Credit Crisis Research Articles

Investigation of the fractal footprint in selected EURIBOR panel banks

EURIBOR emerged as a conventional proxy for a risk-free rate for a reasonably long period of time after the creation of the Eurozone. However, the joy was short-lived, as the global credit crisis shook the markets in mid-2008. Significant counterparty risk embedded in a derivative transaction cannot be left out. EURIBOR reflects the credit spread on borrowing. Hence, risk and uncertainty are inextricably linked here. This study investigates five banks out of 19 panel banks that manage EURIBOR in various Eurozone countries. These banks, HSBC, ING, Deutsche Bank, the National Bank of Greece and Barclays, are tested from January 2009 to December 2017 on a daily basis. Bank specific EURIBOR can be predicted in all five cases with different degrees. The trace of a profound herd is observed in the case of the National Bank of Greece, others were relatively mild in nature. The customer base and their risk grade were recognized as the main factor. Their information asymmetry and derived information entropy suggest embedded chaos and uncertainty.

Cooperativism in a credit crisis: lessons from the Argentine worker takeovers

Contemporary visions of cooperativism – as a political project to limit the social consequences of selfregulating credit markets – inform regulatory debates across the political spectrum. Based on historical examples where similar visions of cooperativism and self-regulation have failed, this article explores the mechanisms by which cooperatives can successfully negotiate the failure of credit markets. It is in this context that lessons can be learned from recent worker takeovers that followed the Argentine debt default in 2001. In 2001, Argentine workers took over the factories that employed them and proceeded to successfully negotiate their way through the credit crisis triggered by the Argentine debt default as cooperatives. The workers resumed – and in some cases sustained – production in factories where they were formerly employed. Most of the takeovers were organised (and subsequently legally recognised) as cooperatives and some continue to hold the factories as such. Their success – albeit for limited periods for most – is premised on a fundamental restructuring of the property rights that underpinned pre-default, credit markets. In the case of Argentina, the debt default and the fundamental restructuring this entailed had political consequences in so far as its reliance on self-regulating credit markets had to be renegotiated. This article concludes by showing that self-regulating credit markets engender forms of corporatism and this is – in the absence of a similar political renegotiation – inimical to contemporary visions of cooperativism.

Price Discovery Limits in the Credit Default Swap Market in the Financial Crisis

We derive the credit default swap (CDS) premium a financial institution requires to assume the default risk of fixed income instruments and the maximum premium a CDS buyer is willing to offer. These premiums are functions of the institution’s capital and current risk exposure. In most cases, an institution requires an increasing premium to assume additional risk. However, we show that an under-capitalized institution that already has substantial default risk exposure would engage in risk-shifting and assume more risk at lower CDS premiums. Consistent with this, prior to the 2008 financial crisis credit default swap issuance increased substantially, as did the volume of the underlying mortgage-backed securities, but the data suggests that required CDS premiums remained constant or declined.

EL ENCUENTRO ENTRE OLIVARES Y LOS BANQUEROS CONVERSOS PORTUGUESES (1625-1628)

This paper adresses an aspect of the relationship that was developed between the Royal Treasury of Philip IV and the portuguese bankers who, mostly of jew convert origin, contributed to the financing of dynastic spending during his reign. After an updated historiographic review, so that we try to specify and provide some new information on the arrival of Portuguese convert bankers to the court of Philip IV, coinciding with the credit crisis that took place around 1627 and the enactment of various measures of relaxation of inquisitorial pressure, presumably sponsored by Olivares. Among its consequences, we will see the implications it had for the Castilian economy and international financial relationships.

Joint Prediction of Turning Points in Credit and Business Cycles: Cross-Country Analysis

This paper provides a joint analysis of business and credit cycles with a focus on unobservable factors affecting both cycles, at the cross-country level. Using quarterly data for 19 developed countries and Russia for the period from 1994 to 2018, we build a system of two dynamic probit models, which includes a cross-correlation between the errors of the equations governing the probability of a recession and the probability of credit crisis. The results show that, first, our system allows us to correctly predict 91% of episodes of joint realization of macroeconomic and credit crises and 89% of non-crisis periods in the training sample, and 92% and 95% respectively in the testing sample. Second, switching from two independent regression models to a system of correlated equations significantly (by 16 percent- age points) increases the share of correctly predicted crisis episodes while only slightly (by 7 percentage points) reducing the proportion of correctly predicted non-crisis episodes. Third, our system can predict an approaching crisis earlier, by 1–4 quarters, in comparison with similar single models. Our results complement the literature on forecasting recessions and credit crises. Fourth, it is revealed that the models which have been constructed on developed countries allow one to predict crisis events for Russia. The model we have constructed correctly predicts 100% of joint crisis episodes and 92% of joint non-crisis episodes in the training sample as well as 86% of joint crisis and 90% of joint non-crisis episodes in the testing sample for Russia.

