An international survey of stress tests

In the summer of 2000, central banks from the Group of Ten countries surveyed large international banks about their use of stress tests_a risk management tool that measures a firm's exposure to extreme movements in asset prices. The survey findings highlight the risks that most concern financial institutions and clarify how these institutions use stress tests in their overall risk management programs.Risk management ; Risk assessment ; Financial services industry

Correlated radio--X-ray variability of Galactic Black Holes: A radio--X-ray flare in Cygnus X-1

We report on the first detection of a quasi-simultaneous radio-X-ray flare of Cygnus X-1. The detection was made on 2005 April 16 with pointed observations by the Rossi X-ray Timing Explorer and the Ryle telescope, during a phase where the black hole candidate was close to a transition from the its soft into its hard state. The radio flare lagged the X-rays by approximately 7 minutes, peaking at 3:20 hours barycentric time (TDB 2453476.63864). We discuss this lag in the context of models explaining such flaring events as the ejection of electron bubbles emitting synchrotron radiation.Comment: 4 pages, 4 figure

Central bank policy in a more perfect financial system

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Confirmation of Two Cyclotron Lines in Vela X-1

We present pulse phase-resolved X-ray spectra of the high mass X-ray binary Vela X-1 using the Rossi X-ray Timing Explorer. We observed Vela X-1 in 1998 and 2000 with a total observation time of ~90 ksec. We find an absorption feature at 23.3 +1.3 -0.6 kev in the main pulse, that we interpret as the fundamental cyclotron resonant scattering feature (CRSF). The feature is deepest in the rise of the main pulse where it has a width of 7.6 +4.4 -2.2 kev and an optical depth of 0.33 +0.06 -0.13. This CRSF is also clearly detected in the secondary pulse, but it is far less significant or undetected during the pulse minima. We conclude that the well known CRSF at 50.9 +0.6 -0.7 kev, which is clearly visible even in phase-averaged spectra, is the first harmonic and not the fundamental. Thus we infer a magnetic field strength of B=2.6 x 10^12 G.Comment: 12 pages, LaTeX, 15 Figures, accepted by A&

The changing incentive structure of institutional asset managers: implications for financial markets.

This article presents the principal findings of the Working Group on Incentive Structures in Institutional Asset Management set up under the aegis of the Commitee on the Global Financial System (CGFS). These findings, which have recently been published in a report, aim to give the central bank community – and beyond that, the financial community – a better understanding of ongoing developments in the fund management industry and their potential implications for financial markets. The report, based on a comprehensive literature review and extensive interviews with market practitioners, has identified various features and trends in the industry with a potential effect on the functioning of financial markets. However, as many of these effects are at least partially offsetting, the lack of reliable empirical evidence has not allowed the working group to come to a clear-cut conclusion on the aggregate effect of these various features and trends at the current juncture. Still, one broad conclusion may be drawn from this report: ongoing and future developments in the fund management industry have the potential to change institutional behaviour in ways that can be important for financial markets. This relates to the general issue of preserving the diversity of investment behaviour, and partially results from the fact that parts of the institutional asset management industry have moved towards becoming a «commodity» industry offering investors more and more standardised investments products and approaches. Therefore, developments in the industry may require further attention by the financial community as a whole. More specifically, the report points to four broad areas where particular attention should be paid: risk management and disclosure, conflicts of interest, explicit and implicit barriers to market entry, and regulatory trade-offs.

Monetary policy spillovers and emerging market credit: The impact of Federal Reserve communications on sovereign CDS spreads

In this paper, we study the effects of US target rate changes and related communications by members of the Federal Reserve Board of Governors on spreads for emerging market sovereign credit default swaps (CDS). Using GARCH models, we find that during the pre-financial crisis sub-sample (April 2002-July 2007) CDS spreads react more to country-specific factors than to US monetary policy news. This finding is reversed during the financial crisis sub-sample (August 2007-December 2009), when US monetary policy actions and communications affect CDS spreads in a notable way. Finally, our analysis suggests that CDS spreads became more prone to spillover effects during the financial crisis

Non-Financial Corporate Risk Management and Exchange Rate Volatility in Latin America

Foreign exchange, Financial markets, International investments, Capital movements

Incentives and tranche retention in securitisation : a screening model

This paper examines the power of different contractual mechanisms to influence an originator's choice of costly effort to screen borrowers when the originator plans to securitise its loans. The analysis focuses on three potential mechanisms: the originator holds a "vertical slice", or share of the portfolio; the originator holds the equity tranche of a structured finance transaction; the originator holds the mezzanine tranche, rather than the equity tranche. These mechanisms will result in differing levels of screening, and the differences arise from varying sensitivities to a systematic risk factor. Equity tranche retention is not always the most effective mechanism, and the equity tranche can be dominated by either a vertical slice or a mezzanine tranche if the probability of a downturn is likely and if the equity tranche is likely to be depleted in a downturn. If the choice of how much and what form to retain is left up to the originator, the retention mechanism may lead to low screening effort, suggesting a potential rationale for government interventionsecuritisation, retention requirements, tranching, screening incentives

Corporate currency hedging and currency crises

We examine the impact of corporate currency hedging on economic stability by introducing hedging activity in a Mundell-Fleming-Tobin framework for analyzing currency and financial crises. The ratio between hedged and unhedged firms is modelled depending on firm size as well as hedging costs. The results indicate that, with an increasing fraction of hedged firms in an economy, the magnitude of a crisis decreases and from a specific hedging level onwards currency crises are ruled out. In order to improve corporate risk management access to hedging instruments should be made possible and hedging costs should be reduced.Mundell-Fleming-Tobin model, currency crises, currency hedging, hedging costs