Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR
IMF Working Papers, October 23, 2013
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- Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR
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Bibliographic details
- Authors: Dale F. Gray
- Published: October 23, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484322185.001
Purpose and Framework
- Develops a model framework to analyze interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States.
- Integrates forward-looking contingent claims analysis (CCA) risk indicators for:
- banking systems in each country
- sovereigns
- Combines the CCA indicators with a global vector autoregression (GVAR) model to link banking, sovereign, and macro spheres.
- Emphasizes a fully endogenous setting where sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables interact.
CCA Indicators and Measurement
- CCA indicators capture nonlinear changes in:
- bank assets
- equity capital
- credit spreads
- default probabilities
- For sovereigns, CCA indicators capture:
- expected losses
- spreads
- default probability
- Also highlights market-value-based measures and CCA balance sheets.
Model Estimation, Calibration, and Scenarios
- The global model is estimated and calibrated to the sample of countries.
- Simulates various shock scenarios, including:
- negative shocks to bank risk
- negative shocks to sovereign risk
- positive shocks to bank and sovereign risk
- Objective of simulations: analyze impacts and spillovers across banking, sovereign, corporate, and real sectors.
Key Goals and Uses
- Analyze impact and spillover of shocks across countries and sectors.
- Help identify policies that mitigate:
- banking system risk
- sovereign credit risk
- recession risk
Policy Recommendations and Mitigating Actions
- Policies identified for mitigation include:
- bank capital increases
- purchase of sovereign debt
- guarantees
Subjects and Keywords (as listed)
- Subjects: 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