Economic (Risk) Capital - How To - References
Wednesday, 4 March 2009 | 
Risk - Research
STRESS TESTING FOR PILLAR 2
Asymptotix published a White Paper (WP) on Credit Risk Economic Capital, Open Source R and High Performance Computing. REvolution Computing (now called Revolution Analytics) kindly supported this paper. The paper is extensively referenced and more and more right now I am being asked about the references, as a body of work in their own right, which indeed they are, my paper isn't really necessary (although I would argue that REvolution is!). My paper simply glues together in a narrative, that body of theoretic work which constitutes the leading thinking in the Economic Risk Capital space. You could view the references as a theoretical forge from which a set of R objects could be refined from that universe and then optimised in REvolution. At least that's way I see it. You can reference my paper here, at this url;
http://www.asymptotix.eu/content/credit-economic-capital-financial-predictive-analytics
Below is a presentation of the set of references I used both the theoretical work (alot of it is very applied) on issues in Risk and Economic Capital and the specific applied papers on Stress Testing.
Credit Risk (Economic) Capital Modeling REFERENCES
a. Capital allocation for securitizations with uncertainty in loss prioritization, Michael Gordy and David Jones, Federal Reserve Board, December 6, 2002, http://www.bis.org/publ/bcbs_wp11gj.pdf
b. Pykhtin, and Dev, “Credit Risk in Asset Securitizations: Analytical Model" Risk, May 2002. Model Foundations for the Supervisory Formula Approach, Michael B. Gordy, Board of Governors of the Federal Reserve System, July 2004; http://www.moodyskmv.com/conf05/pdf/papers/m_gordy.pdf
c. Bank of England, Working Paper No. 346, Network models and financial stability, Erlend Nier,, Jing Yang, Tanju Yorulmazer and Amadeo Alentorn; http://www.bankofengland.co.uk/publications/workingpapers/wp346.pdf
d. Basel Committee on Banking Supervision, The Joint Forum Cross-Sectoral review of group-wide identification and management of risk concentrations, April 2008; http://www.bis.org/publ/joint19.pdf?noframes=1
e. Basel Committee on Banking Supervision Consultative Document, Range of practices and issues in economic capital modelling, Issued for comment by 28 November 2008; http://www.bis.org/publ/bcbs143.pdf?noframes=1
f. Stress testing of real credit portfolios, Ferdinand Mager (Queensland University of Technology and School of Economics and Finance), Christian Schmieder (Deutsche Bundesbank and European Investment Bank), Deutsche Bundesbank, Discussion Paper, Series 2: Banking and Financial Studies, No 17/2008; http://www.bundesbank.de/download/bankenaufsicht/dkp/200817dkp_b_.pdf
g. Financial Services Authority, Review of the liquidity, requirements for banks and building societies DP07/7, http://www.fsa.gov.uk/pubs/discussion/dp07_07.pdf
h. Economic Implications of Copulas and Extremes, Norges Bank, 2008, http://www.norges-bank.no/upload/71737/economic%20implications_pek_02_08.pdf
i. Correlation: Pitfalls and Alternatives, Paul Embrechts, Alexander McNeil & Daniel Straumann, Departement Mathematik, ETH Zentrum, 1999; http://www.math.ethz.ch/~mcneil/ftp/risk.pdf
j. Modeling Dependencies in Finance using Copulae; Wolfgang Härdle, Ostap Okhrin & Yarema Okhrin, SFB 649 Discussion Paper 2008-043; http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2008-043.pdf
k. BIS Working Papers, No 165, Stress-testing financial systems: an overview of current methodologies, by Marco Sorge, BIS, Monetary and Economic Department, December 2004; http://www.bis.org/publ/work165.pdf?noframes=1
l. Modelling Dependent Defaults: Asset Correlations Are Not Enough! Rudiger Frey, Swiss Banking Institute, University of Zurich. Alexander J. McNeil, Department of Mathematics, ETH Zurich, Mark A. Nyfeler, Investment Office RTC, UBS Zurich, March 9, 2001; http://www.mathematik.uni-leipzig.de/MI/frey/FreyMcNeilNyfeler.pdf
m. BIS Working Papers, No 214; The pricing of portfolio credit risk by Nikola Tarashev and Haibin Zhu, Monetary and Economic Department, September 2006; http://www.bis.org/publ/work214.pdf?noframes=1
n. The pricing of correlated default risk: evidence from the credit derivatives market, Nikola Tarashev, (Bank for International Settlements) Haibin Zhu, (Bank for International Settlements) Discussion Paper, Series 2: Banking and Financial Studies, No 09/2008; http://www.bundesbank.de/download/bankenaufsicht/dkp/200809dkp_b_.pdf
