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Implied market loss given default
Seidler, Jakub ; Jakubík, Petr (advisor) ; Dědek, Oldřich (referee)
This thesis focuses on the key credit risk parameter - Loss Given Default (LGD). We describe its general properties and determinants with respect to seniority of debt, characteristics of debtors or macroeconomic conditions, and discuss its role in Basel II framework. Further, we illustrate how the LGD can be extracted from market observable information with help of both the structural and reduced-form models. Finally, by using the adjusted Mertonian approach, we estimate the 5-year expected LGDs for companies listed on Prague Stock Exchange and find out, that the average LGD for this analyzed sample is around 20%. Keywords: loss given default, credit risk, structural models, reduced-form models JEL class: C02, G13, G33
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Dopad Basel III na české banky a efektivita kapitálových pomerov predpovedať finančnú tieseň bánk
Matejašák, Milan ; Dvořák, Petr (advisor) ; Teplý, Petr (referee) ; Seidler, Jakub (referee)
The aim of this thesis is to evaluate the impact of Basel III on Czech banks and to compare the effectiveness of capital ratios in predicting bank distress. After a short introduction, in the second chapter we estimate the impact of tightened Basel III capital regulation on lending spreads in the Czech banking sector. In this chapter we conclude that the tightened capital regulation will not lead to more expensive borrowing in the Czech Republic mainly because the banking sector has been well-capitalized. In the third chapter we identify the strategies that Czech banks adopted in order to significantly increase their capital ratios between 2009 and 2013. Our analysis shows that retained earnings have played a major role in increasing the average capital adequacy of Czech banks. In addition, the Czech banks have decreased their average asset risk to further strengthen the overall capital adequacy ratio. In the last chapter, using a dataset on bank distress in European banks during 2008-2012, we compare the performance of risk-weighted capital ratios and simple leverage capital ratios to predict bank distress. Our results suggest that simple leverage ratios can perform better than complex risk-weighted capital ratios when predicting bank distress. While such a finding is not conclusive, it suggests that more complex risk modeling does not always mean better risk modeling.
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In the Quest of Measuring the Financial Cycle
Plašil, Miroslav ; Konečný, Tomáš ; Seidler, Jakub ; Hlaváč, Petr
The recent financial crisis has demonstrated the importance of the linkages between the financial sector and the real economy. This paper sets out to develop two complementary methods for assessing the position of the economy in the financial cycle in order to identify emerging imbalances in timely manner. First, we construct a composite indicator using variables representing risk perceptions in the financial sector and calibrate this indicator to capture the credit losses the Czech banking sector experienced during the recent crisis. Second, we focus on the transitions of loans from one risk category to another, which allows us to capture the financial cycle from the perspective of the debt-paying ability of non-financial corporations. Both financial cycle measures can be used by policy makers for a wide range of policy decisions, including that on the setting of the countercyclical capital buffer.
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Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic
Belyaev, Konstantin ; Belyaeva, Aelita ; Konečný, Tomáš ; Seidler, Jakub ; Vojtek, Martin
This paper focuses on key macroeconomic driving factors influencing the loss given default (LGD) – an important credit risk parameter determining credit losses of the banking sector. Various econometric approaches are applied on both individual and aggregated data for different bank segments in order to identify the sensitivity of LGD parameters to both the micro characteristics of debtors and aggregated macro-level data. Despite the relatively low importance of macro variables in the model combining micro- and macroeconomic information, our estimates suggest that the macroeconomic environment contributes directly to the variation in LGD. The results from the different approaches confirm a negative link between LGD and consumption growth for the retail portfolio, while in the case of the corporate segment, a negative link between LGD and real GDP growth is identified. Importantly, given that aggregation effects and non-linearities may substantially affect the choice of relevant macroeconomic variables, it is essential to distinguish between models employing purely macroeconomic data and models combining micro- and macro-based information.
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Capital Buffers Based on Banks’ Domestic Systemic Importance: Selected Issues
Skořepa, Michal ; Seidler, Jakub
Regulators in many countries are currently considering ways to impose domestic systemic importance-based capital requirements on banks. Aiming to assist these considerations, this article discusses a number of issues concerning the calculation of a bank’s systemic importance to the domestic banking sector, such as the choice of indicators used and the pros and cons of focusing on an individual or consolidated level. Also, the “equal expected impact” procedure for determining adequate additional capital requirements is presented in detail and some of its properties are discussed. As an illustrative example of the practical use of the procedures presented, systemic importance scores and implied capital buffers are calculated for banks in the Czech Republic. The article also stresses the crucial role of public communication of the motivation for the buffers: regulators should make every effort to explain that the imposition of a non-zero systemic importance-based capital buffer on a bank is not to be interpreted by the markets as a signal that the bank is too big to fail and would therefore be guaranteed a public bail-out if it got into difficulties.
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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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The merton approach to estimating loss given default: application to the Czech republic
Seidler, Jakub ; Jakubík, Petr
This paper focuses on a key credit risk parameter – Loss Given Default (LGD). Writers illustrate how the LGD can be estimated with the help of an adjusted Mertonian structural approach. They present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other company structural parameters. Finally, we estimate the five-year expected LGDs for companies listed on Prague Stock Exchange and find that the average LGD for the analyzed sample is around 20–50%.
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Empirical Evidence from Central and Eastern European Countries
Geršl, Adam ; Seidler, Jakub
Excessive credit growth is often considered to be an indicator of future problems in the financial sector. This paper examines the issue of how to determine whether the observed level of private sector credit is excessive in the context of the “countercyclical capital buffer”, a macroprudential tool proposed in the new regulatory framework of Basel III by the Basel Committee on Banking Supervision. An empirical analysis of selected Central and Eastern European countries, including the Czech Republic, provides alternative estimates of excessive private credit and shows that the HP filter calculation proposed by the Basel Committee is not necessarily a suitable indicator of excessive credit growth for converging countries.
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Granger Causality Evidence
Horváth, Roman ; Seidler, Jakub ; Weill, Laurent
This paper examines the relation between banks’ capital and liquidity creation. This issue is of interest to determine the potential impact of higher capital requirements for banks on their liquidity creation, which may have particular importance with new Basel III reform demanding from banks higher capital. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive dataset of Czech banks from 2000 to 2010.
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