The value of information : the impact of European Union bank stress tests on stock markets

We tested whether the 2010, 2011 and 2014 European Union bank stress tests produced useful and real information to the market. Using an augmented capital asset pricing model, we analyzed the impact of the information disclosures on each stress test (announcement, methodology and results events) on the stock market returns and risk of banks. Our approach allows an integrated analysis, as a sample of 41 banks that participated in all three stress tests was used. The most significant event was the methodology disclosure, in terms of its impact on risk and returns. In contrast, the results events did not have much impact in the stock market when considering the entire sample of banks. On the other hand, after dividing the sample of banks into two groups (those that passed the 2014 European Union stress test vs. those that failed), we observed a significant reaction of the stock markets in both groups. These findings are consistent with the hypothesis that stress tests provide real and valuable information to the markets about the banking system. A significant part of that information is conveyed by announcement and methodology eventsinfo:eu-repo/semantics/publishedVersio

Value at Risk Disclosure of Banks

Mismanagement of risk can carry an enormous cost. In recent years, business has experienced numerous risks that have resulted in considerable financial losses, decrease in shareholder value, and damage to the banks or financial institutions reputations, dismissals of senior management and in some cases dissolution of the business. This risky environment where mismanagement of risks arrives makes it mandatory for management to adopt a more proactive perspective on risk management. In this paper we would be looking at the level of Value at Risk, Stress Tests and Enterprise Risk Management disclosure for a sample of sixteen banks where US, UK, Canadian and Japanese banks have been chosen. To measure the disclosure level of Value-at-Risk we modified an existing disclosure index; and for Stress Tests and Enterprise Risk Management we created a new disclosure index since lack of literature on ERM disclosure was found. A total score of fifteen for Value at Risk disclosure, four for Stress Tests and six for Enterprise Risk Management disclosure is assigned which captures different facets of risk disclosure where the data has been gathered from the bank’s annual reports from 2007 to 2010. We have observed that UK and Canadian banks have been consistently disclosing risk information in their annual reports, whereas, on the other hand Japanese banks and surprisingly US banks have been disclosing less information when compared to the other countries. Moreover, we have seen that few banks such as HSBC and Royal Bank of Canada have scored the highest disclosure score; and Wells Fargo and Nomura Bank have scored the least points in risk disclosure. Moreover, our results have shown that there little or no relationship between Value at Risk disclosure and the bank size and leverage and a positive relationship with banks profits

The dark side of stress tests:Negative effects of information disclosure

This paper studies the effect of information disclosure on banks’ portfolio risk. We cast a simple banking system into a general equilibrium model with trading frictions. We find that the information disclosure lowers the expected risk-adjusted profits for a non-negligible fraction of banks. The magnitude of this effect depends on the structure of the banking system and, alarmingly, it is more pronounced for systemically important institutions. We connect these theoretical findings to the stress test procedure, where bank information is disclosed by the regulator. The 2011 and 2014 stress tests are used in an empirical study to further support our theoretical results

Bank stress tests: implications on accounting discretion, transparency and market discipline

Since 2009, regulators worldwide have conducted large-scale stress tests to reveal systemically important banks’ soundness to financial markets. Regulators aim to enforce market discipline that penalises excessive risk-taking and requires banks to operate more responsibly leading to financial stability. In this thesis, I contribute to this current debate by empirically analysing the implications of bank stress tests on three important aspects, namely accounting discretion, transparency and market discipline. First, based on a unique accounting dataset of stress-tested and untested European banks, I reveal that the accounting information of stress-tested banks is affected by stress tests. In particular, stress tests incentivise bank managers to exercise accounting discretion over loan loss provisions to manage both capital and earnings. The results suggest that stress tests exacerbate discretionary behaviour with the purpose of passing stress tests and conveying a sound picture of the bank’s financial condition to regulators and market participants. Second, examining a unique textual dataset of stress-tested European banks, I find that stress tests incentivise banks to enrich their textual narratives utilising certain stress test terms that I call ‘stress test sentiment’. This effect may specifically apply to newly than regularly stress-tested banks. Importantly, banks seem to compensate an increased stress test sentiment using a more positive disclosure tone; this may obfuscate market players, as market measures indicate lower information asymmetry and more analyst coverage. Third, based on a dataset of European and U.S. stress-tested banks, I show that stress tests do promote market discipline in both positive and negative directions as well as in short- and long-term event windows. In Europe, bank fundamentals are improved in terms of reduced bank risk-taking and funding structure, whilst the U.S. results are inconclusive. However, stress tests also tend to exacerbate negative performance of weaker institutions, due to market discipline, which could unintentionally compromise financial stability. In summary, this thesis provides novel results on stress tests that might be of interest to policymakers and regulators. I conclude that stress tests are an important addition that increases regulatory awareness and can enhance financial stability. However, I also show that stress tests may lead to unintended drawbacks on bank accounting practice and market discipline. Therefore, stress tests must be paired with a carefully executed disclosure policy to be a more effective regulatory tool

