Shadow banks play an important role in the modern financial system and are arguably the source of key vulnerabilities that led to the 2007-2009 financial crisis. I develop a quantitative framework with uncertainty fluctuations and endogenous bank default to study the dynamics of shadow banking....

How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank’s optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank...

This paper studies the relationship between the riskiness of banks' assets and their average risk weight. Banks' initial risk weights explain about half of the variation in projected credit losses in the 2018 European Banking Authority stress test. In contrast to related papers, this paper also...

Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. Financial institutions are required to maintain a capital cushion against such events and stress tests...

A flexible framework for the analysis of tail events is proposed. The framework contains tail moment measures that allow for Expected Shortfall (ES) estimation. Connecting the implied tail thickness of a family of distributions with the quantile and expectile estimation, a platform for risk...

This paper examines the relationship between money market fund (MMF) risks and outcomes during crises, with a focus on the ABCP crisis in 2007 and the run on money funds in 2008. I analyze three broad types of MMF risks: portfolio risks arising from a fund's assets, investor risk reflecting the...

This paper uses Bayesian model averaging (BMA) techniques to examine the driving factors of equity returns of U.S. financial institutions. The main advantage of BMA is accounting for model uncertainty. For the period 1986-2010, we fi nd that the most likely model explaining banking sector...

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...

Central to the ongoing debate on default resource adequacy are the incentives provided by the clearinghouse waterfall structure. We show that clearinghouse equity and member default funds play a complementary role to initial margins: they incentivize safe members to participate rather than...

This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models...