The liquidity of corporate and government bonds: drivers and sensitivity to different market conditions

In this report we investigate the liquidity of the European fixed income market using a large sample of government, corporate and covered bonds. We construct a robust liquidity index, based on PCA, to aggregate several measures and proxies for liquidity and estimate a multivariate regression models to identify the main factors driving bond liquidity in ordinary times as well as in times of market stress. We find that European bond liquidity is driven by bonds’ specific characteristics such as duration, rating, amount issued and time to maturity. The sensitivity of bond liquidity to these factors is larger when markets are under stress. We also analyze the link between the liquidity of individual bonds and the liquidity of the market as a whole. This is done through the estimation a liquidity market model that controls for bonds’ duration and rating as well as for periods of market stress. Results show that the illiquidity of individual bonds follows the illiquidity of the market. This effect is more pronounced for bonds with longer duration and lower rating, especially in times of market stress. Our results confirm the importance of rating in driving asset allocation decision (flight-to-safety) and suggest specific interventions that regulators might consider to introduce. First, provided that duration plays a very important role in bond liquidity, bond eligibility for the purposes of the LCR might be subject to a penalization based on duration. Second, given that the size of the bond issue affects the liquidity, regulators might create incentives for plain vanilla issues and re-openings of old issues.JRC.G.1-Financial and Economic Analysi

European deposit guarantee schemes: revision of risk based contributions using CDS spreads

Deposit Guarantee Schemes (DGS) aim at protecting depositors of all credit institutions against bank failures. One of the most critical issues about DGS concerns the criteria to be used to assess the risk‐based contribution that each member bank should pay to the Scheme. We propose an alternative model for risk-based contributions based on CDS spreads. We construct the same balance sheet ratios used in the Italian DGSs for a sample of EU banks issuing CDSs. Subsequently we perform panel regressions to explore the relationship between CDS spreads and balance sheet indicators. Results are used to construct an Aggregate Indicator of bank riskiness that is compared with the Aggregate Indicator currently used in the analyzed DGS.JRC.G.1-Scientific Support to Financial Analysi

The Role of Contagion in Financial Crises: an Uncertainty Test on Interbank Patterns

The main lesson learned from the recent financial crisis is the crucial role of interconnectedness between banks as a factor that can push the effects of bank defaults to extreme levels. One bank in distress can compromise the ability to repay obligations of its creditor banks, thereby inducing a more general crisis that spreads from the banking system towards the real economy. Several empirical and theoretical studies have focused on the role of the interbank market in causing contagion in financial crises. In this regard, one frequent problem encountered in dealing with contagion risk in the banking system is that only data on interbank credits and debts aggregated at bank level are publicly available, whereas the whole matrix of interbank linkages would be needed in order to estimate systemic risk correctly. One common solution is to assume that banks maximise the dispersion of their interbank credits and debts, so that the interbank matrix can be approximated by its maximum entropy. This paper tests the influence of this hypothesis on simulations by verifying if variations in the structure of the interbank matrix lead to significant changes in the magnitude of contagion. In order to do this, an algorithm was developed that generates interbank matrices with higher concentration. Then a Monte Carlo simulation was run by making use of the SYMBOL model (SYstemic Model of Banking Originated Losses) jointly developed by the JRC, DG MARKT, and experts of banking regulation (see De Lisa et al., 2010). We than compared results obtained using the maximum entropy approximated matrix with those obtained from more concentrated matrices. Numerical experiments, performed on samples of banks from four European countries, highlight that concentration in interbank loans does affect results but that, when considering the probability distribution of losses, even significant changes in the interbank matrix do not deeply affect results.JRC.G.1-Scientific Support to Financial Analysi

The mitigation role of collaterals and guarantees under Basel II

Under the Basel II framework for capital adequacy of banks, regulatory financial collateral and guarantees (C&G ) can affect lending policy in both a micro and a macro perspective. This paper aims at assessing these effects throught the modelling of the impact of C&G on credit spreads. In doing this we assume the perspective of a bank adopting a Foundation Internal Rating Based approach to measure credit risk and we apply a comparative-static analysis to a pricing model, based on the intrinsic value pricing approach as in the loan arbitrage-free pricing model (LAFP) suggested by Dermine (1996). Our results show that financial collaterals are more effective than guarantees in reducing credit spreads, this differential impact becoming greater as the borrower’s rating worsen. Moreover, the effects of C&G on credit spreads can be more effective than an improvement of borrower’s rating, this possibly leading to negative outfits on credit industries’ allocative efficiency.JRC.G.1-Scientific Support to Financial Analysi

The determinants of interbank contagion: do patterns matter?