The Impact of Prudential Regulation on Jordanian Banks Liquidity

Regulation of the financial sector is major aspect of consideration by the regulating authority, since financial sector highly influences the performance of the entire economy. The Global Financial Crises underlined the importance of liquidity management,when the credit crisis led to a liquidity crisis. Thus, Jordanian regulatory authorities are trying to achieve and maintain the financial stability by assessment of the banks’ financial condition and through regulations that ensure the stability and prevent failures that can occur under adverse circumstances. The study aim to analyze the impact of a prudential regulation on the Jordanian Banks liquidity. The specific objective in this case is; to determine whether the current prudential regulation enhance the banks liquidity in Jordan, or financial regulation still need additional updates. This study examines the impact of both Microprudential and Macroprudential regulation on Banks Liquidity Ratio, within the context of the Jordanian Banking Sector. To carry out the analysis, managed to collect the annual data for 12 listed during the period 2005-2018 with data arranged in the form of a panel, by using Random Effect Approach Regression, and compared the bank liquidity ratios during period before and after Global Financial Crisis (2008).The results indicate that Macroprudential tools have positive significant impact on Banks Liquidity Ratio, while micro is not. The main conclusions from this research indicate that while liquidity requirements tend to reduce liquidity risk, it appear to be more costly to comply with, reduced bank liquidity, and the banking sector still need additional Regulation updates to enhance banks Liquidity.

The IMF's Financial Catch-22: Global Banker or Lender of Last Resort?

The International Monetary Fund (IMF) has dual institutional roles: a steward of international financial stability and a global banker safeguarding the resources of its sovereign shareholders. But, how does the IMF behave when its balance sheet becomes exposed to higher-than-usual credit risk, creating a financial catch-22? We expect the IMF varies its lending behavior, based on the nature of sovereign credit crises. When there is high contagion risk, the IMF aims to preserve global financial stability as a lender of last resort by extending large loans, notwithstanding its balance sheet strains. The IMF employs policy conditionality to hedge its lending risk, but prioritizes alleviating global market turmoil over program compliance. When market contagion is contained, however, the IMF is more likely to act as a traditional banker, suspending programs for non-compliance. Ironically, given its tendency to forgive non-compliance as a lender of last resort, our theoretical framework suggests that the Fund intensifies its moral hazard problem. We test our theoretical priors by conducting a comparative case study analysis of IMF decision-making over time for two of its largest borrowers: Argentina and Greece. Leveraging volumes of hundred-paged minutes from IMF executive board meeting archives and extensive field research interviews, we illustrate the lending stances of IMF directors evolve in response to changes in global contagion risk. By examining the IMF’s own institutional agency under high financial risk, this study offers new insights for the study of international political economy and international organizations.

From Primitive Barter to Inflationary Dollar: A Warless Economic Weapon of Mass Destruction

Trade among people dates back to prehistoric times; before invention of money, a primitive system of exchange called barter existed. Barter has reemerged as an alternative to the dollar, attributable to high-magnitude financial crises such as the 2006 mortgage debacle and the ensuing global credit crisis (2008). It has been observed that bartering is more frequently used in malignant economic times than in benign economic times. The advantage of barter is that it does not revolve around expanding or contracting the aggregate money supply via credit, therefore people do not end up with massive debt hangover. The evolution of American imperialism and the dollar’s hegemony are closely interlinked. History has witnessed that imperialism was in America’s DNA even before its birth when European settlers arrived in the new world and began killing American Indians to gain land; at that moment, the seeds of an imperial nation were planted and flourished with more blood. President Trump and some branches of the US government feel agitated that there is a situation of diminishing U.S. power (and dollar). Anonymity of Bitcoin (pseudoanonymous) and the upcoming Libra is exactly one of these ire situations; just to protect the dollar’s hegemony, the Trump administration chooses to brutally attack cryptocurrencies as Trump said “one real currency in the USA”. But regulators must be real careful because running headlong into backlash to Libra just to punish Facebook due to its tarnished reputation of past privacy abuse and exploitation of users’ data (i.e. Cambridge Analytica) could adversely affect any potential future innovation, and in the process, harm consumers. Like any life-changing event or invention, Bitcoin and Libra (i.e. cryptocurrencies) will continue to forge ahead unabated regardless of ongoing efforts by doubters, pessimists, doomsayers, skeptics, disbelievers, and short-sighted/blindfolded politicians who are very much eager to put another nail in the coffin. One wonders, when will it end? How many more lives must be perished and the world’s resources must be exploited to serve the U.S. to keep enjoying its “exorbitant privilege” of dollar hegemony?

