Important Financial Institutions Research Articles

Equity Finance: Matching Liability to Power

Abstract In this article we question the wisdom of limited liability for all equity holders in the case of banks and systemically important financial institutions (SIFIs), though our proposals could be extended to all public limited companies. Limited liability can be a major source of moral hazard and excessive risk taking—a privilege that allows shareholders to enjoy the upside from their commercial activity while limiting their exposure in the event of failure. We propose that there should be two different classes of equity for banks and SIFIs. The division should be between outsiders, with no inside knowledge of the working of the firm and/or ability to control its decisions, and insiders, who have both the information and capacity to influence corporate decision-making. Outsiders would remain with limited liability, while multiple liability (double, triple, and potentially unlimited) would apply to insiders. The purpose of our proposal is to shift the costs of failure back to those who have responsibility for taking these decisions. The idea of financial liability ‘with teeth’—which is rooted in history—provides an innovative solution that improves the incentives for managers to take responsible decisions, and promotes a radical change in the structure of capitalism—addressing the unfairness of the current system which has enhanced inequality and encouraged populism.

Measuring Systemic Risk Contagion Effect of the Banking Industry in China: A Directed Network Approach

ABSTRACT To capture the impact of investor sentiment on risk contagion of financial institutions and potential tail risks caused by financial network structure, this paper uses a directed network approach to measure systemic risk contagion effect of Chinese banking industry. We use linear quantile lasso regression and local polynomial method to estimate TENET model, and construct a weighted directed network. Moreover, we study directed network from different perspectives, analyze financial risk contagion effect and the influence of investor sentiment on financial risk contagion, and identify systemically important financial institutions. We find that: (1) As crisis spreads, financial system becomes more closely related, and total network connectivity continues to rise until it reaches a maximum value. (2) Total network connectivity and systemic risk have the same upward or downward trend, but systemic risk lags behind total network connectivity. (3) Current bank has characteristics of “too big to fail” and “too contact to fail”.

SIKAP PETANI TERHADAP PRODUK BANK SYARIAH MANDIRI DI KECAMATAN GUBUG KABUPATEN GROBOGAN

Bank was one of the important financial institutions in supporting economic growth, the bank was being an alternative source of capital for farmers to meet the needs of agricultural production facilities. This study aims to analyze the factors that influence the attitudes of farmers towards Bank Syariah Mandiri products, analyze the attitudes of farmers toward Bank Syariah Mandiri products, analyze the influence of factors that influence the attitudes of farmers including education, age duration of farming, number of family dependents and income towards Bank Syariah Mandiri products in Grobogan Regency Gubug District. The method used in this study is a survey method. The study was conducted on Juny 14-July 30, 2019 in Trisari Village, Gubug District, Grobogan Regency. Research location was chosen intentionally and the method of determining the number of samples used is purposive sampling with non-probability techniques. The number of respondents is 47 people from the Farmer Group Subur Makmur. Data analyzed with descriptive analysis to analyze the attitudes of farmers, and the factors forming farmers 'attitudes towards Bank Syariah Mandiri Products while the quantitative analysis was used to determine the effect of attitude forming factors with farmers' attitudes towards Bank Syariah Mandiri Products in the Gubug District using multiple linear regression. Farmer's attitude towards Bank Syariah Mandiri Products in the category good/like with a score of 77.78%. Based on the F test shows that simultaneously there is a significant influence between the age of the farmer, the length of farming, the level of education the number of family dependents, and the income of farmers' Attitudes towards Bank Mandiri Syariah Products in Grobogan District. The length of farming, and the number of family dependents partially do not affect the farmers' attitudes towards Bank Syariah Mandiri Products. Based on the t test, the results show that the age of the farmer, the level of education, and income partially influences the attitude of the Farmers towards Bank Syariah Mandiri Products. Keyword: attitude forming factors, Bank Syariah Mandiri products, attitudes of farmers.

