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Collateral Composition, Diversification Risk, and Systemically Important Merchant Banks
Derviz,Alexis
We study the impact of collateral diversification by non-financial firms on systemic risk in a general equilibrium model with standard production functions and mixed debt-equity financing. Systemic risk comes about as soon as firms diversify their collateral by holding claims on a big wholesale bank (called merchant bank in the paper) whose asset side includes claims on the same producer set. The merchant bank sector proves to be fragile (has a short distance to default) regardless of competition. In this setting, the policy response, consisting in official guarantees for the merchant bank’s liabilities, entails considerable government loss risk. An alternative without the need for public sector involvement is to encourage systemically important merchant banks to introduce a simple bail-in mechanism by restricting their liabilities to contingent convertible bonds. This line of regulatory policy is particularly relevant to the containment of systemic events in globally leveraged economies serviced by big international banks outside host country regulatory control.
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Coordination Incentives in Cross-Border Macroprudential Regulation
Derviz, Alexis ; Seidler, Jakub
When national financial sector regulators need to mutually harmonize macroprudential policy decisions, imperfections of cross-border information exchange may undermine fair cooperation. Attempts to overcome the effects of informational distortions by delegating macroprudential policy to a supranational body are also likely to entail welfare losses due to informational inefficiencies. We study the tradeoff between macroprudential policy autonomy and centralization by means of a signaling game of imperfect information played by two national regulators. The model concentrates on informational frictions in an environment with otherwise fully aligned preferences. We show that even in the absence of evident conflicting goals, the non-transferable nature of some regulatory information creates misreporting incentives. Reporting accuracy is a part of a broader problem of strategic advantage-seeking by the national regulators. Therefore, crossborder coordination mechanisms, centralized or not, that limit strategic behavior are preferable to those allowing its full deployment. The results are applicable to systemic risk management by international organizations, including the relevant EU institutions.
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Economic research bulletin (2007, No.1)
Heřmánek, Jaroslav ; Hlaváček, Michal ; Jakubík, Petr ; Geršl, Adam ; Derviz, Alexis ; Podpiera, Jiří ; Šmídková, Kateřina
This issue of the CNB Research Bulletin looks at advances in the area of financial stability. Financial stability issues have attracted the attention of central banks in the last 10 years, mainly due to the rapid development of financial systems, the emergence of new financial products and the increased integration of the financial system across borders. These issues are extremely important for the Czech financial sector as well. One of the most widely used analytical tools for evaluating the stability of the financial sector is stress testing. The first article – by Jaroslav Heřmánek, Petr Jakubík and Michal Hlaváček – describes progress in this area as compared to earlier versions of stress testing. Progress has been made primarily in the areas of modelling credit risk and linking the stress testing to the CNB’s official macroeconomic forecast. The second and third articles – by Adam Geršl and by Alexis Derviz and Jiří Podpiera – are devoted to the issue of cross border-contagion in the Czech Republic. This problem is of great importance for the Czech Republic due to the strong foreign ownership of the Czech banking sector and the increasing crossborder flows of capital. The article by Adam Geršl uses macroeconomic data from BIS and compares the threats of cross-border contagion from other CEECs using a common creditor index. The article by Alexis Derviz and Jiří Podpiera presents the results of a sophisticated microeconomic model of lending contagion within multinational banking groups together with an empirical model of lending contagion using individual bank data from Bankscope.
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Financial frictions, bubbles, and macroprudential policies
Derviz, Alexis
Writer explores the ability of a macroprudential policy instrument to dampen the consequences of equity mispricing (a bubble) and the correction thereof (the bubble bursting), as well as the consequences for real activity in a production economy. In the model, producers are financed by both bank debt and equity, and face a mix of systemic and idiosyncratic uncertainty.
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Funding costs and loan pricing by multinational bank affiliates
Derviz, Alexis ; Raková, Marie
Writers conduct a theoretical and empirical investigation of the influence which the financial condition of a multinational bank group may have on the lending rates of its affiliates. Tehy first propose a model of bank lending to risky clients in which the implicit opportunity costs of lending by a foreign bank affiliate are influenced by the abundance/scarcity of funds within the multinational conglomerate. They then formulate an empirical model of the spread charged by the affiliate to clients over the local interbank rate as a function of affiliate-level controls and a parent influence variable.
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Cross-border lending contagion in multinational banks
Derviz, Alexis ; Podpiera, Jiří
This paper studies the interdependence of lending decisions in different country branches of a multinational bank. This is done both theoretically and empirically. First, it formulates a model of a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. Second, it constructs a large sample of multinational banks and their ranches/subsidiaries and look for the presence of lending contagion by panel regression methods.
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