Does trust matter? The role of trust in collaboration in virtual teams

Virtual cross-border teams emerged after the global credit crisis as a new operational phenomenon of multinational enterprises. This new form eliminates country-based entities and combines local departments. It is of notable benefit to financial efficiency; however, it may have a crucial impact on the structural dimension and nature of relations (ties) of social capital. The damage to ties is characterised by weak trust and heightened operational risk. Measuring trust directly is cumbersome; therefore, this study aims to measure its inversion (internal control). A quantitative research method is used to analyse a) the data (location, nationality, level of seniority, department) of 495 managers of a multinational enterprise to describe their impact on the structural dimension of social capital and the ties between employees, and b) 298 operational control points to find a statistical correlation among their number, the various types of risks and organisational diversity. The authors’ correlation analysis demonstrates that all well-structured high-risk processes are controlled by the organisation. However, the internal controlling system does not seem to cover the trust-based ill-structured processes: human relations and behaviour.

The Two Demands: Why a Demand for Non-Consumable Money is Different From a Demand For Consumable Goods

The paper explicitly discusses the key differences between a demand for consumables and demand for (non-consumable) credit money. For example, in contrast to consumables, money cannot be demanded by only one agent; it is a stock variable; credit requires special arrangements to implement trust now to clear up a debt later; for a finite time period there is zero demand for nonconsumable money (Hahn paradox). These issues are important for developing micro-foundations of monetary macroeconomics, including those for a liquidity trap and credit crunches, not well investigated in existing literature. Contemporary economic theory already has some answers, initiated by works of Martin Shubik. These micro-foundations are vitally important for understanding a credit crisis and credit cycle as interactions between real and financial sectors of economic systems.

State regulation of bankruptcy relations in the national economy

Introduction The deepening crisis in numerous business entities of various sizes is due to macroeconomic and domestic political instability, complicated by the consumer credit crisis, as well as tax and administrative pressure. Therefore, the acute problem of bankruptcy of business entities of different sizes and the need to regulate this issue at the state level. Unprofitable business entities of various sizes cause negative consequences for the domestic economy.
 Aim and tasks. The purpose of the work is to study state regulation of relations in the field of bankruptcy in the economy of Ukraine.
 Results. The factors, internal and external, preceding the bankruptcy of economic entities. Thus, the external preconditions of bankruptcy are international, economic, political, demographic and others. Internal prerequisites include economic, technical, technological, social and others. The characteristic and gradation criteria of business entities in accordance with legislative acts of Ukraine are presented. It was revealed that the proportion of sales of micro-enterprises is unequal to their share in the total number of enterprises, indicating their negligible contribution to the development of the national economy. According to the results of empirical studies, it was found that during the analyzed period the share of unprofitable enterprises of different sizes is at least a 25%. Such a large number entails not only low financial stability, insolvency and efficiency of business entities themselves, but also inhibits the process of economic growth of the whole country. The application of the method of multivariate discriminant analysis will allow us to draw a conclusion about the financial condition with assigning it a class in accordance with the values of the integral indicator and taking into account the probability of non-fulfillment of obligations, that is, to identify the presence of an unprofitable enterprise and the likelihood of bankruptcy.
 Conclusions. So, an analysis of the criteria for graduation of business entities made it possible to establish the difference between the administrative and accounting interpretation of the criteria for the attitude of enterprises to various sizes. The dynamics of structural statistics indicators of domestic business entities were monitored, suggesting that individual entrepreneurs make an insignificant contribution to the development of the national economy. Since a quarter of business entities still remain unprofitable, it is necessary to take preventive measures to prevent the loss of solvency by enterprises, one of which is to identify the existence of an unprofitable enterprise and the likelihood of bankruptcy.

