The use of bank-owned life insurance (BOLI) has more than tripled since 2001 and has caught the attention of the Office of the Comptroller of the Currency. We find increases in BOLI lead to higher levels of liquidity risk, credit risk, and interest rate risk. Robustness tests confirm these...

Rather than taking on more risk, US insurers hit hard by the crisis pulled back from risk taking, relative to insurers hit less hard by the crisis. Capital requirements alone do not explain this risk reduction: insurers hit hard reduced risk within assets with identical regulatory treatment....

Risk parity is an asset allocation strategy designed so each asset class contributes equally to overall portfolio risk (as measured by volatility). While risk parity offers potential advantages, its success hinges on key assumptions and a favorable environment for bonds. Like the traditional...

We present a stochastic simulation forecasting model for stress testing aimed at assessing banks' capital adequacy, financial fragility and probability of default. The paper provides a theoretical presentation of the methodology and the essential features of the forecasting model on which it is...

This article examines how governance, culture, and risk management affect risk taking in banks. It distinguishes between good risks, which are risks that have an ex ante private reward for the bank on a standalone basis, and bad risks, which do not have such a reward. A well-governed bank takes...

We analyze whether variation in systemic risk in the banking system (also known as “bank systemic risk”) can explain corporate investment. We show that in a sample of publicly listed firms in 10 advanced and emerging markets economies during the period 1990–2013, bank systemic risk is...

We show that maturity transformation does not expose banks to interest rate risk---it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is...

The interaction of capital and risk for trading and treasury units is of primary interest in the corporate governance of banks as it links operational profitability and strategic risk management. During the financial crisis, several banks' trading units suffered significantly higher losses than...

We present a stochastic simulation forecasting model to stress-test banks' capital adequacy and to estimate probability of infringement of regulatory capital ratios and default probability. The stochastic methodology proposed is based on a simplified reduced model that provides a manageable...

We estimate a structural model of bank portfolio lending and find that the typical U.S. community bank reduced its business lending during the global financial crisis. The decline in business credit was driven by increased risk overhang effects (consistent with a reduction in the liquidity of...