o. BIS Working Papers, No 173, Measuring default risk premia from default swap rates and EDFsby Antje Berndt, Rohan Douglas, Darrell Duffie, Mark Ferguson and David Schranz Monetary and Economic Department March 2005; http://www.bis.org/publ/work173.pdf?noframes=1
p. McNeil AJ and Wendin JP: Bayesian inference for generalized linear mixed models of portfolio credit risk. Journal of Empirical Finance, 14(2): 131-149. 2007 Earlier preprint version may be found here: http://www.defaultrisk.com/pp_model_09.htm
q. TIME-VARYING DEPENDENCE MODELLING OF MARKET AND CREDIT RISK, ROBERT SCHOFTNER; http://www.msfinance.ch/pdfs/RobertSchoeftner.pdf
Stress Testing (Specific Process) References
1. Non-Linearities, Model Uncertainty, and Macro Stress Testing, by Miroslav Misina and David Tessier, Working Paper/Document de travail, 2008-30; Banque de Canada; http://dsp-psd.pwgsc.gc.ca/collection_2008/bank-banque-canada/FB3-2-108-30E.pdf
2. Macro-model-based stress testing of Basel II capital requirements, Esa Jokivuolle, Kimmo Virolainen & Oskari Vähämaa, Bank of Finland Research, Discussion Papers, 17 2008; http://www.bof.fi/NR/rdonlyres/6F6D65CB-7334-4629-954C-B90F7AC279AC/0/0817netti.pdf
3. SIMULATING FINANCIAL INSTABILITY, Conference on stress testing and financial crisis simulation exercises, The European Central Bank, July 2008; http://www.ecb.eu/pub/pdf/other/simulatingfinancialinstability200809en.pdf
4. Stress testing of real credit portfolios, Ferdinand Mager, Christian Schmieder, Discussion Paper, Series 2: Banking and Financial Studies, No 17/2008; http://www.bundesbank.de/download/bankenaufsicht/dkp/200817dkp_b_.pdf
5. Modelling The Distribution Of Credit Losses With Observable And Latent Factors, Gabriel Jiménez and Javier Mencía, 2007, Documentos de Trabajo, No. 0709, Banco de Espana; http://www.bde.es/informes/be/docs/dt0709e.pdf
6. Stress Tests for the Austrian FSAP Update, 2007: Methodology, Scenarios and Results, Michael Boss, Gerhard Fenz, Gerald Krenn, Johannes Pann, Claus Puhr, Thomas Scheiber, Stefan W. Schmitz, Martin Schneider and Eva Ubl; http://www.oenb.at/en/img/fsr_15_special_topics_01_tcm16-87339.pdf
7. The Next Generation of Default Prediction Models, Andreas Blochlingery, Zurcher Kantonalbank, Version: April 2007; http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1080231
8. A FRAMEWORK FOR STRESS TESTING BANKS’ CREDIT RISK, Research Memorandum 15/2006, October 2006, Hong Kong Monetary Authority. http://www.info.gov.hk/hkma/eng/public/qb200612/E_25_38.pdf
9. The Basel II framework: the role and implementation of Pillar 2, PIERRE-YVES HORAVAL General Secretariat of the Commission Bancaire, Banque de France Financial Stability Review No. 9 December 2006; http://www.banque-france.fr/gb/publications/telechar/rsf/2006/etud6_1206.pdf
10. DEVELOPING A FRAMEWORK FOR STRESS TESTING OF FINANCIAL STABILITY RISKS, NIGEL JENKINSON, Executive Director, Financial Stability, Bank of England, 2007. http://www.bankofengland.co.uk/publications/speeches/2007/speech318.pdf
11. Integrating credit and interest rate risk: A theoretical framework and an application to banks' balance sheets Mathias Drehmann, Steffen Sorensen & Marco Stringa; First Draft, April 2006; http://www.bis.org/bcbs/events/rtf06stringa_etc.pdf
12. Adjusting Multi-Factor Models for Basel II-consistent Economic Capital by Marc Gürtler, Martin Hibbeln, and Clemens Vöhringer, summer 2008. http://www.fmpm.ch/docs/11th/papers_2008_web/A2b.pdf
13. A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios, Klaus Düllmann and Nancy Masschelein, version: October 2006; http://www.bundesbank.de/download/bankenaufsicht/dkp/200609dkp_b.pdf
14. Stress testing as a tool for assessing systemic risks Bank of England Financial Stability Review: June 2005; http://www.bankofengland.co.uk/publications/fsr/2005/fsr18art8.pdf
15. Liquidity Stress-Tester: A macro model for stress-testing banks' liquidity risk, Jan Willem van den End, Netherlands Central Bank, Research Department in its series DNB Working Papers 175, May 2008, http://www.dnb.nl/binaries/Working%20paper%20175_tcm46-175526.pdf
16. Credit Risk Factor Modeling and the Basel II IRB Approach, Alfred Hamerle, Thilo Liebig, Daniel Rösch, Deutsche Bundesbank, Preliminary Draft from: October 7, 2002; http://www.bundesbank.de/download/bankenaufsicht/dkp/200302dkp_b.pdf
