This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but...

This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but...

The growth of the shadow banking system has allowed credit risk to grow outside the purview of traditional bank regulation. Despite lacking relevant information and control over shadow banks, the magnitude of the recent financial crisis required the Federal Reserve to backstop their activities....

Using supervisory data for US banks, we evaluate the alignment of Basel II/III AIRB (Advanced Internal Ratings Based) risk estimates with portfolio risk. We use loan performance as a direct measure of portfolio risk as well as less direct market-based measures. Our results document that loan...

A defining difference of macro-style stress testing is the explicit consideration of profitability dynamics in the stress scenario. Traditional stress testing had focused almost exclusively on losses only, but a complete assessment of capital adequacy under stress must take into account not just...

Theory suggests that unhealthy banks exhibit more pronounced flight-to-quality behavior during financial crises and, hence, the infusion of capital through unhealthy banks is less effective in relieving the liquidity shocks of vulnerable borrowers. We test these predictions by investigating how...

This paper illustrates channels by which regulations that require banks to hold liquid assets can either increase or decrease a bank's incentive to take risk with its remaining ineligible assets. A greater capacity to respond to liquidity stress increases the potential profits a bank would put...

Credit risk arises because of the possibility that promised cash flows on financial claims held by banks and other financial institutions (BOFIs) will not be paid in full. Virtually all BOFIs face this risk. BOFIs are operating in markets with asymmetric information wherein prospective borrowers...

Basel framework for bank's capital adequacy has been criticized for its over reliance on external credit rating agencies. Moreover, implementation of Minimum Capital Requirement (MCR) under Basel-III is often linked to a decrease in economic growth as it requires banks to maintain a higher...

The purpose of this paper is to investigate the main drivers of the change in the credit risk provisions at a portfolio level for the banks that have been subject of the 2018 EBA stress tests. Therefore, we perform a holistic review of the drivers of the three-year projections of credit losses....