Business cycle

Euro area financial stability environment remains challenging

Retrieved on: 
Friday, November 22, 2019

PRESS RELEASE

Key Points: 
  • PRESS RELEASE

    Euro area financial stability environment remains challenging

    20 November 2019

    Downside risks to global and euro area economic growth have increased and continue to create financial stability challenges, according to the November2019 Financial Stability Review (FSR) of the European Central Bank (ECB).

  • Low interest rates should support economic activity in the euro area, but may also encourage excessive risk-taking by some non-bank financial institutions and highly leveraged non-financial corporations, and in some real estate markets.
  • In the event of a sudden repricing of financial assets, growing credit and liquidity risk in some parts of the euro area non-bank financial sector coupled with higher leverage in investment funds may lead non-banks to respond in ways that cause stress to spread to the wider financial system.
  • Authorities are using, and should continue to use, targeted macroprudential measures, where available, to address the associated risks to financial stability.

Assessing the systemic footprint of euro area banks

Retrieved on: 
Friday, November 22, 2019

Prepared by Micha Adam, Paul Bochmann, Maciej Grodzicki, Luca Mingarelli, Mattia Montagna, Costanza Rodriguez dAcri and Martina Spaggiari This special feature discusses several ways in which the measurement of banks systemic footprint can be complemented with new indicators.

Key Points: 
  • Prepared by Micha Adam, Paul Bochmann, Maciej Grodzicki, Luca Mingarelli, Mattia Montagna, Costanza Rodriguez dAcri and Martina Spaggiari This special feature discusses several ways in which the measurement of banks systemic footprint can be complemented with new indicators.
  • The proposed additional systemic footprint measures may help macroprudential authorities in exercising that judgement.
  • Using loan-level data matched with individual corporate balance sheet information allows macroprudential authorities to gain a better understanding of how a banks failure may affect employment and economic activity.
  • Similar data, used in a model of network contagion, help assess the impact of a banks failure on the rest of the system.

1 Introduction

    • The extent and type of disruption that the distress or failure of an individual bank could cause to the financial system and economy is its systemic footprint.
    • Mitigating the risks posed by systemically important banks, with large footprints, has been a key part of the post-crisis regulatory reforms.
    • This special feature considers how new metrics can support the assessment of the systemic importance of individual banks.
    • The economic costs of a banks distress or failure stem from, among other things, its size, complexity, substitutability or business model.
    • In line with the definition of financial stability, measures of systemic importance should capture the impact on the real economy, including lending and economic growth.

2 Regulatory approaches to assessing systemic importance

    • Each indicator is presented in comparison to values for selected global banks.
    • In 2018, 29 banks were identified as G-SIBs globally, of which eight were headquartered in the euro area.
    • In October 2012 the BCBS also published a principles-based framework for dealing with domestic systemically important banks.
    • So, the resulting systemic footprint ranking may not present a full picture of the underlying risks.
    • A mechanical scoring approach may also not be sufficient to understand the amplification mechanisms or interactions between financial sector agents.
    • It could be less relevant for more straightforward dimensions such as size and cross-border activity.

3 Advances in measuring the systemic footprint

    • The increased availability of granular data on bilateral and common exposures of financial institutions opens up new ways to measure the systemic footprint.
    • The importance of a banks lending to employment and economic value added can be analysed through granular data on loans to individual companies.
    • The banks borrowers may struggle to replace lost relationships, and to roll over or top up financing obtained from this particular bank.
    • Indices assessing employment and revenue relevance can capture these additional aspects of a banks economic importance.
    • Revenue relevance is measured in a similar fashion, by using revenues instead of employment data, thus measuring the amount of economic turnover that could potentially be disrupted by the distress of the bank.
    • Employment and revenue relevance measures do provide more information on economic importance than total assets of the bank alone (see Chart B.1).
    • Chart B.1 Economic importance of banks is correlated with size, but with wide dispersion
    • Bilateral exposures between financial institutions can be used to construct a network, and the topology of that network can help identify the most important participants of an interbank network.
    • [10],[11] This may be done on the basis of out-degree and in-degree, which measure the number and value of interbank loans originated and interbank deposits collected by a given bank.
    • PageRank is an indicator of the relative importance not only of a specific bank, but also of its interbank lenders and borrowers.
    • Chart B.2 Contagion models complement other network-based measures with additional information about systemic risk
    • As measures of connectivity may provide an ambiguous signal about the systemic footprint, they can be complemented with contagion models.
    • A highly interconnected bank may amplify systemic risk by spreading losses to its counterparties if it is not adequately resilient to shocks.
    • Conversely, a very resilient bank may act as a firebreak, absorbing incoming losses from the failure of its counterparties.
    • It follows that, while the most connected banks contribute most to systemic risk, other banks which are also critical from the perspective of shock propagation may not be among those that are the most connected.
    • Shapley values, originating in game theory and portfolio management, decompose the losses from a joint default by multiple banks into the individual banks contributions to systemic risk.
    • Chart B.3 Contagion losses and market-based measures offer another perspective on contributions of individual banks to systemic risk
    • These advances notwithstanding, further work is necessary to investigate other aspects of bank interconnectedness and substitutability.
    • Beyond the tools discussed here, the assessment of bank substitutability should take the competitive landscape of the banking system and available balance sheet, liquidity and operational capacity into account.
    • With respect to interconnectedness, a more systemic view of the links between systemic banks and the rest of the financial system would also be beneficial for understanding their systemic footprint.

