Bank capital: a myth resolved

In order to promote financial stability, regulatory authorities pay a lot of attention in setting minimum capital levels. In addition to these requirements, financial institutions calculate their own economic capital reflecting the unexpected losses and true risk according to the specific characteristics of their portfolio. The current Basel I framework pays little or no attention to the creditworthiness of a borrower in deciding on the regulatory capital requirements. As a result, a lot of banks remove low-risk assets from their balance sheets and only retain relatively high risk assets on balance. The recently introduced Basel II framework should result in a further convergence between regulatory and economic capital. However, recent papers (Elizalde et al., 2006, Jackson et al., 2002 and Jacobson et al. 2006) argue that also under Basel II, regulatory and economic capital will have different determinants. This paper first gives an overview of capital adequacy and then further describes the differences and similarities between economic and regulatory capital based on a literature review

Early treatment versus expectative management of patent ductus arteriosus in preterm infants

_Background:_ Much controversy exists about the optimal management of a patent ductus arteriosus (PDA) in preterm infants, especially in those born at a gestational age (GA) less than 28weeks. No causal relationship has been proven between a (haemodynamically significant) PDA and neonatal complications related to pulmonary hyperperfusion and/or systemic hypoperfusion. Although studies show conflicting results, a common understanding is that medical or surgical treatment of a PDA does not seem to reduce the risk of major neonatal morbidities and mortality. As the PDA might have closed spontaneously, treated children are potentially exposed to iatrogenic adverse effects. A conservative approach is gaining interest worldwide, although convincing evidence to support its use is lacking. _Methods:_ This multicentre, randomised, non-inferiority trial is conducted in neonatal intensive care units. The study population consists of preterm infants (GA1.5mm. Early treatment (between 24 and 72h postnatal age) with the cyclooxygenase inhibitor(COXi) ibuprofen (IBU) is compared with an expectative management (no intervention intended to close a PDA). The primary outcome is the composite of mortality, and/or necrotising enterocolitis (NEC) Bell stage ≥ IIa, and/or bronchopulmonary dysplasia (BPD) defined as the need for supplemental oxygen, all at a postmenstrual age (PMA) of 36weeks. Secondary outcome parameters are short term sequelae of cardiovascular failure, comorbidity and adverse events assessed during hospitalization and long-term neurodevelopmental outcome assessed at a corrected age of 2 years. Consequences regarding health economics are evaluated by cost effectiveness analysis and budget impact analysis. _Discussion:_ As a conservative approach is gaining interest, we investigate whether in preterm infants, born at a GA less than 28weeks, with a PDA an expectative management is non-inferior to early treatment with IBU regarding to the composite outcome of mortality and/or NEC and/or BPD at a PMA of 36weeks

STAT2 signaling restricts viral dissemination but drives severe pneumonia in SARS-CoV-2 infected hamsters

Emergence of SARS-CoV-2 causing COVID-19 has resulted in hundreds of thousands of deaths. In search for key targets of effective therapeutics, robust animal models mimicking COVID-19 in humans are urgently needed. Here, we show that Syrian hamsters, in contrast to mice, are highly permissive to SARS-CoV-2 and develop bronchopneumonia and strong inflammatory responses in the lungs with neutrophil infiltration and edema, further confirmed as consolidations visualized by micro-CT alike in clinical practice. Moreover, we identify an exuberant innate immune response as key player in pathogenesis, in which STAT2 signaling plays a dual role, driving severe lung injury on the one hand, yet restricting systemic virus dissemination on the other. Our results reveal the importance of STAT2-dependent interferon responses in the pathogenesis and virus control during SARS-CoV-2 infection and may help rationalizing new strategies for the treatment of COVID-19 patients. SARS-CoV-2 infection can result in severe lung inflammation and pathology, but host response remains incompletely understood. Here the authors show in Syrian hamsters that STAT2 signaling restricts systemic virus dissemination but also drives severe lung injury, playing a dual role in SARS-CoV-2 infection

Retrospective evaluation of whole exome and genome mutation calls in 746 cancer samples

Funder: NCI U24CA211006Abstract: The Cancer Genome Atlas (TCGA) and International Cancer Genome Consortium (ICGC) curated consensus somatic mutation calls using whole exome sequencing (WES) and whole genome sequencing (WGS), respectively. Here, as part of the ICGC/TCGA Pan-Cancer Analysis of Whole Genomes (PCAWG) Consortium, which aggregated whole genome sequencing data from 2,658 cancers across 38 tumour types, we compare WES and WGS side-by-side from 746 TCGA samples, finding that ~80% of mutations overlap in covered exonic regions. We estimate that low variant allele fraction (VAF < 15%) and clonal heterogeneity contribute up to 68% of private WGS mutations and 71% of private WES mutations. We observe that ~30% of private WGS mutations trace to mutations identified by a single variant caller in WES consensus efforts. WGS captures both ~50% more variation in exonic regions and un-observed mutations in loci with variable GC-content. Together, our analysis highlights technological divergences between two reproducible somatic variant detection efforts

