Does prudential regulation contribute to effective measurement and management of interest rate risk? Evidence from Italian banks

Cerrone, Rosaria; Cocozza, Rosa; Chiodo, Domenico; Gianfrancesco, Igor

doi:10.1016/j.jfs.2017.05.004

Cited by 8 publications

(11 citation statements)

References 20 publications

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“…Second, Hoffmann et al (2019) show that European banks maintain significant exposure to the interest rate risk, an important component of which comes from residential mortgages, and that banks only partially hedge this exposure with derivatives. Esposito et al (2015) and Cerrone et al (2017) provide further evidence of non-trivial exposure to the interest rate risk and imperfect derivative hedging by Italian banks. 11,12 Third, the relative importance of different sources of financing varies substantially across banks.…”

Section: Banks' Incentives To Steer Customersmentioning

confidence: 81%

“…In Figure 5, we plot the time series for the number of banks in the Italian system exposed to interest rate risk. The figure is based on the evidence provided in Cerrone et al (2017) which implement a duration gap approach on data from the balance sheets of a representative sample of 130 Italian commercial banks. They offset assets and liabilities -on and off balance sheets -at each maturity to obtain a net position and assess the effect on the value of the bank of a 200 basis points parallel shift of the yield curve.…”

Section: A1 Characteristics Of the Italian Mortgage Marketmentioning

confidence: 99%

“…The picture shows that every bank in the sample analyzed by Cerrone et al (2017) was exposed to interest risk for the full span of the time period that we analyze. In terms of the size of the exposure to interest rate, they report that over the period 2006-2013 the loss of value due to a 200 basis point parallel shift upward in the yield curve was 10.37% of the regulatory capital for "Asset sensitive" banks; whereas the average "Liability sensitive" bank would lose 6.62% of its regulatory capital from an equally sized downward shift.…”

Section: A1 Characteristics Of the Italian Mortgage Marketmentioning

confidence: 99%

“…Banks retain on their balance sheets the mortgages that they originate. This creates an interest rate exposure, which is not completely hedged through derivatives, such as interest rate swaps (Esposito et al (2015); Cerrone et al (2017); Hoffmann et al (2019)). Thus, banks have incentives to use both relative pricing of mortgages and steering in order to manage the maturity mismatch.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

The cost of steering in financial markets: Evidence from the mortgage market

Guiso

Pozzi

Tsoy

et al. 2022

Journal of Financial Economics

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BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS.This publication is available on the BIS website (www.bis.org).

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Section: Banks' Incentives To Steer Customersmentioning

confidence: 81%

Section: A1 Characteristics Of the Italian Mortgage Marketmentioning

confidence: 99%

Section: A1 Characteristics Of the Italian Mortgage Marketmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The cost of steering in financial markets: Evidence from the mortgage market

Guiso

Pozzi

Tsoy

et al. 2022

Journal of Financial Economics

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“…The authors argue that correlations between the different risk types, such as credit risk and interest rate risk, play a crucial role in calculating appropriate capital reserves. Cerrone, Cocozza, Curcio, and Gianfrancesco (2017) develop an internal measurement system for interest rate risk. On the basis of a sample of Italian banks the authors show that the current Basel regulation on interest rate risk needs to be improved from a financial stability perspective.…”

Section: Literature Reviewmentioning

confidence: 99%

The Choice of Interest Rate Models and Its Effect on Bank Capital Requirements Regulation and Financial Stability

Lang¹,

Signer²,

Spremann³

2017

IJEF

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According to the Basel regulation banks may use internal risk models to measure interest rate risk and calculate regulatory capital requirements. Under its pillar II the Basel framework grants leeway to banks in their choice of these models. We therefore focus on how well interest rate models describe real interest rate movements empirically and which impact the model choice has on the economic value of bank equity during the financial crisis. Furthermore, we address the question how different choices of interest rate models affect the overall financial stability. To this end we estimate eight different interest rate models for three different currencies (USD, EUR, CHF) using the Generalized Method of Moments (GMM). Then we approximate the balance sheet of a typical Swiss bank during the financial crisis and run Monte Carlo simulations of the balance sheet using the estimated interest rate models. Our results show that the required economic value of equity for a bank varies considerably with the different choices of interest rate models. However, the interest rate models which are empirically best fitting do not imply aggregate financial stability. Thus, banks’ choices of interest rate models to calculate regulatory capital requirements may have a crucial impact on overall financial stability.

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System-Wide and Banks' Internal Stress Tests: Regulatory Requirements and Literature Review

Pliszka

2021

SSRN Journal

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Research questionThe financial crisis of 2007-09 revealed the vulnerability of banks. In response, stress testing was established as a key supervisory element and as an essential risk management tool. Based on these developments, this paper first deals with system-wide stress tests and provides an overview of their evolution, compares programs in major jurisdictions, and reviews the academic literature. Second, this paper summarizes regulatory requirements and expectations for banks' internal stress tests and gives an overview of the relevant literature. ContributionThis paper contributes to the literature, as it deals with both system-wide stress tests and banks' internal stress tests and discusses the differences between the two types. Moreover, it provides an update of earlier surveys by covering discussions from 2019-20 on the envisaged changes to system-wide stress testing in the EU and the US. ResultsSystem-wide stress tests have gained in importance. For instance, they feed into the calculation of capital requirements in the EU. The literature shows that the disclosure of stress test results reveals new information to the market. Furthermore, banks that participate in system-wide stress tests increase their capital ratios and shift lending to less risky borrowers. Banks' internal stress tests are deeply embedded in the Basel III framework and the banks that apply internal models are subject to more stringent stress testing requirements. For example, these banks have to ensure capital adequacy if the internal risk parameters are being stressed. Research on banks' internal stress tests shows that stress scenarios derived from expert judgment should be complemented by scenarios, which consider historical characteristics of the risk factors. As stress testing is exposed to considerable model and estimation risk, banks should carry out extensive robustness checks. In sum, both system-wide and banks' internal stress tests play a complementary role in ensuring resilience of individual banks and the financial system to adverse shocks. Nichttechnische ZusammenfassungFragestellung Als Reaktion auf die Finanzmarktkrise 2007 bis 2009 wurden Stresstests als ein zentrales Element der Aufsicht und als ein wichtiges Instrument im Risikomanagement etabliert. Ausgehend von diesen Entwicklungen befasst sich dieses Papier zunächst mit systemweiten Stresstests und gibt hierbei eine Übersicht über die Entwicklung, vergleicht Programme aus verschiedenen Jurisdiktionen und rezensiert die wissenschaftliche Literatur. Zum anderen fasst das Papier regulatorische Erwartungen zu bankinternen Stresstests zusammen und gibt einen Überblick über die einschlägige Literatur. Beitrag Der Beitrag des Papiers liegt darin, dass es sich sowohl mit systemweiten als auch mit bankinternen Stresstests beschäftigt und dabei die Unterschiede diskutiert. Darüber hinaus geht es auf Diskussionen aus 2019 und 2020 zu angedachten Änderungen bei systemweiten Stresstests in der EU und in den USA ein. Ergebnisse Systemweite Stresstests haben an Bedeutung gewo...

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Does prudential regulation contribute to effective measurement and management of interest rate risk? Evidence from Italian banks

Cited by 8 publications

References 20 publications

The cost of steering in financial markets: Evidence from the mortgage market

The cost of steering in financial markets: Evidence from the mortgage market

The Choice of Interest Rate Models and Its Effect on Bank Capital Requirements Regulation and Financial Stability

System-Wide and Banks' Internal Stress Tests: Regulatory Requirements and Literature Review

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