Small shop survival – The financial response to a global financial crisis

Small and medium-sized enterprises (SMEs), many of which are small retail shops, remain the largest employer in the western world. Yet the financing of their fixed and working capital investments remains under-researched. This study focuses on this topic by examining Eurozone wholesale and retail SMEs enterprises at the peak of the 2008 financial credit crisis. In order to do this, an innovative analysis of existing theories in retail finance and policy research using generalised multilevel structural equation modelling is performed to establish how retail SMEs sourced capital during this period. This analysis, a first of its kind in wholesale and retail SME research, finds that pecking order theory, the independence of investment and financing, as well as the contest for financial resources between fixed and working capital do not hold for wholesale and retail SMEs. Moreover, it is found that government grants and subsidised loans were not used by SMEs in this sector of the Eurozone as primary sources of finance during the aftermath of the 2008 global credit crisis. Crucially, it is posited that a business environment characterized by stronger legal rights and deeper credit information did not improve SMEs’ access to external finance. The authors recommend that further research should be pursued in this field in order to improve current understanding of the resilience of retail SMEs for future global financial crises.

Conditional dependence in post-crisis markets: dispersion and correlation skew trades

Strengthening of asset return dependence during the 2007–2008 credit crisis highlighted its dynamic and conditional nature. Option prices reflect the market assessment of how dependence between assets varies with price movements and time horizons, yielding the implied correlation surface. Return dependence increases in falling markets and makes correlation a priced risk factor, causing a spread between implied and actual correlation. Order flow pressure from hedging structured products also contributes to the spread. Prior to the crisis, the gap between implied and actual correlation motivated selling dependence between equities—dispersion trading. However, spiking dependence among stock returns during the crisis decimated correlation sellers. Selling at-the-money conditional correlation between NASDAQ-100 components regains an attractive risk-return profile during periods of strong bull market. This may be due to an increasing correlation risk premium caused by greater investor belief heterogeneity. The implied correlation surface enables the construction of strategies with exposures to dependence conditional on various market dynamics. In particular, a long correlation skew trade delivers attractive returns, while hedging the effects of volatility and mitigating exposure to the level of correlation. This suggests segmentation of the options market along the moneyness dimension. As a risk factor, a correlation skew trade is nearly orthogonal to the five Fama–French risk factors, as well as the momentum factor.

Managing the Downside of Active and Passive Strategies—Part 1: Convexity and Fragilities

In this article, the author addresses the question of how to manage a large (or small) portfolio in low interest rate conditions while equity markets bear significant drawdown risk. More generally, he explains how to build an antifragile portfolio that can weather the most extreme market scenarios without affecting long-term performance. He also discusses how active strategies systematically create or increase existing market instabilities. By analyzing in depth market behavior during past speculative bubbles and credit crises, the author aims to address these issues. In this first part of a two-part series, the author describes as faithfully as possible the major mechanisms at stake, avoiding the trap of mapping the complexity of financial markets into a single mathematical model, which would necessarily be wrong at some point. Starting from Minsky’s financial instability hypothesis, he tries to disentangle the complex relation between dynamics and randomness, including the presence of fat tails. TOPICS:Mutual fund performance, passive strategies, portfolio theory Key Findings • Financial crises are, in their vast majority, the result of internal instabilities. Exogenous causes are minor and at best serve as triggers. They can mainly be divided into two kinds: speculative bubbles and credit bubbles. • Artificially antifragile (convex) strategies, such as trend following, portfolio insurance, momentum, and so on, are good for the marginal investor but create instabilities when used by the bulk of the buy-side industry. • It is illusory to predict the date of a bubble burst and to catch either the top of the bubble or the market trough that follows it. However, even a small insight into the probability of a crisis can be highly beneficial for long-term performance and drawdown control.

The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling

This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some well-known risky valuation models in the markets can be viewed as special cases of this framework. We introduce the concept of comvariance (or comrelation) into the area of credit risk modeling to capture the default relationship among three or more parties. Accounting for default correlations and comrelations becomes important, especially during the credit crisis. Moreover, we find that collateralization works well for financial instruments subject to bilateral credit risk, but fails for ones subject to multilateral credit risk.