Canada

This Technical Note on Financial Safety Net and Crisis Management for the Canada focuses on housing finance. Housing finance is broadly resilient, but pockets of vulnerabilities exist. Mortgage finance is dominated by domestic systemically important financial institutions (D-SIFIs) and supported by the government via mortgage insurance, securitization guarantees, and other policies. With a market share of about 70 percent, D-SIFIs focus on prime borrowers, and their lending is backed by their strong balance sheets. The cost of prime mortgage financing is low and little differentiated, with credit risk being under-priced in some segments. Aspects of Canada’s mortgage finance may amplify procyclical effects of falling house prices during severe downturns. Core lenders focus on low-risk mortgage lending. In response to deteriorating household debt-servicing capacity, they may constrain new lending or renewals of maturing uninsured mortgages, potentially adding pressures on the housing market. Alternatively, a sudden adoption of risk-based pricing to accommodate financially weak borrowers might amplify household debt servicing fragility.

Application of the Merton model to estimate the probability of breaching the capital requirements under Basel III rules

In this paper, we estimate the probability of a financial institution breaching the Common Equity Tier 1 capital under Basel III rules. We do so by applying the Merton model, where balance sheet data and market data are used to match the probability of default implied by the model with the probability of default implied by market quotations for credit default swaps. We provide an empirical analysis for several banks classified by the Financial Stability Board and the Basel Committee on Banking Supervision as Global Systemically Important Financial Institutions, evaluating how the probability of breaching the Common Equity Tier 1 Capital evolved from 2005 to 2015. We find that higher Common Equity Tier 1 Capital ratios do not necessarily imply lower probabilities of breaching capital requirements and vice versa. We also focus on the asset volatility calibrated according to our model and we find that it appears to be a good proxy for the risk-weighted asset density.

Back to the future: Backtesting systemic risk measures during historical bank runs and the great depression

Abstract We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on two challenges: ranking systemically important financial institutions (SIFIs) and financial crisis prediction. We find that CoVaR and SRISK meet the SIFI ranking challenge. That is, they help identify systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months before panics. In contrast, aggregate CoVaR and SRISK are only somewhat effective at predicting financial crises.

Quid Pro Quo: Evidence from Mutual Funds As Friendly Shareholders

We show that mutual funds are more likely to hold and significantly overweight stocks of their broker banks. Correspondingly, funds’ proxy voting is biased towards management of their brokers in contentious proposals. Such voting bias has a material impact on voting outcomes. In return, client mutual funds with greater portfolio overweighting and voting support receive larger allocations of underpriced IPOs from connected broker banks. Our study not only uncovers a new mechanism—being brokers’ friendly shareholders—through which the two parties maintain their quid pro quo relationships, it also raises a broader concern on shareholder monitoring of important financial institutions.

Quantifying systemic risk with factor copulas

We propose a tail dependence based network approach to study systemic risk in a network of systemically important financial institutions (SIFIs). We utilize a flexible factor copula-based method which allows us to measure the level of extreme risk in a portfolio when dependence is driven by one or several factors. We identify the most ``connected'' SIFIs based on an eigenvector centrality approach applied to copula-implied dependence structures as ``central'' SIFIs. We then demonstrate that the level of systemic risk implied by such SIFIs chosen as conditioning factors in the factor copula setup exceeds that which is implied by non-central SIFIs in terms of portfolio Value-at-Risk and the portfolio return under stress. This study contributes to the quantification and ranking of the systemic importance of SIFIs which is important for setting adequate capital requirements in particular and stability of financial markets in general.