Сравнение мировой и украинской практики банковского стресс тестирования

Early stress tests, used primarily as risk management tools, date back as far as the 1990s. Programs conducted by the IMF, Bank of England, Dodd-Frank Act, Bank of Japan, Swiss Financial Market Supervisory Authority and the World Bank promoted the used of stress tests. The basic idea the introduction of stress testing was to ensure that banks have sufficient capital to cover their risks, and to ensure that banks and banking systems are more resilient to economic and financial shocks. This paper provides an overview of the recent implementation of stress testing by regulatory agencies in the United States, the United Kingdom, Japan, Switzerland and the European Union. This article also gives an overview of the stress testing methodology developed by the National Bank of Ukraine and in accordance with Basel III recommendations. The aim of research is comparative evaluation of key aspects of system-wide stress tests in different finance systems: Euro area, United Kingdom, Switzerland, Japan, the United States and Ukraine, identifying identification of similarities and differences and prospects for the development in our country. To substantiate the theoretical positions and reasoning of the conclusions general scientific methods are used, including system, abstract-logical approach, as well as methods of formalization, analysis and synthesis of information, comparative analysis. During the study, a comparative analysis of the stress-testing methodology in six countries was conducted. The scientific importance of the work lies in the fact that on the basis of the conducted research it is possible to improve stress-testing of Ukrainian banking system based on best practices from developed countries. The value of the research is that it is increasingly necessary to used best practices of stress tests as a powerful tool in risk management, in micro prudential and macroprudential policies. Results of researches can to used not only in development methodology of stress-testing, but also in case-study of banking.Перші стрес-тести, які використовувалися переважно в якості інструментів управління ризиками, датуються 1990-ми роками. Програми, впроваджені МВФ, Банком Англії, Законом Додда-Франка, Банком Японії, Швейцарським органом з нагляду за фінансовим ринком і Світовим банком, сприяли подальшому використанню стрес-тестів. Основна ідея введення стрес-тестування полягала в забезпеченні банків достатнім капіталом для покриття своїх ризиків і зростанні стійкості банків і банківських систем до економічних і фінансових потрясінь. У даній статті узагальнено досвід стрес-тестування регулюючими органами в Сполучених Штатах, Великобританії, Японії, Швейцарії та Європейському союзі. У цій статті також дається огляд методології стрес-тестування, розробленої Національним банком України відповідно до рекомендацій Базель III. Метою дослідження є порівняльна оцінка ключових аспектів загальносистемних стрес-тестів в різних фінансових системах: зоні євро, Великобританії, Швейцарії, Японії, США та України, виявлення подібностей, відмінностей і перспектив подальшого розвитку. Для обґрунтування теоретичних положень і висновків використовуються загальнонаукові методи, в тому числі системний, абстрактно-логічний підхід, а також методи формалізації, аналізу та узагальнення інформації, порівняльний аналіз. В ході дослідження було проведено порівняльний аналіз методології стрес-тестування в шести країнах. Наукова значимість роботи полягає в систематизації передового досвіду стрес-тестування розвинених країн та розробці на їх основі рекомендацій щодо поліпшення методики стрес-тестів банківської системи України. Цінність дослідження полягає в обґрунтуванні необхідності використовувати кращі методи стрес-тестів в якості потужного інструменту управління ризиками в мікропруденціальной і макропруденційних політиці. Результати досліджень можуть бути використані не тільки в розробці методології стрес-тестування, але і в тематичному дослідженні банківської справи.Ранние стресс-тесты, используемые в основном в качестве инструментов управления рисками, датируются 1990-ми годами. Программы, проводимые МВФ, Банком Англии, Законом Додда-Франка, Банком Японии, Швейцарским органом по надзору за финансовым рынком и Всемирным банком, способствовали использованию стресс-тестов. Основная идея введения стресс-тестирования состояла в обеспечении банков достаточным капиталом для покрытия своих рисков и сделать так, чтобы банки и банковские системы были более устойчивыми к экономическим и финансовым потрясениям. В данной статье обобщен опыт недавнего стресс-тестирования регулирующими органами в Соединенных Штатах, Великобритании, Японии, Швейцарии и Европейском союзе. В этой статье также дается обзор методологии стресс-тестирования, разработанной Национальным банком Украины и в соответствии с рекомендациями Базель III. Целью исследования является сравнительная оценка ключевых аспектов общесистемных стресс-тестов в различных финансовых системах: зоне евро, Великобритании, Швейцарии, Японии, США и Украине, выявление сходства, различий и перспектив дальнейшего развития. Для обоснования теоретических положений и выводов используются общенаучные методы, в том числе системный, абстрактно-логический подход, а также методы формализации, анализа и обобщения информации, сравнительный анализ. В ходе исследования был проведен сравнительный анализ методологии стресс-тестирования в шести странах. Научная значимость работы состоит в систематизации передового опыта стресс-тестирования развитых стран и разработке на их основе рекомендаций по улучшению методики стресс-тестов банковской системы Украины. Ценность исследования заключается в обосновании необходимости использовать лучшие методы стресс-тестов в качестве мощного инструмента управления рисками в микропруденциальной и макропруденциальной политике. Результаты исследований могут быть использованы не только в разработке методологии стресс-тестирования, но и в тематическом исследовании банковского дела