Asymmetric dependence in international currency markets

We find new channels for the transmission of shocks in international currencies, by developing a model in which shock propagations evolve from domestic stock markets, liquidity, credit risk and growth channels. We employ symmetric and asymmetric copulas to quantify joint downside risks and document that asset classes tend to experience concurrent extreme shocks. The time-varying spillover intensities cause a significant increase in cross-asset linkages during periods of high volatility, which is over and above any expected economic fundamentals, providing strong evidence of asymmetric investor induced contagion. The critical role of the credit crisis is amplified, as the beginning of an important reassessment of emerging currencies which lead to changes in the dependence structure, a revaluation and recalibration of their risk characteristics. By modelling tail risks, we also find patterns consistent with the domino effect.

Ignoring personal moral compass: factors shaping bankers’ decisions

PurposeThe purpose of this paper is to increase our understanding of the challenges the banking industry continues to face from an ethics standpoint more than a decade after the credit crisis. Since 2007, there has been renewed interest in the way professional ethics is integrated within the banking culture. With a public that has become more sensitive towards ethical and corporate governance failures, the banking industry has been at the receiving end of strong ethical criticism. Yet, in spite of the regulatory response to the crisis, ethics is still a major issue in an industry where the corporate governance systems implemented by companies have failed to control employee behaviours, even in institutions branding themselves as ethical banks.Design/methodology/approachThis paper studies factors inside and around institutions in the banking industry that impact the moral anomie in bankers’ professional environment. This paper applies an ordinary least square regression analysis, preceded by exploratory and confirmatory factor analysis, to test the hypothesised relations between anomie and the factors proposed.FindingsThe results show that long-term orientation, strategic aggressiveness and competitive intensity do have an influence on anomie. These results are compared to previous research applied in non-financial industries and prompt the strengthening of corporate governance systems in financial companies with aggressive corporate cultures.Originality/valueThe paper therefore introduces the factors that lead bankers to ignore the morals they gained from society and provide a better understanding of the reasons behind the deviant behaviours that caused the crisis a decade ago. It represents a crucial first step for future policymaking that fills an important gap in the financial regulation literature. Indeed, the lack of understanding of the factors dictating behaviours in the industry meant that regulatory changes in the past decade have mostly focussed on technical aspects of the problem (e.g. new capital structure requirements) and produced few answers to address the ethical challenges.

Credit Pit Detection in Subordinate Securities: A French Perspective

The purpose of this research is to prepare a predictive model for identifying credit crisis using an artificial neural network. The paper also aims to find out the driver and driven relationship between various financial instruments like CDS, FRA, IRS, and the Volatility index (VCAC) and government securities for France. The model, thus, is directed towards finding a threshold for credit pit events and linking various events corresponding to that dates where the threshold is breached to validate the accuracy and usefulness of the model. From the research, it is found that for France, the CDS-FRA-VCAC model derives the threshold for VCAC to indicate the probability of credit crisis or financial market crash. It is also found that sovereign bonds have a huge impact on France economy including various derivatives. This is probably why the Eurozone debt crisis impacted France much more than the 2008 financial crash.

Explaining CDS prices with Merton’s model before and after the Lehman default

We examine whether CDS prices around the Credit Crisis can be explained with Merton’s model. First we invert the model with market prices to reveal skewed volatility smiles over the whole 2005–2012 period. Then we calibrate the model to pre-Crisis data in two novel ways that allow for skewness, one based on equity-index options (MEIV) and the other on the sensitivity of CDS prices to equity volatility (MSKEW). In out-of-sample forecasts both calibrations match the in-Crisis peak of prices, but the second is better at capturing the systematic component of prices thereafter. Average CDS prices remain at twice their pre-Crisis level long after that event; the MSKEW calibration demonstrates that this is due to extra idiosyncratic risks, which are important for some firms but have negligible impact on others.

Unfair 'Fair Value' in Illiquid Markets: Excessive Spillover Effects in Times of Crisis

The paper investigates the effects of mark-to-market write-downs by financial institutions on market prices and volumes, as well as the prominent role that illiquidity plays in exacerbating the direct and spillover effects of exit valuation on equity and credit default swaps markets. Using a hand-collected database of write-down announcements made during and after the credit crisis (from January 1, 2007 through June 30, 2010), we find that firms that write down assets in accordance with mark-to-market rules experience significant abnormal negative stock returns and spikes in the premiums of credit default swaps written on their obligations. Equally noteworthy, we find that similar firms without write-downs exhibited sympathetic and significant negative abnormal returns and positive premiums at the same time as the write-down firms. We find that the effects of information spillovers associated with write-downs during the financial crisis go beyond normal information transfer expected from asset fundamentals and may have contributed to adverse consequences of the crisis.