“ECONOMIC BELT OF THE SILK ROAD”: NEW OPPORTUNITIES AND PROSPECTS FOR MONGOLIA


 
 
 
 Earth is continents, seas, the developing countries, the developed countries, the centers and the borders is the One Belt-One Road initiative. On the other hand, the Sea “Silk Road” is called the “Economic Belt of the Silk Road” as a way of “New Belt and Road” for China's new long-term development strategy. "Silk Road" refers to the ancient land-based commercial trade route that originated in ancient China and connected to Asia, Africa and Europe.In order to benefit from the “Economic Belt of the Silk Road” initiative, China has partnered with other Asian countries and created two important financial development institutions, the Asian Infrastructure Investment Bank and the Silk Road Fund.The main objective of the initiative is to create an Eurasian trade economic integration space and cross-border transport corridors, that is, to strengthen the links between government policies and national development strategies along the route, promote international cooperation, and promote the development of joint ventures. For this purpose, the following tasks have been set: 1. Development of regional economic integration method; 2. Create an integrated transportation design for Asian transportation, connect communication networks, and develop pipeline systems; 3. Switch back to investment and trade barriers and create a good investment environment; 4.Strengthen national currency; 5.Deepening cooperation in the humanitarian field; 6.Expanding China's exports and domestic power growth will be concentrated in the western provinces (steel, lead, photovoltaic equipment, wind turbines).The “One Belt and One Road” is a new starting point for China-global relations and human development. Utilize the geographical advantages of Mongolia, China and Russia to increase cross-border trade between Mongolia, Russia and China, creating opportunities for logistics and transportation. China is one of the Mongolia's largest sources of foreign direct investment and is seen as a huge market for Mongolia to provide services and products.Mongolia hopes to unite its “Steppe Road” initiative with China’s “One Belt and One Road” initiative. The goal of the “Steppe Road” initiative aims to expand the Mongolian economy through cross-border transportation, strengthen the road line connecting Russia and China, transform and extend the current railway line in Mongolia, and build oil and gas between Russia and China. The pipeline improves the infrastructure of Mongolia. Mongolia and other Asian countries are actively participating in the “One Belt and One Road” initiative implemented in China to reduce risks and threats and gain new opportunities and advantages in regional cooperation.
 
 
 

The role of the most important financial institutions in the development of small and micro agricultural projects in Egypt

UNEMPLOYMENT and poverty in Egypt are the main problems that the Egyptian economy is experiencing in the labor market at present. So development and rural development in particular are essential, where the rural is the backbone of the Egyptian society to achieve social security and still represents the rural about 60% of population sentence in Egypt in 2016. Therefore, the problem of the study was poverty, hunger and unemployment, where the unemployment rate reached about 13% of the total population.The research aimed to study the sources of financing small and micro enterprises, as well as the role and importance of financing institutions in the development of small and micro enterprises such as loans, facilities provided, the number of projects, projects types.The results of the study showed that 85% of the jobs available in the economy through small and micro enterprises. The Ministry of Social Solidarity is the least resource in terms of the cost of the job opportunity, which amounted to about 2950.67LE for the job opportunity. All sources finance micro projects except the Small Enterprise Development Authority and the Agricultural Bank of Egypt are funded small and micro projects. The number of projects financed by the Small Enterprise Development Authority since its inception is higher than the number of projects financed from all other sources of financing.Therefore, this study recommends encouragement of the financing sources mentioned above because its' projects are characterized by increasing the net profit and return.

Financial contagion in inter-bank networks with overlapping portfolios

By considering overlapping portfolios among financial institutions, we construct a financial contagion model for inter-bank networks with two channels of contagion: counter-party risk and common asset holdings risk. Based on the model, we verify the contribution of overlapping portfolios to systemic risk contagion and further analyse how the degree of diversification and initial shock affect the probability, extent and loss degree of contagion in different network structures. The results show that as the degree of diversification increases, the probability, extent and loss degree show overall inverted U-shaped tendencies. Different from the existing research that focuses only on a single channel of risk contagion, we find that the risk contagion is significant because of the combined effect of counter-party risk and common asset holdings risk, even though there is little portfolio overlap. Additionally, we study the core–periphery network to investigate the particularity of systematically important financial institutions and the feedback effect in financial networks when banks proactively reduce the exposure of depreciating assets.

