This paper develops a theoretical framework to study the impact of bonus caps on banks' risk taking. In the model, labor market price adjustments can offset the direct effects of bonus caps. The calibrated model suggests that bonus caps are only effective when bank executives' mobility is...

Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency...

Concentration risk is an important feature of many banking sectors, especially in emerging and small economies. Under the Basel Framework, Pillar 1 capital requirements for credit risk do not cover concentration risk, and those calculated under the Internal Ratings Based (IRB) approach...

This paper explores three possible transmission channels for transition risk shocks to the financial system in Norway. First, we estimate the direct firm-level impact of a substantial increase in domestic carbon prices under severe assumptions. Second, we map the impact of a drastic increase in...

The traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency. Liquidity stress tests have been applied in parallel to and independently from solvency stress tests, based on scenarios which may not be consistent with those used in solvency...

This paper builds a framework to quantify the financial stability implications of climate-related transition risk in Colombia. We explore risks imposed on the banking system based on scenarios of an increase in the domestic carbon tax by using bank- and firm-level data. Focusing on the...

We study the effects of a bank's engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, shortterm, capital constrained, and with...

This study assesses the overall impact on credit of the financial regulatory reforms in Europe, Japan, and the United States. Long-term cost estimates are provided for Basel III capital and liquidity requirements, derivatives reforms, and higher taxes and fees. Overall, average lending rates in...

Despite increased need for top-down stress tests of financial institutions, performing them is challenging owing to the absence of granular information on banks' trading and loan portfolios. To deal with these data shortcomings, this paper presents a market-based structural top-down stress...

Despite increased need for top-down stress tests of financial institutions, performing them is challenging owing to the absence of granular information on banks' trading and loan portfolios. To deal with these data shortcomings, this paper presents a market-based structural top-down stress...