks with low degrees) or biggest banks increases the probability of observing a cascade of defaults. In contrast, we find that a power-law degree distribution for assets increases stability with respect to random shocks, but not with respect to targeted shocks. We also study how allocations of capital buffers between banks affects the system's stability, and we find that assigning capital to banks in relation to their level of diversification reduces the probability of observing cascades of defaults relative to size based allocations. Finally, we propose a non-capital based policy that improves the resilience of the system by introducing disassortative mixing between banks and assets.

show abstract

“…The figure suggests that assigning capital based on a bank's degree supersedes assignment based on size further confirming recent findings reported by [16].…”

Section: Diversification Versus Sizesupporting

confidence: 88%

The Effect of Heterogeneity on Financial Contagion Due to Overlapping Portfolios

Banwo

Caccioli

Harrald

et al. 2016

Advs. Complex Syst.

View full text Add to dashboard Cite

show abstract

“…For obtaining a measure of pair-wise distance, we rely on the methodology proposed in Cai, Saunders, and Ste↵en (2014). Their measure is constructed in such a way that a lower distance between two banks implies greater similarity in terms of their lending portfolios.…”

Section: Similarity In Lending Practicementioning

confidence: 99%

Credit risk interconnectedness: What does the market really know?

Abbassi

Brownlees

Hans

et al. 2017

Journal of Financial Stability

View full text Add to dashboard Cite

Reproduction permitted only if source is stated. ISBN Non-technical summary Research questionThe identification and quantification of the systemic component of financial risk require an in-depth understanding of the channels through which shocks can spread and amplify, thereby jeopardizing the stability of a financial system. Our understanding of these links as a whole is, however, hampered by the absent comprehension of the key determinants of financial institutions' interconnections. This has been due to the lack of comprehensive datasets on a from-whom-to-whom basis that are sufficient for analyses of this kind. Therefore, a number of recent studies have suggested network estimation techniques based on market information to overcome this hurdle. In this paper, we examine the relationship between market-based measures of credit risk interconnectedness and actual common exposures of banks through their funding and securities holdings. ContributionWe use CDS prices to measure market-implied interconnectedness between banks employing a correlation-based approach and use a unique proprietary dataset for the period 2006-2013 to evaluate how much market information-based measures capture actual balance sheet linkages and risks associated with banks' funding, security investment, and credit provision behavior. ResultsTwo main results emerge from our analysis. First, we find that our market-based interconnectedness measure strongly reflects the information on banks' exposure to the wholesale funding market and assets associated with securities investments and credit supply. Second, we show that the relation between our market-based interconnectedness measure and the balance sheet positions exhibits asymmetries both over time and cross-sectionally. For instance, we find that interbank lending is a relevant driver of our measure during crisis times as other sources of financing become hard to obtain. And, bank pairs with higher exposures to the troubled security classes show up as more interconnected. On the contrary, commonality in securities investments related to crisis-unaffected security classes does not induce higher dependency. These results show that market information-based measures of interdependence can serve well as a risk monitoring tool in the absence of disaggregated highfrequency bank fundamental data. Abstract We analyze the relation between market-based credit risk interconnectedness among banks during the crisis and the associated balance sheet linkages via funding and securities holdings. For identification, we use a proprietary dataset that has the funding positions of banks at the bank-to-bank level for 2006-13 in conjunction with investments of banks at the security level and the credit register from Germany. We find asymmetries both cross-sectionally and over time: when banks face di culties to raise funding, the interbank lending a↵ects market-based bank interconnectedness. Moreover, banks with investments in securities related to troubled classes have a higher credit risk interconnectedness. ...

show abstract

“…We adopt this interpretation throughout this paper. The firm will file bankruptcy when log V t first falls to some low boundary v. 16 We Cai, Saunders and Steffen [2012], Maffett, Owens and Srinivasan [2013] as more recent studies.…”

Section: Theorymentioning

confidence: 99%

Forecasting Bankruptcy with Incomplete Information

2013

SSRN Journal

View full text Add to dashboard Cite

We propose new specifications that explicitly account for information noise in the input data of bankruptcy hazard models. The specifications are motivated by a theory of modeling credit risk with incomplete information (Duffie and Lando [2001]). Based on over 2 million firm-months of data during 1979-2012, we demonstrate that our proposed specifications significantly improve both insample model fit and out-of-sample forecasting accuracy. The improvements in forecasting accuracy are persistent throughout the 10-year holdout periods. The improvements are also robust to empirical setup, and are more substantial in cases where information quality is a more serious problem. Our findings provide strong empirical support for using our proposed hazard specifications in credit risk research and industry applications. They also reconcile conflicting empirical results in the literature.JEL Codes: C41, G17, G33.

show abstract

Syndication, Interconnectedness, and Systemic Risk

Cited by 46 publications

References 40 publications

The Effect of Heterogeneity on Financial Contagion Due to Overlapping Portfolios

The Effect of Heterogeneity on Financial Contagion Due to Overlapping Portfolios

Credit risk interconnectedness: What does the market really know?

Forecasting Bankruptcy with Incomplete Information

Contact Info

Product

Resources

About