The Prediction of Corporate Bankruptcy and Czech Economy’s Financial Stability through Logit Analysis

This article presents a financial scoring model estimated on Czech corporate accounting data. Seven financial indicators capable of explaining business failure at a 1-year prediction horizon are identified. Using the model estimated in this way, an aggregate indicator of the creditworthiness of the Czech corporate sector (named as JT index) is then constructed and its evolution over time is shown. This indicator aids the estimation of the risks of this sector going forward and broadens the existing analytical set-up used by the Czech National Bank for its financial stability analyses. The results suggest that the creditworthiness of the Czech corporate sector steadily improved between 2004 and 2006, but slightly deteriorated in 2007 what could be explained through global market turbulences.bankruptcy prediction, financial stability, logit analysis, corporate sector risk, JT index

Operational Risk Management and Implications for Bank’s Economic Capital – a Case Study

In this paper we review the actual operational data of an anonymous Central European Bank, using two approaches described in the literature: the loss distribution approach and the extreme value theory (“EVT”). Within the EVT analysis, two estimation methods were applied; the standard maximum likelihood estimation method and the probability weighted method (“PWM”). Our results proved a heavy-tailed pattern of operational risk data consistent with the results documented by other researchers in this field. Additionally, our research demonstrates that the PWM is quite consistent even when the data is limited since our results provide reasonable and consistent capital estimates. From a policy perspective, it should be noted that banks from emerging markets such as Central Europe are exposed to these operational risk events and that successful estimates of the likely distribution of these risk events can be derived from more mature markets.operational risk, economic capital, Basel II, extreme value theory, probability weighted method

Efficiency of EU Merger Control in the 1990-2008 Period

The main goal of this paper is to provide an analysis of key regulatory changes in the European merger control and to evaluate their real impact on the efficiency of merger regulation. Our main contribution is an empirical analysis of a unique representative sample of 161 horizontal mergers covering the final regulatory assessments during the period from 1990 to 2008. We use stock market data to identify those cases where there are discrepancies between the Commission and market evaluation of the merger. The PROBIT model is then used to further investigate the sources of these discrepancies. Our results suggest that the Commission’s decisions are not purely explained by the motive of protecting consumer welfare and that other political and institutional factors do play a role in setting policy. We did not find evidence that the Commission protects competitors at the expense of consumers and foreign firms. Moreover, we conclude that the regulatory reform introduced in 2004 has significantly enhanced efficiency of the European merger control. To the authors’ best knowledge, this paper is the first study using stock market data to evaluate an impact of the recent EU merger control.merger control, European Union, political economy, regulatory reform, PROBIT model

Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period

In recent years, regulators have increased their focus on the capital adequacy of banking institutions to enhance their stability, hence the stability of the whole financial system. The purpose of this paper is to assess and compare how American and European banks adjust their level of capital and portfolio risk under capital regulation, whether and how they react to constraints placed by the regulators. In order to do this, we estimate a modified version of the simultaneous equations model developed by Shrieves and Dahl. This model analyzes adjustments in capital and risk at banks when they approach the minimum regulatory capital level. The results indicate that regulatory requirements have the desired effect on bank behavior. Both American and European banks that are close to minimum requirements simultaneously increase their capital. In addition, the US banks decrease their portfolio risk taking.banking regulation, Basel Capital Accord, capital adequacy, banks, simultaneous equations model

Main Flaws of The Collateralized Debt Obligation‘s: Valuation Before And During The 2008/2009 Global Turmoil

As a result of the 2008 financial crisis, the world credit markets stalled significantly and raised the doubts of market participants and policymakers about the proper and fair valuation of financial derivatives and structured products such as collateralized debt obligations (CDOs). The aim of the paper is to contribute to the understanding of CDOs and shed light on CDO valuation based on data before and during the current financial upheaval. We present the One Factor Model based on a Gaussian Copula and test five hypothesizes. Based on the results we discovered four main deficiencies of the CDO market. For our modelling we used data of the CDX NA IG 5Y V3 index from 20 September 2007 until 27 February 2009 and its quotes we appropriately transform into CDO quotes. Based on the results we discovered four main deficiencies of the CDO market: i) an insufficient analysis of underlying assets by both investors and rating agencies; ii) the valuation model was usually based only on expected cash-flows when neglecting other factors such mark-to-market losses or correlation risk; iii) mispriced correlation; and finally iv) the mark-to-market valuation obligation for financial institutions should be reviewed. Based on the mentioned recommendations we conclude that the CDO market has a chance to be regenerated. However, the future CDO market would then be more conscious, driven by smarter motives rather than by poor understanding of risks involved in CDOs.collateralized debt obligations, Gaussian Copula, valuation, securitization

Procyclicality as a source of systemic risk?

ABSTRACT This paper deals with procyclicality from both accounting and systemic risk point of view. The Basel Committee of Banking Supervision has called for amends in the accounting standards as there are several accounting issues affecting the business cycle. Certain changes have been made and the accounting standards are in the process of upgrading. We argue that it is not possible to omit the procyclical factors altogether, however. The accounting should provide transparent information and it is the task of regulators with the prudential tools to deal with any procyclicality. We highlight that the improper regulation of procyclicality might cause higher systemic risk of financial institutions

Operational Risk - Scenario Analysis

Operational risk management and measurement has been paid an increasing attention in last years. The main two reasons are the Basel II requirements that were to be complied with by all international active financial institutions by the end of 2006 and recent severe operational risk loss events. This paper focuses on operational risk measurement techniques and on economic capital estimation methods. A data sample of operational losses provided by an anonymous Central European bank is analyzed using several approaches. Multiple statistical concepts such as the Loss Distribution Approach or the Extreme Value Theory are considered. One of the methods used for operational risk management is a scenario analysis. Under this method, custom plausible loss events defined in a particular scenario are merged with the original data sample and their impact on capital estimates and on the financial institution as a whole is evaluated. Two main problems are assessed in this paper – what is the most appropriate statistical method to measure and model operational loss data distribution and what is the impact of hypothetical plausible events on the financial institution. The g&h distribution was evaluated to be the most suitable one for operational risk modeling because its results are consistent even while using a scenario analysis method. The method based on the combination of historical loss events modeling and scenario analysis provides reasonable capital estimates for the financial institution and allows to measure impact of very extreme events and also to mitigate operational risk exposure.operational risk, scenario analysis, economic capital, loss distribution approach, extreme value theory