The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data

Calmès, Christian; Théoret, Raymond

doi:10.1016/j.jbankfin.2010.03.017

Cited by 76 publications

(40 citation statements)

References 42 publications

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“…Is this also the case with respect to the banks' holdings of financial derivatives? The, admittedly very scarce, literature on this subject suggests that this might be the case, Calmès and Théoret (2010) find that off-balance-sheet activities reduce banks' mean returns, simultaneously increasing the volatility of their operating revenue and therefore increasing banks' systemic risk. Nijskens and Wagner (2011) report that the first use of credit derivatives is associated with an increase in a bank's risk, largely due to an increase in banks' correlations and therefore in their systemic risk.…”

Section: Introductionmentioning

confidence: 99%

Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

2012

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This paper studies the impact of the banks' portfolio holdings of financial derivatives on the banks' individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 91 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks' contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that the banks' holdings of foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. We find that before the subprime crisis credit derivatives decreased systemic risk whereas during the crisis increased it. So, credit derivatives seemed to change their role from shock absorbers to shock issuers. This effect is not observed in the other types of derivatives. María Rodríguez-Moreno Derivatives Holdings and Systemic Risk in the U.S. Banking SectorAbstract This paper studies the impact of the banks' portfolio holdings of financial derivatives on the banks' individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information.Using a sample of 91 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks' contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that the banks' holdings of foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings.We find that before the subprime crisis credit derivatives decreased systemic risk whereas during the crisis increased it. So, credit derivatives seemed to change their role from shock absorbers to shock issuers. This effect is not observed in the other types of derivatives.

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Section: Introductionmentioning

confidence: 99%

Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

2012

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“…As we mention in Calmès and Théoret [9] and Calmès and Théoret [10], NIGA is not that bad after all. In particular, despite their procyclicality, they help banks better manage credit risk.…”

Section: What To Do About Them?mentioning

confidence: 87%

“…But in a second stage, once the structural break-point has been passed, risk-adjusted returns clearly show some benefits for banks to diversify in NIGA -especially if we take rigorously into account the fact that the decision to diversify in non-traditional activities is actually endogenous [9].…”

Section: Introductionmentioning

confidence: 99%

Noninterest Income Generating Activities and the Future of Banking

Calmès

Théoret²

2014

J Stock Forex Trad

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Firms' financial structure has changed drastically over the last decades. Entrepreneurs can get access to direct financing much more easily than they used to. With accelerating financial innovation, this better access to financial markets coincides with financial deepening, and it importantly contributes to disintermediation.To accommodate this structural mutation, banking regulation has adapted. It now allows financial institutions to be much more involved in market-based activities (e.g., securitization, investment banking and trading). Consequently, the banking landscape has completely mutated compared to the traditional model of the seventies. This paper discusses the implications of such a change for the future of banking, with a particular focus on the challenges related to macroprudential policies and tools, as they currently stand, and as they are likely to evolve to fulfil their role -i.e., optimally --in monitoring and supervising bank systemic risk.

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“…En outre, les liens entre activité de crédit et ratios de capital doivent être revisités dans le cadre d'un modèle d'affaires où la titrisation des créances bancaires permet d'augmenter le levier : pour un même niveau de fonds propres, les banques peuvent alors accroître le volume d'activité autant que la demande de crédit le permet (Lubochinsky, 2008). Cette stratégie permet à son tour de rehausser la rentabilité financière (Return on Equity [ROE]; Lacoue-Labarthe, 2008), même si les revenus de la titrisation sont globalement plus volatils que les intérêts perçus sur les activités traditionnelles (Calmès et Théoret, 2010).…”

Section: Revue De La Littératureunclassified

“…Cf. Adrian et Shin (2011) à propos de l'accroissement de la procyclicité du secteur financier par la VaR, et Calmès et Théoret (2010) pour la sousestimation des risques extrêmes et donc du risque systémique qu'induit pour les banques (qui recourent massivement au levier) cette mesure du risque.…”

Section: Actifunclassified

Politique monétaire, choix de portefeuille du secteur bancaire et canal de la prise de risque

Gilles

Huchet

Gauvin

2013

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La responsabilité des banques centrales dans le déclenchement des crises est mise en cause lorsque des taux d’intérêt directeurs durablement bas favorisent des prises de risques excessives, notamment de la part des banques. Ces dernières réalisent également des choix en liaison avec la distorsion induite par l’existence de ratios de capital réglementaires, suivant le canal dit du capital bancaire. Dans ce contexte, un modèle simple centré sur le secteur bancaire permet de montrer comment le pilotage macroéconomique par les taux d’intérêt peut favoriser des arbitrages défavorables à l’activité traditionnelle de crédit et producteurs d’instabilité financière. La possibilité de titriser les créances peut renforcer la solvabilité bancaire, mais produit à son tour de nouveaux risques en liaison avec la création de monnaie par le secteur bancaire fantôme. Des résultats s’en dégagent en termes de politiques monétaire et prudentielle.The question of central banks’ partial liability for emerging crisis is raised when sustainable low interest rates lead to excessive risk exposures, especially if faced by banks. Portfolio choices also depend on the bank capital channel and may induce regulatory capital arbitrages. In this context, a simple model shows that monetary policy can induce both a fall in credit activity and an increase in financial instability. Moreover, securitization can enhance bank solvency, but also systemic risks through the shadow banking system. Conclusions can be drawn in terms of monetary and prudential policies

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The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data

Cited by 76 publications

References 42 publications

Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

Noninterest Income Generating Activities and the Future of Banking

Politique monétaire, choix de portefeuille du secteur bancaire et canal de la prise de risque

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