The recent financial crisis highlighted that interconnectedness between banks has a crucial role, and can push the effects of bank defaults to extreme levels. The distress of one bank can compromise the solvency of its creditor banks, possibly inducing a more general crisis that can even deeply affect the real economy. Several studies have focused on the role of the interbank market in causing contagion in financial crises. As only data on interbank credits and debts aggregated at bank level are publicly available, whereas the whole matrix of interbank linkages would be needed in order to estimate systemic risk correctly, some approximation is needed. One common solution is to assume that banks maximize the dispersion of their interbank credits and debts, so that the interbank matrix is approximated by its maximum entropy realization. The aim of this paper is to test the influence of this approximation on simulations, and verifying if variations in the structure of the interbank matrix systematically change the magnitude of contagion. In order to do this, an algorithm was developed for generating interbank matrices with higher concentration, and, via a Monte Carlo simulation, a counterfactual test was realized comparing results obtained using the maximum entropy approximated matrix with those obtained from more concentrated matrices. Performing numerical experiments on samples of banks from four European countries, resulted in small changes in the point estimation, but variability and confidence interval for the estimates are deeply affected, in particular in banking systems when contagion effects are more important.JRC.G.1-Financial and Economic Analysi

The liquidity of corporate and government bonds: drivers and sensitivity to different market conditions

In this report we investigate the liquidity of the European fixed income market using a large sample of government, corporate and covered bonds. We construct a robust liquidity index, based on PCA, to aggregate several measures and proxies for liquidity and estimate a multivariate regression models to identify the main factors driving bond liquidity in ordinary times as well as in times of market stress. We find that European bond liquidity is driven by bonds’ specific characteristics such as duration, rating, amount issued and time to maturity. The sensitivity of bond liquidity to these factors is larger when markets are under stress. We also analyze the link between the liquidity of individual bonds and the liquidity of the market as a whole. This is done through the estimation a liquidity market model that controls for bonds’ duration and rating as well as for periods of market stress. Results show that the illiquidity of individual bonds follows the illiquidity of the market. This effect is more pronounced for bonds with longer duration and lower rating, especially in times of market stress. Our results confirm the importance of rating in driving asset allocation decision (flight-to-safety) and suggest specific interventions that regulators might consider to introduce. First, provided that duration plays a very important role in bond liquidity, bond eligibility for the purposes of the LCR might be subject to a penalization based on duration. Second, given that the size of the bond issue affects the liquidity, regulators might create incentives for plain vanilla issues and re-openings of old issues

Distinguishing features between patients with acute diverticulitis and diverticular bleeding: Results from the REMAD registry

Background: Pathogenesis of acute diverticulitis and diverticular bleeding remains poorly defined, and few data compare directly risk factors for these complications. Aims: to assess differences in clinical features, lifestyles factors and concurrent drug use in patients with acute diverticulitis and those with diverticular bleeding. Methods: Data were obtained from the REMAD Registry, an ongoing 5-year prospective, observational, multicenter, cohort study conducted on 1,217 patients. Patient- and clinical- related factors were compared among patients with uncomplicated diverticular disease, patients with previous acute diverticulitis, and patients with previous diverticular bleeding. Results: Age was significantly lower (OR 0.48, 95% CI: 0.34-0.67) and family history of diverticular disease was significantly higher (OR 1.60, 95% CI: 1.11-2.31) in patients with previous diverticulitis than in patients with uncomplicated diverticular disease, respectively. Chronic obstructive pulmonary disease was significantly higher in patients with previous diverticular bleeding as compared with both uncomplicated diverticular disease (OR 8.37, 95% CI: 2.60-27.0) and diverticulitis (OR 4.23, 95% CI: 1.11-16.1). Conclusion: This ancillary study from a nationwide Registry showed that some distinctive features identify patients with acute diverticulitis and diverticular bleeding. These information might improve the assessment of risk factors for diverticular complications

Discovery of new risk loci for IgA nephropathy implicates genes involved in immunity against intestinal pathogens

We performed a genome-wide association study (GWAS) of IgA nephropathy (IgAN), the most common form of glomerulonephritis, with discovery and follow-up in 20,612 individuals of European and East Asian ancestry. We identified six new genome-wide significant associations, four in ITGAM-ITGAX, VAV3 and CARD9 and two new independent signals at HLA-DQB1 and DEFA. We replicated the nine previously reported signals, including known SNPs in the HLA-DQB1 and DEFA loci. The cumulative burden of risk alleles is strongly associated with age at disease onset. Most loci are either directly associated with risk of inflammatory bowel disease (IBD) or maintenance of the intestinal epithelial barrier and response to mucosal pathogens. The geospatial distribution of risk alleles is highly suggestive of multi-locus adaptation, and genetic risk correlates strongly with variation in local pathogens, particularly helminth diversity, suggesting a possible role for host-intestinal pathogen interactions in shaping the genetic landscape of IgAN