17. Stresstests in Banken, Von Basel II bis ICAAP, Kai-Oliver Klauck, Claus Stegmann, iFB, 2006
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Detailed Methodological Notes EBA Stress Test April 2011
18 March 2011
2011 EU-Wide Stress Test:
Methodological Note
Version 1.1
EUROPEAN BANKING AUTHORITY
Stress Testing for Pillar 2 asymptotic update
This is an update and consolidation of a number of references to techniques and procedures required to implement stress testing to meet supervisory requirements whether for Basel II or Solvency II. These references are to relevant material either here on the asymptotix website or from my analytic bridge blog. I thought it was useful to update this page which is so popular and I know is regarded as a useful resource all over the world. There are useful lessons here for anyone setting up an internal Stress Testing unit to support Basel II or Solvency II compliance.
Credit Models Pre- and In-Crisis
The Business Cycle and Basel III
Stress of stress tests
The term macroprudential
Liquidity scenario analysis in the Luxembourg banking sector
FSA strengthens stress testing regime
The New Banking Transparency
Statement by Informal Ecofin on EU-wide stress test
Mitigating Model Risk
Dynamic Provisioning & Bank Capital Integrity
FSA statement on its use of stress tests
The Point About Stress Tests
Papers from the Bank for International Settlements
FINANCIAL SECTOR PRO-CYCLICALITY LESSONS FROM THE CRISIS
A method to incorporate information from Dynamic Stochastic General Equilibrium (DSGE) models into Dynamic Factor Analysis
ERM-II Enterprise Risk Management & Economic Capital
Extreme Value Theory and the Financial Crisis of 2008
Macroeconomic Models of the Euro area at the European Central Bank
Liquidity Risk - The Definitive Methodological Paper
Comparison and Pooling of MacroEconomic Forecasts
Academic & Central Bank Papers
The Asymptotic Single-Risk-Factor
After the Credit Crunch: The importance of Economic Capital
The Case for Fully Integrated Models of Economic Capital
Measuring Risk Dependencies in the Solvency II-Framework
Solvency II Modelling of Risk Aggregation
MODELLING AND FORECASTING UK MORTGAGE ARREARS AND POSSESSIONS
An economic capital model for the Banking Book
ASSESSING PORTFOLIO CREDIT RISK CHANGES IN A SAMPLE OF EU LARGE AND COMPLEX BANKING GROUPS IN REACTION TO MACROECONOMIC SHOCKS
Factor Modelling in the European Context
ECB FSR XII MMX Macro Financial Models
European Central Bank Financial Stability Review December 2010
Special Feature
TOWARDS MACRO-FINANCIAL MODELS WITH REALISTIC CHARACTERISATIONS OF FINANCIAL INSTABILITY
Realistic characterisations of such instabilities include bank defaults, financial market illiquidity, extreme events, and related non-linearities.
None of these feature in the macroeconomic models regularly used for forecasting and monetary policy analysis and only recently has more emphasis been given to better developing the role of financial sectors in these models. This gap is of particular concern given the ongoing efforts to establish serious macro-prudential oversight and regulation to counter systemic risks.
The aim of this special feature is to provide an overview of the recent upsurge in research papers trying to integrate more developed financial sectors in standard macroeconomic models and to compare this work with what is needed for the support of macro-prudential policies.
One conclusion is that very significant further research efforts are needed, including attempts using modelling approaches that deviate from the currently dominating macroeconomic paradigm. It is of great importance that the academic and policy-oriented research communities join forces in working towards this objective.
here
the concept of Basel II
the concept of Basel II operational risk appears at first as innovative little, insofar as the banks did not wait for the Basel Committee to organize their activities in the form of procedures, and to establish internal audit departments responsible for verifying the correct application of these procedures. However, spectacular failures such as Barings, have attracted the attention of authorities on the need for banks to dispute prevention and coverage (through the creation of dedicated funds) against operational risks. ( Source : Basel II Operational Risk )
Betty Swan
Financial Manager