Extended Shareholder Liability for Systematically Important Financial Institutions

Regulators generally have tried to address the problems posed by the excessive risk-taking of Systemically Important Financial Institutions (SIFIs) by placing restrictions on the activities in which SIFIs engage. However, the complexity of these institutions makes such attempts necessarily imperfect. This article proposes to address the problem at its very source, which is the incentives that SIFI owners have to push for excessive risk-taking by managers. Building on the traditional rule of “double liability,” we propose to modify the current (general) rule limiting the liability of SIFI shareholders to the amount of their initial investments in such companies. We propose replacing the extant limited liability regime with a new system that imposes additional liability over and above what SIFI shareholders already have invested in a pre-set amount that varies with a SIFI’s centrality in the financial network. Our liability regime has a number of advantages. First, by increasing shareholder exposure to downside risk, it discourages excessive risk-taking. At the same time, by placing a clearly defined ceiling on shareholders’ total liability exposure, it will not obliterate shareholders’ incentives to invest in the first place. Second, the liability to which shareholders are exposed is carefully tailored to the level of systemic risk that their institution creates. Thus, our rule induces shareholders to account for the negative externality SIFIs can impose without unduly stifling such financial institutions’ role within the financial system and in the wider economy. Third, as the amount of liability is clearly defined ex ante using the rigorous tools of network theory, our rule minimizes the influence of interest groups and the impact of idiosyncratic government decisions. Last, as markets know in advance the amount of liability to which shareholders are exposed, our rule favors the creation of a vibrant insurance and derivative market so that the risk of SIFIs defaults can be allocated to those who can better bear it.

The Greenium Matters: Evidence on the Pricing of Climate Risk

This study provides evidence on the existence of a negative Greenium, i.e. a risk premium linked to firms' greenness and environmental transparency, based on European individual stock returns. We define a priced "greenness and transparency" factor based on companies' greenhouse gas emissions and the quality of their environmental disclosures. Based on this factor, we offer a tool to assess the exposure of a portfolio to the risk associated with the low-carbon transition, and hedge against it. We estimate that in a stressed scenario where greener and more transparent firms very much outperform brown stocks, there would be losses at the global level, including for European large banks, should investors fail to price climate-transition risks. These results call for the introduction of climate stress tests for systemically important financial institutions.

Systemically important financial institutions as an area of vulnerability to threats to financial safety of Russia

Systemically important financial institutions as an area of vulnerability to threats to financial safety of Russia

Regulating Financial Guarantors: Abstraction Bias As a Cause of Excessive Risk-taking

To improve financial regulation, scholars have engaged in extensive research over the past decade to try to understand why systemically important financial institutions engage in excessive risk-taking. None of that research fully explains, however, the unusually excessive risk-taking by financial guarantors such as bond insurers, protection sellers under credit-default-swap (CDS) derivatives, credit enhancers in securitization transactions, and even issuers of standby letters of credit. With tens of trillions of dollars of financial guarantees outstanding, the potential for failure is massive. This Article argues that financial guarantor risk-taking is influenced by a fundamental anomaly in perceiving risk. Financial guarantors commit to pay out capital only if certain future contingencies occur, in contrast to banks and other financial institutions that pay out capital—for example, by making a loan—at the outset of a project. As a result, financial guarantors are subject to a previously unrecognized cognitive bias, which the author calls “abstraction bias,” that causes them to underestimate the risk on their guarantees. The Article provides empirical evidence that supports the existence of abstraction bias and its influence on financial guarantors. The Article also examines how an understanding of abstraction bias can improve the regulation of financial guarantor risk-taking.

