Regulators charged with monitoring systemic risk need to focus on sentiment as well as narrowly defined measures of systemic risk. This chapter describes techniques for jointly monitoring the co-evolution of sentiment and systemic risk. To measure systemic risk, we use Marginal Expected...

We examine the effects on a financial network of multilateral clearing via a central clearing counterparty (CCP) from an ex ante and ex post perspective. The CCP is capitalized with equity and a guarantee fund and it can charge a volume-based fee. We propose a CCP design which improves aggregate...

Using the mechanics of creep in material sciences as a metaphor, we present a general framework to understand the evolution of financial, economic and social systems and to construct scenarios for the future. In a nutshell, highly non-linear out-of-equilibrium systems subjected to exogenous...

U.S. banks have increasingly diversified into activities traditionally considered as non-core for the banking sector. This paper investigates whether diversification influences banks' investment (credit) policy and profitability. Diversified banks appear to benefit from “coinsurance,” supply...

Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system as a whole is undercapitalized. In this paper, we investigate the case of non-U.S. institutions, with several factors explaining the dynamics of financial firms returns and...

We study a financial network where forced liquidations of an illiquid asset have a negative impact on its price, thus reinforcing network contagion. We give conditions for uniqueness of the clearing asset price and liability payments. Our main result holds under mild and natural assumptions on...

We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit-spread-based correction for the value of shareholders' default option. We show that without such a correction, the estimated impact of a...

How do changes in Environmental, Social and Governance (ESG) scores influence banks’ systemic risk contribution? We document a beneficial impact of the ESG Combined Score and Governance pillar on banks’ contribution to system-wide distress analysing a panel of 367 publicly listed banks from...

Do macroprudential regulations on residential lending influence commercial lending behavior too? To answer this question, we identify the compositional changes in banks' supply of credit using the variation in their holdings of residential mortgages on which extra capital requirements were...