In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model which measures...

Islamic strictures require investors to share risks with the entrepreneurs they finance. Sukuk (Islamic securities) come mostly in two varieties, musharakah (basically a joint venture agreement) and ijarah (more like an operational lease agreement). Yet defaults did happen, even in the case of...

Cyclicality in the losses of bank loans is important for bank risk management. Because loans have a different risk profile than bonds, evidence of cyclicality in bond losses need not apply to loans. Based on unique data we show that the default rate and loss given default of bank loans share a...

We extend the Hidden Markov Model for defaults of Crowder, Davis, and Giampieri (2005) to include covariates. The covariates enhance the prediction of transition probabilities from high to low default regimes. To estimate the model, we extend the EM estimating equations to account for the time...

A banking union limits international bank default contagion, eliminating inefficient liquidations. For particularly low short term returns, it also stimulates interbank flows. Both effects improve welfare. An undesirable effect arises for moderate moral hazard, as the banking union encourages...

We propose a simple network–based methodology for ranking systemically important financial institutions. We view the risks of firms –including both the financial sector and the real economy– as a network with nodes representing the volatility shocks. The metric for the connections of the...

An anticipated benefit of the prospective European Banking Union is stronger supervision of European banks. Another benefit would be enhanced resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution...

CoCo’s (contingent convertible capital) are designed to convert from debt to equity when banks need it most. Using a Diamond-Dybvig model cast in a global games framework, we show that while the CoCo conversion of the issuing bank may bring the bank back into compliance with capital...

During the Global Financial Crisis, regulators imposed short-selling bans to protect financial institutions. The rationale behind the bans was that “bear raids”, driven by short-sellers, would increase the individual and systemic risk of financial institutions, especially for institutions...

We study the dependence between the downside risk of European banks and insurers. Since the downside risk of banks and insurers differs, an interesting question from a supervisory point of view is the risk reduction that derives from diversification within large banks and financial...