Capital regulation of financial institutions, the role of ratings and the tension field between regulation and economic reality

The capital regulation of financial institutions, the role of ratings and the tension field between regulation and economic reality Over the past decade, the economic environment has been characterised by high-profile business scandals and failures, in which different company stakeholders were involved. In July 2007, the world entered the most profound and disruptive crisis since 1929. Initially originating in the US, it has evolved into a deep and complex crisis at global level, resulting in significant economic damage. Lack of market transparency, the abrupt downgrading of credit ratings and the failure of Lehman Brothers have initiated a global breakdown of trust. In autumn 2008 interbank markets shot down, creating a liquidity crisis that is still having a profound impact on the cost and availability of credit, financial markets and the macro-economy as a whole. Both government and Central Banks have taken numerous measures to address the systemic risk and to refuel the economy. However, it has become clear that the regulatory framework and measures in place were insufficient to tackle the crisis. As such, regulatory and supervisory financial authorities are currently confronted with major challenges. In light of these recent developments, this research contributes to the fundamentals of capital regulation of financial instructions and the use of internal and external ratings in that respect. Chapter 1: On the road to a safer banking system? Theory and evidence on capital regulation in Europe Traditionally capital requirements have been the foundation of regulation for banks. To protect banks against failure and to prevent an economic crisis due to contagion and systemic risk, different stakeholders want banks to maintain a certain level of capital. Rating agencies, supervisors and debt holders want higher capital to support solvency, shareholders want lower capital to boost profitability and even the behaviour of other banks might impact the target capital ratio. As a result of these conflicting interests, bank capital needs to be optimized with as a key purpose to internalise the social costs of potential bank failures. The capital adequacy requirements in place have been found inadequate, and as a reaction major steps to move the banking system are currently being taken. Taking into account these evolutions, it is interesting to know the extent to which recommendations have been adopted and whether the reforms have been and are perceived to be beneficial to the European banking sector. Based on guidance from academics, supervisors and policy makers, we have put together an extensive survey that is used for interviews with various bank managers and chief risk officers from European banks. The first chapter of this PhD presents new evidence on where European banks are with respect to capital regulation and on how the future road to a safer banking system should look like. By commenting on differences and similarities between the financial institutions we have questioned,we describe the present state of affairs with respect to Basel II implementation, regulatory and economic capital calculations and Basel III expectations. In doing so, we also address another objective of the Basel Committee, the creation of a level playing field, albeit in an indirect way. Banks believe that reinforcement and the realization of effective supervision is the main criterion for the realization of a more stable financial market. This confirms the important role our research assigns to the supervisor. One of the major difficulties will be to make a reliable estimate on how far the capabilities of supervisors go. Another difficulty on the subject of supervision is that it is still a national responsibility that will not be centralised very quickly for political reasons. Furthermore, we believe Basel III entails a lot of improvement, but in line with the academics and opinion leaders and regulators and supervisors, we feel that Basel III should look more comprehensively at the risks. We entered a financial crisis because assets that were full of worth suddenly became worthless. With this in mind, regulators should reconsider their way of treating assets on a bank s balance sheet in a more detailed way. Chapter 2: The development of a simple and intuitive rating system under Solvency II Another type of financial institution that has been both victim and cause in the financial crisis are the insurance companies. Notwithstanding the fact that insurance companies are very important players in financial markets who are involved in many credit risk exposures and as a consequence are also prone to high levels of uncertainty and solvency issues, literature on the topic is scarce (Florez-Lopez, 2007). Due to the Solvency II Directive, also insurers are currently being confronted with new regulatory requirements that promote internally developed risk models. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, and taking into account the limited data and modelling experience of insurance companies and the scarcity of academic research on insurance companies, the second chapter of this dissertation suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable. Chapter 3: Analyzing bank ratings: key determinants and procyclicality While upgrading financial regulations and supervision in order to prevent future crises, many authorities are being confronted with the fact that risks taken in the process of financial intermediation are difficult to observe and assess from outside the bank. In the absence of tight regulations, this opaqueness exposes banks to runs and systemic risk. In order to reduce this lack of transparency, credit rating agencies (CRAs) provide information that can help various stakeholders to evaluate the credit risk of issues and issuers. Even though CRAs have been criticized a lot in the latest crisis, for many observers of financial markets, credit ratings continue to play an essential role. Morgan (2002) shows that Moody s and S&P have more split ratings over financial intermediaries, suggesting that banks are more difficult to rate because of their opaqueness. This additional lack of transparency is linked to the banks asset base and their high leverage, which create agency problems and further increase uncertainty over their assets. So far the research linked to ratings of financial institutions is rather limited. The third chapter of this dissertation presents a joint examination of how different factors influence the assignment of S&P and Moody s long term bank ratings using a unique data set covering different regions, bank sizes, and bank types. In doing so, we include new bank and country specific variables. Furthermore, we include measures of the business cycle in our analysis to determine whether long term bank ratings tend to be related to the cycle after conditioning on a set of variables. Using annual data on US and European banks rated by S&P and/or Moody s, we find that the bank ratings of both agencies exhibit a different sensitivity to the business cycle. Finally, we check our findings on a sample of banks that are rated by both rating agencies while controlling for potential sample selection bias. Our findings are highly relevant for various bank stakeholders, who often tend to assume that Moody s and S&P have equivalent rating scales and rating processes. This paper shows clear evidence that this is not necessarily the case. Moody s and S&P seem to have different rating determinants, different sensitivity towards the business cycle and behave differently when rating banks that are rated by both of them. We believe that the findings of this dissertation are highly relevant for various bank stakeholders and academics. As such, we hope that the outcome of our three chapters will be used in further discussions on the regulation of financial institutions, the role of ratings and rating agencies and finally, on how to reduce the tension field between theory, regulation and economic reality