Runs versus Lemons: Information Disclosure and Fiscal Capacity

We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained

Written emotional disclosure for women with ovarian cancer and their partners: randomised controlled trial.

OBJECTIVE: Written emotional disclosure for 15-20 min a day over 3 to 4 days improves physical and psychological health and may benefit cancer patients. However, no studies have tested the effectiveness of guided writing in cancer patients and their partners. A randomised controlled trial tested whether writing about the patient's diagnosis and treatment of ovarian cancer using the Guided Disclosure Protocol (GDP) is effective in reducing perceived stress and improving quality of life (QoL) in ovarian cancer couples. The study also tested two theories that may account for beneficial effects of written emotional disclosure, the cognitive processing hypothesis and the social interaction hypothesis. METHODS: Patients and their partners (N = 102 couples) were randomised to write at home for 15 min a day over 3 days about the patient's diagnosis and treatment using the GDP or what the patient did the previous day (control). Couples were assessed at baseline, 3- and 6-month follow-ups on the primary outcomes of perceived stress and QoL and secondary outcomes of intrusive thoughts (testing the cognitive processing hypothesis) and illness-related couple communication (testing the social interaction hypothesis). RESULTS: There were no main effects for any outcomes. However, in patients, the GDP improved QoL if illness-related couple communication improved and buffered the effect of intrusive thoughts on perceived stress. CONCLUSIONS: The GDP might benefit patients in certain circumstances, through changes in communication (in line with the social interaction hypothesis). Further research is needed to determine whether patients benefit from interventions to improve illness-related couple communication and under which conditions. Copyright © 2013 John Wiley & Sons, Ltd

Leverage Ratios and Basel III: Proposed Basel III Leverage and Supplementary Leverage Ratios

The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision – as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. It will also consider the consequences – as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood, indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.? The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a pro-active approach – particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standard

The Silicon Meta-shell X-ray Mirror Technology Development Roadmap for the Lynx Mission

This document presents a roadmap for advancing the silicon meta-shell optics (SMO). It describes an overall strategy and key technical elements to be developed to meet the four-fold Lynx requirements: (1) angular resolution, (2) effective area, (3) mass, and (4) production schedule and cost. It also describes the building and testing of an engineering unit whose successful completion will retire all risks, technical, logistical, schedule, and cost, associated with building and delivering a mirror assembly for the Lynx mission. All of this work, designed to advance this technology to TRL 6, will be completed by Preliminary Design Review (PDR) to ensure that the flight mirror assembly production process will be but a repetition of a set of well-defined and mature steps, leading to on-time and on-budget delivery of a mirror assembly for the Lynx mission

Juridical and Financial Considerations on the Public Recapitalisation and Rescue of Financial Institutions During Periods of Financial Crises (Part I)

As well as a consideration of why the lender of last resort facility should be used for emergency situations and systemically relevant institutions in particular, an interesting point which will be considered in this publication is the comparison between the European Central Bank (ECB) Recommendation and its application by the Commission in the Re capitalisation Communication, specifically with its Annex, where the Commission explains how it determines the price of equity or own funds (ordinary or common shares) - balancing the “real value” with the “market value” within a crisis context. This publication will also consider how to transform the Crisis into an opportunity in order to minimise tax burdens to taxpayers – as well as making financial markets more efficient. Furthermore, whether the Commission and Member States have applied the methodology (the determination of the price of equity – as stated in the Annex to the Recapitalisation Communication on Financial Institutions) in determining the price of equity with respect to the capital of banks acquired by Member States, will be addressed. Such consideration could provide a vital key to determining the real value of State Aid and the best possible price for which capital could be sold. Given the scale of government intervention and State rescues which occurred during the recent crisis – as well as the prominence accorded to measures aimed at preventing and limiting distortions of competition, calls have been made for competition authorities to take on more formidable roles in designing and implementing exit strategies. In order to foster competition as much as possible, it is proposed that ”governments should provide financial institutions with incentives to prevent them from depending on government support once the economy begins to recover.