Interconnectedness and systemic risk network of Chinese financial institutions: A LASSO-CoVaR approach

The 2015–2016 China’s stock market crash raises awareness of risk contagion in financial system. How to investigate systemic risk from the perspective of network is still a challenging work especially for considering a large number of financial institutions. To this end, we introduce the least absolute shrinkage and selection operator (LASSO) method into the CoVaR estimation to construct a systemic risk network between financial institutions’ tail risk exposures. First, we apply the LASSO-CoVaR based systemic risk network to investigate the interconnectedness and systemic risk of financial institutions in China from 2010 to 2017. Our empirical results show that the interconnectedness among institutions is very important and cannot be ignored in estimating CoVaR of an individual institution. Second, the topology analysis shows that the system-level interconnectedness reaches a peak when the system is under distress, especially before and after the stock market crash occurred. Third, we rank institutions in terms of the systemic risk contribution and find that their systemic importance changes in four different sub-periods. To sum up, our empirical results reveal substantial relevant risk spillover channels and identify the systemically important financial institutions in China, providing useful information for regulators to formulate macro prudential supervision policy.

An Analysis of the Aig Case - Understanding Systemic Risk and its Relation to Insurance

This study describes the AIG model of operations prior to the conglomerate failure up to the point when the liquidity crisis triggered the massive bailout by the US government. It is a study designed to provide understanding of the key factors in the demise of AIG in relationship to systemic risks in insurance. The main contribution of this report is the delineation of the key internal factors from the external macro market and regulatory factors that contributed to the failure. We regard the latter as macro factors underpinning the foundation that propelled the activities of AIG Financial Products Unit (AIGFP). The study shows that if it were not for the “non-insurance” activities of the AIGFP under the AIG Holding Company, the averted collapse (with the bailout), in all likelihood, would have been avoided. The main key takeaways are: AIGFP was not an insurance company; AIGFP was not regulated by insurance regulations; AIGFP’s credit default swaps were the key factor to the AIG collapse. As global regulators look into indicators for Systemically Important Financial Institutions (SIFIs), the macro factors should be integrated into any newly created regulatory framework: 1. Use credit ratings with care and avoid exploitation of high ratings, 2. Be aware of banks’ capital being replaced by new opaque financial products, 3. Remove gaps in regulations and require transparency, 4. Forbid companies to select their own regulatory bodies, 5. Understand insurance vs. non-insurance or quasi-banking activities and products, and 6. Create clarity to delineate between the banking and insurance models. In brief, the key lesson is that when non-insurance or quasi-banking operations enter the insurance arena, expert insurance supervision is needed to close gaps in regulation.

Usage of time series models in assessing the value of demand in the insurance market

Insurance can affect savings and investment as insurance and reinsurance companies are among the most important financial institutions in the country's economy. The researcher will analyze, based on the partial auto correlation function and experimenting with several models of auto regression and moving averages, and testing the most appropriate model to describe the quarterly data on the number of polices.

Network-Sensitive Financial Regulation

Shocks that hit part of the financial system, such as the subprime mortgage market in 2007, can propagate through a complex network of interconnections among financial and non-financial institutions. As the financial crisis of 2007-2009 has shown, the consequences for the entire economy of such systemic risk materializing can be catastrophic. Following the crisis, economists and policymakers have become increasingly aware that the structure of the financial system is a key determinant of systemic risk. A wide consensus now exists among them that network theory is the natural framework for studying systemic risk. Yet, most of the existing rules in financial regulation are still “atomistic,” in that they fail to incorporate the fact that each individual institution is part of a wider network. This article shows that policies building upon insights from network theory (network-sensitive policies) can address systemic risk more effectively than traditional atomistic policies, also in areas where an atomistic approach would seem natural, such as the corporate governance of systemically important financial institutions. In particular, we consider four prescriptions for the governance of systemically important institutions (one on directors’ liability, two on executive compensation and one on failing financial institutions’ shareholders appraisal rights in mergers) and show how making them network-sensitive would both increase their effectiveness in taming systemic risk and better calibrate their impact on individual institutions.

'Mortgage Lending and Systemic Crises: Defending Macro-Stability'

“Should Fannie Mae and Freddie Mac Be Designated as Systemically Important Financial Institutions?” on June 25, 2019 Before the Committee on Banking, Housing, and Urban Affairs U.S. Senate