This paper presents a new method to validate risk models: the Risk Map. This method jointly accounts for the number and the magnitude of extreme losses and graphically summarizes all information about the performance of a risk model. It relies on the concept of a super exception, which is...

We contribute to the current regulatory debate by examining the wealth and risk effects of the Dodd-Frank Act on U.S. financial institutions. We measure the effects of key legislative events of the Act by means of a multivariate regression model using the seemingly unrelated regression (SUR)...

This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are...

Empirically, bank equity value is decreasing in the interest rate. Yet (i) many banks do not hedge interest rate risk and (ii) above 50% of hedging banks use derivatives to increase exposure. We model a bank's capital structure, and show that these facts are consistent with optimal hedging under...

We present an empirical study of stress testing for portfolios of auto loans. We find that loans aged five years or more have significantly higher default probabilities. This finding raises concerns about the increasing maturity of auto loans in recent years. A challenge in stress testing is the...

Reverse stress tests are a relatively new stress test instrument that aims at finding exactly those scenarios that cause a bank to cross the frontier between survival and default. Afterward, the scenario which is most probable has to be identified. This paper sketches a framework for a...

We investigate financial intermediaries' interest rate risk management as the simultaneous decision of on-balance-sheet exposure and interest rate swap use. Our findings show that both decisions are substitute risk management strategies. A higher likelihood of bank distress makes banks reduce...

We investigate whether corporate governance is related to insolvency risk of financial institutions. Using a large sample of U.S. financial institutions over the 2005–2010 period, we find that corporate governance is positively related with insolvency risk of financial institutions as proxied...

Although risk culture is a key element in the risk management process, identifying the riskculture of a firm can be challenging due to the abstract concept of culture. We introduce textmining and unsupervised machine learning algorithms to define the risk culture for U.S. bankholding companies...

This paper proposes an alternative framework to set banks’ operational risk capital, which allows for forward-looking assessments and limits gaming opportunities by relying on an incentive-compatible mechanism. This approach would improve upon the vulnerability to gaming of the AMA and...