Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR

October 23, 2013

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Dale F. Gray Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR, (USA: International Monetary Fund, 2013) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.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. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.

Subject: Banking, Commercial banks, Corporate sector, Credit, Credit default swap, Credit risk, Economic sectors, Financial institutions, Financial regulation and supervision, Financial statements, Money

Keywords: Asset volatility, Bank assets, Bank capital, Bank CD, Bank creditor, Bank risk, Capital ratio, CCA balance sheets, Commercial banks, Contingent claims analysis (CCA), Corporate sector, Credit, Credit default swap, Credit risk, Fair value, Global, Global vector autoregression (GVAR), Market value, Risk indicator, Senior debt, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/218
Stock No:

WPIEA2013218
ISBN:

9781484322185
ISSN:

1018-5941

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