4 Scope for application to structural capital buffer-setting

    • The indicators discussed in this special feature may be relevant for setting capital buffers for systemically important banks.
    • Although they are not used in scoring approaches, they carry new information about a banks systemic importance.
    • As such, they may in principle contain useful information for the calibration of bank-specific structural macroprudential capital buffers.
    • [12] Judgements exercised by national authorities in the euro area are already implicitly taking some of these elements into account.
    • The European Systemic Risk Board has documented the wide dispersion of O-SII capital buffers, and of the O-SII designation practices.
    • Chart B.4 Contagion losses provide new information about systemic relevance that is not embedded in the O-SII score, and more contagious banks face higher capital buffers
    • Given the extent of common exposures and interlinkages, changes to the capital requirements of each individual bank can affect the stability of their counterparties and the entire system.
    • Network contagion models could enable regulators to assess more clearly how the distribution of capital requirements amongst banks could reduce the probability of contagion spreading in a stress event.
    • An illustrative exercise shows that the reallocation of capital may lead to a considerable reduction in systemic risk.
    • With buffers allowed to change in increments of 25 basis points, a grid search algorithm can help to find the distribution of capital buffers that minimises systemic risk.
    • This exercise does not, however, account for the costs of imposing higher aggregate capital requirements, which may be sizeable and could lead to net effects being negative.

Bankers Split: Nearly Half See No Recession Until After 2020

Retrieved on: 
Thursday, November 21, 2019

"Bankers are just as divided as economists are on the question of when a recession will start," said Mark Jacobsen, President and CEO of MilliporeSigmaNetwork.

Key Points: 
  • "Bankers are just as divided as economists are on the question of when a recession will start," said Mark Jacobsen, President and CEO of MilliporeSigmaNetwork.
  • Nearly half (47%) of bankers predicted that the next U.S. recession will begin after 2020 while 43% believe a recession will start sometime in the next calendar year.
  • A majority of respondents (61%) believe peer-to-peer money transfer services will eventually displace cash, ATMs, and traditional money transfer services.
  • Slightly more than half (53%) say their banks already offer a peer-to-peer money transfer service, and another 39% are considering introducing one.

Leaders Say Their Company Is Not Recession-Ready

Retrieved on: 
Thursday, November 21, 2019

According to new research from VitalSmarts, a Top 20 Leadership Training company , leaders say nearly half of their employees don't have the necessary skills to weather a financial downturn.

Key Points: 
  • According to new research from VitalSmarts, a Top 20 Leadership Training company , leaders say nearly half of their employees don't have the necessary skills to weather a financial downturn.
  • The recession-readiness study asked 1,080 employees and executives to rate their company on five general skills which were thought to be most important to weathering a financial downturn.
  • And it turns out, leaders weren't the only ones fearful of how their skills stack up against a financial downturn.
  • Only an average of 7.3 percent of employees were confident their senior leaders could plan, communicate or lead the sustainable changes needed for success.

The Conference Board Leading Economic Index® (LEI) for India Increased

Retrieved on: 
Wednesday, November 20, 2019

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

Key Points: 
  • The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.
  • The leading and coincident economic indexes are essentially composite averages of several individual leading or coincident indicators.
  • For more information about The Conference Board global business cycle indicators, click here .
  • The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead.

The Conference Board Leading Economic Index® (LEI) for Australia Increased

Retrieved on: 
Monday, November 18, 2019

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

Key Points: 
  • The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.
  • The leading and coincident economic indexes are essentially composite averages of several individual leading or coincident indicators.
  • For more information about The Conference Board global business cycle indicators, click here .
  • The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead.

The Conference Board Leading Economic Index® (LEI) for Mexico Remains Unchanged

Retrieved on: 
Friday, November 15, 2019

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

Key Points: 
  • The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.
  • The leading and coincident economic indexes are essentially composite averages of several individual leading or coincident indicators.
  • For more information about The Conference Board global business cycle indicators, click here .
  • The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead.

The Conference Board Leading Economic Index® (LEI) for the Euro Area Declined

Retrieved on: 
Friday, November 15, 2019

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

Key Points: 
  • The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.
  • The leading and coincident economic indexes are essentially composite averages of several individual leading or coincident indicators.
  • For more information about The Conference Board global business cycle indicators, click here .
  • The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead.

The Conference Board Leading Economic Index® (LEI) for Germany Increased

Retrieved on: 
Wednesday, November 13, 2019

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

Key Points: 
  • The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.
  • The leading and coincident economic indexes are essentially composite averages of several individual leading or coincident indicators.
  • For more information about The Conference Board global business cycle indicators, click here .
  • The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead.

The Conference Board Leading Economic Index® (LEI) for Spain Declined

Retrieved on: 
Tuesday, November 12, 2019

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

Key Points: 
  • The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.
  • The leading and coincident economic indexes are essentially composite averages of several individual leading or coincident indicators.
  • For more information about The Conference Board global business cycle indicators, click here .
  • The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead.