Fire-Sale Spillovers and Systemic Risk

Duarte, Fernando; Eisenbach, Thomas M.

doi:10.2139/ssrn.2340669

“…Under sufficiently adverse conditions, self-fulfilling runs can occur. Duarte and Eisenbach (2013) quantify repo runs and find large systemic effects.…”

Section: Financial Stabilitymentioning

confidence: 96%

Monetary Policy, Financial Conditions, and Financial Stability

Adrian

¹

,

Liang

²

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy's traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy's risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy's risk-return trade-off.

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“…Carletti (2010) as well as Duarte and Eisenbach (2013) are recent examples. Furthermore, Nier, Yang, Yorulmazer, and Alentorn (2008) relate bank interconnectedness to bankspecific balance sheet information.…”

Section: Introductionmentioning

confidence: 99%

Credit risk interconnectedness: What does the market really know?

Abbassi

¹

,

Brownlees

²

,

Hans

³

et al. 2017

Journal of Financial Stability

37

0

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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. ...

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“…On the theoretical front, there is a growing literature that analyzes how balance sheet channels such as interbank lending, loan syndication or asset commonality induce interconnectedness among banks and propagate distress (inter alia, research by Freixas, Parigi, and Rochet (2000), Iyer and Peydró (2005), Gai, Haldane, andKapadia (2011), Greenwood, Landier, andThesmar (2012), Caballero and Simsek (2013), Duarte and Eisenbach (2013), Hale, Kapan, and Minoiu (2013) and Suhua, Yunhong, and Gaiyan (2013)). On the empirical side, there is a large literature which focuses on measuring credit risk interconnectedness from market data (Kritzman, Yuanzhen, Page, andRigobon (2011), Zhang et al (2012), Barigozzi and Brownlees (2013), Podlich and Wedow (2014) and Betz et al 1 (2014)).…”

Section: Introductionmentioning

confidence: 99%

Credit Risk Interconnectedness: What Does the Market Really Know?

Abbassi

¹

,

Brownlees

²

,

Hans

³

et al. 2015

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

Fire-Sale Spillovers and Systemic Risk

Cited by 87 publications

References 32 publications

Monetary Policy, Financial Conditions, and Financial Stability

Monetary Policy, Financial Conditions, and Financial Stability

Credit risk interconnectedness: What does the market really know?

Credit Risk Interconnectedness: What Does the Market Really Know?

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