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When Micro Prudence Increases Macro Risk: The Destabilizing Effects of Financial Innovation, Leverage, and Diversification

Fulvio Corsi, Stefano Marmi, Fabrizio Lillo
2013 Social Science Research Network  
Introduction of financial innovation makes: ↓ c ↑ m ↓ σp ↑ λ Fulvio Corsi () Micro Prudence and Macro Risk Ancona, 4 July 2013 28 / 30  ...  ,2009; Adrian et al., 2011) ; on the effects of diversification and overlapping portfolios on systemic risk (Tasca & Battiston, 2012; Caccioli et al., 2012) on the risks of financial innovation (Brock  ... 
doi:10.2139/ssrn.2278298 fatcat:od2bkymbqje25mie7tygpibdti

When Micro Prudence Increases Macro Risk: The Destabilizing Effects of Financial Innovation, Leverage, and Diversification

Fulvio Corsi, Stefano Marmi, Fabrizio Lillo
2016 Operations Research  
The model shows that when financial innovation reduces the cost of diversification below a given threshold, the strength (due to higher leverage) and coordination (due to similarity of bank portfolios)  ...  Abstract By exploiting basic common practice accounting and risk management rules, we propose a simple analytical dynamical model to investigate the effects of micro-prudential changes on macro-prudential  ...  Intermediary leverage cycles and financial stability. Technical Report 2012-010, Becker Friedman Institute for Research in Economics Working  ... 
doi:10.1287/opre.2015.1464 fatcat:537awclwrbfnbhmkmixl3jj6ju

Introduction: Contemporary Challenges in Risk Management [chapter]

Torben J. Andersen
2014 Contemporary Challenges in Risk Management  
"When Micro Prudence increases Macro Risk: The Destabilizing Effects of Financial Innovation, Leverage and Diversification" Authors: Corsi F. -Lillo F. -Marmi S.  ...  Room Ks48 "Exploring The Corporate Risk Outcomes of Effective Dynamic Capabilities" Authors: Andersen T. -Hansen A.  ...  Room Ks71 "Bank risk -return efficiency and bond spread: Is there evidence of market discipline in Europe?" Authors: Casteuble C. -Nys E. -Rous P.  ... 
doi:10.1057/9781137447623_1 fatcat:pf6t4myudbf2lp7ah3e624xvee

Financial Sector in Flux

ARNOUD W.A. BOOT
2014 Journal of Money, Credit and Banking  
Leverage would then be encouraged (i.e. it increases ROE) and help explain the low capitalization in banking.  ...  Finally, the paper also warns against too much trust in diversification and risk transfers as these may lead to risks being concentrated in the hands of naïve investors.  ...  The critical observation is that increasing asset risk and/or leverage increases the per unit cost of capital.  ... 
doi:10.1111/jmcb.12082 fatcat:ldzy4co7i5e3hjom77wpfth73u

The Great Game Will Never End: Why the Global Financial Crisis Is Bound to Be Repeated

David Blake
2022 Journal of Risk and Financial Management  
This article re-examines key explanations of the Global Financial Crisis—product complexity, behavioural biases in decision making, systemic risk, and regulatory arbitrage and capture—and finds a common  ...  Although governments have introduced some significant mitigatory measures, they will not be effective in preventing future financial crises, because they do not and, indeed, cannot provide the appropriate  ...  risks, requiring both micro-prudential and macro-prudential policy responses.  ... 
doi:10.3390/jrfm15060245 fatcat:3whj2wjrobebpbcgzrsu4mn77y

Revisiting Risk-Weighted Assets

Sofiya Avramova, Vanessa Le Leslé
2012 IMF Working Papers  
In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel  ...  We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.  ...  RWAs are an important part of both the micro-and macro-prudential toolkit, and can (i) provide a common measure for a bank's risks; (ii) ensure that capital allocated to assets is commensurate with the  ... 
doi:10.5089/9781475502657.001 fatcat:5cjopizg2nfqtiybjn7lqufs54

The future of financial markets and regulation: what strategy for Europe?

Jean-Baptiste Gossé, Dominique Plihon, Dr Robert Gurrman and Mrs Pascal Petit
2014 Foresight  
Nevertheless, the "European government" might gradually increase the degree of financial integration outside Europe in line with the degree of cooperation with the rest of the world.  ...  This article provides insight into the future of financial markets and regulation in order to define what would be the best strategy for Europe.  ...  This was done in the name of transparency, risk-sensitivity and prudence, but what it achieved was increasing homogeneity and cyclicality of market behaviour, hence also increased systemic fragility.  ... 
doi:10.1108/fs-05-2012-0039 fatcat:rtxjavan2bd4nfouytu3jvlwra

Minsky at Basel: A Global Cap to Build an Effective Postcrisis Banking Supervision Framework

Giuseppe Mastromatteo, Lorenzo Esposito
2016 Social Science Research Network  
We think an overall alternative is needed and at hand: Minsky's theories on investment, financial stability, the growing weight of the financial sector, and the role of the state.  ...  In this respect, we argue that the only effective solution is to impose a global cap on the absolute size of banks.  ...  Prosperity is destabilizing because it is built on financial leverage.  ... 
doi:10.2139/ssrn.2845995 fatcat:6akhp6hudfaa3jvgok4kngizv4

Mainstream Versus Heterodox View on Financial Innovation

MARTIN JANICKO
2015 International Journal of Economic Sciences  
Its main conclusion is that higher intensity of financial innovation usually leads to a higher volatility of the business cycles, namely due to excessive pessimistic or optimistic sentiment and influx  ...  In terms of economic fluctuations, financial innovations are frequently assessed based on the cycle amplitude.  ...  The first signs of reorientation are being felt in terms of micro-vs. macro-prudence, as systemic risk, related to the collapse of the financial sector, has proved to be rather imminent.  ... 
doi:10.20472/es.2015.4.1.001 fatcat:hjmbov2hgrhn7e74g46ukwrssi

Promoting Bank Stability Through Compensation Reform: Lessons from Iceland

Jay Cullen, Gudrun Johnsen
2015 Social Science Research Network  
Extensive reforms to compensation rules at financial institutions have been implemented across the globe, including increased use of deferral, mandatory capping of bonuses and the introduction of claw-back  ...  Arguably, these recommendations will help improve the resilience of the European banking system and contribute to greater financial stability.  ...  financial oversight or cross-border surveillance, and misplaced faith in modern risk-management techniques, as well as poor micro-and macro-incentives.  ... 
doi:10.2139/ssrn.2581733 fatcat:pvyixa44kvbtlpkh2ks36ciqle

Promoting Bank Stability through Compensation Reform: Lessons from Iceland

Jay Cullen, Guðrún Johnsen
2015 Stjórnmál og Stjórnsýsla  
Extensive reforms to compensation rules at financial institutions have been implemented across the globe, including increased use of deferral, mandatory capping of bonuses and the introduction of claw-back  ...  Arguably, these recommendations will help improve the resilience of the European banking system and contribute to greater financial stability.  ...  financial oversight or cross-border surveillance, and misplaced faith in modern risk-management techniques, as well as poor micro-and macro-incentives.  ... 
doi:10.13177/irpa.a.2015.11.2.11 fatcat:2xjip3lnuzgshkieikiqdx6rca

Euro Area Policies: 2011 Article IV Consultation--Lessons from the European Financial Stability Framework Exercise; and Selected Issues Paper

International Monetary Fund
2011 IMF Staff Country Reports  
a distressed institution-could undermine market confidence and risk destabilizing the financial system.  ...  Priorities should be set on the basis of sound risk assessments performed by the supervisory authority, encompassing both micro-and macro risks.  ...  Preventive arm--Principles of fiscal prudency--Limiting risks to public finance sustainability Preventive arm-Warnings and Sanctions in case of deviation from fiscal prudency Current rules Legislative  ... 
doi:10.5089/9781462338542.002 fatcat:7ouguhqfvfh3lanrct4km2b5de

The Basel Capital Accords and International Mortgage Markets: A Survey of the Literature

Linda Allen
2004 Financial Markets, Institutions & Instruments  
This paper surveys the literature on the impacts of the Basel Capital Accords on banking market profitability, competitiveness, structure and risk-taking.  ...  This paper has received generous financial support from the Canada Housing and Mortgage Corporation (CMHC). The Basel Capital Accords and International Mortgage Markets: A Survey of the Literature 1.  ...  Correlations Between LGD and PD Sign of correlation between LGD and PD. Relationship between PD- LGD correlation and systematic macro effects.  ... 
doi:10.1111/j.0963-8008.2004.00001.x fatcat:rhwc5voftnhopn6vctfarvxify

Policy Instruments to Lean Against the Wind in Latin America

International Monetary Fund
2011 IMF Working Papers  
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.  ...  This Working Paper should not be reported as representing the views of the IMF.  ...  Liquidity risk management has become a regulatory priority, both from a micro and macro prudential angle.  ... 
doi:10.5089/9781455297726.001 fatcat:w7ycnnhpnnf3xg56odzuzb35cu

Euro Area Policies: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Member Countries

2018 IMF Staff Country Reports  
Results from the second phase of the ECB Expert Group Linking Macro and Micro data, established to understand and quantify the differences between micro and macro data on household wealth, were presented  ...  The ECB, Eurostat and the OECD actively cooperates on statistics and research concerning the joint distribution of income, consumptions and wealth (ICW) as well as linking macro and micro data on household  ... 
doi:10.5089/9781484368954.002 fatcat:q42qkyaajfg7dkflpbrra5a5oe
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