Capital regulation of financial institutions, the role of ratings and the tension field between regulation and economic reality.

The capital regulation of financial institutions, the role of ratings and the tension field between regulation and economic realityOver the past decade, the economic environment has been characterised by high-profile business scandals and failures, in which different company stakeholders were involved. In July 2007, the world entered the most profound and disruptive crisis since 1929. Initially originating in the US, it has evolved into a deep and complex crisis at global level, resulting in significant economic damage. Lack of market transparency, the abrupt downgrading of credit ratings and the failure of Lehman Brothers have initiated a global breakdown of trust. In autumn 2008 interbank markets shot down, creating a liquidity crisis that is still having a profound impact on the cost and availability of credit, financial markets and the macro-economy as a whole. Both government and Central Banks have taken numerous measures to address the systemic risk and to refuel the economy. However, it has become clear that the regulatory framework and measures in place were insufficient to tackle the crisis. As such, regulatory and supervisory financial authorities are currently confronted with major challenges. In light of these recent developments, this research contributes to the fundamentals of capital regulation of financial instructions and the use of internal and external ratings in that respect. Chapter 1: On the road to a safer banking system? Theory and evidence on capital regulation in Europe Traditionally capital requirements have been the foundation of regulation for banks. To protect banks against failure and to prevent an economic crisis due to contagion and systemic risk, different stakeholders want banks to maintain a certain level of capital. Rating agencies, supervisors and debt holders want higher capital to support solvency, shareholders want lower capital to boost profitability and even the behaviour of other banks might impact the target capital ratio. As a result of these conflicting interests, bank capital needs to be optimized with as a key purpose to internalise the social costs of potential bank failures. The capital adequacy requirements in place have been found inadequate, and as a reaction major steps to move the banking system are currently being taken. Taking into account these evolutions, it is interesting to know the extent to which recommendations have been adopted and whether the reforms have been and are perceived to be beneficial to the European banking sector. Based on guidance from academics, supervisors and policy makers, we have put together an extensive survey that is used for interviews with various bank managers and chief risk officers from European banks. The first chapter of this PhD presents new evidence on where European banks are with respect to capital regulation and on how the future road to a safer banking system should look like. By commenting on differences and similarities between the financial institutions we have questioned,we describe the present state of affairs with respect to Basel II implementation, regulatory and economic capital calculations and Basel III expectations. In doing so, we also address another objective of the Basel Committee, the creation of a level playing field, albeit in an indirect way. Banks believe that reinforcement and the realization of effective supervision is the main criterion for the realization of a more stable financial market. This confirms the important role our research assigns to the supervisor. One of the major difficulties will be to make a reliable estimate on how far the capabilities of supervisors go. Another difficulty on the subject of supervision is that it is still a national responsibility that will not be centralised very quickly for political reasons. Furthermore, we believe Basel III entails a lot of improvement, but in line with the academics and opinion leaders and regulators and supervisors, we feel that Basel III should look more comprehensively at the risks. We entered a financial crisis because assets that were full of worth suddenly became worthless. With this in mind, regulators should reconsider their way of treating assets on a bank s balance sheet in a more detailed way. Chapter 2: The development of a simple and intuitive rating system under Solvency II Another type of financial institution that has been both victim and cause in the financial crisis are the insurance companies. Notwithstanding the fact that insurance companies are very important players in financial markets who are involved in many credit risk exposures and as a consequence are also prone to high levels of uncertainty and solvency issues, literature on the topic is scarce (Florez-Lopez, 2007). Due to the Solvency II Directive, also insurers are currently being confronted with new regulatory requirements that promote internally developed risk models. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, and taking into account the limited data and modelling experience of insurance companies and the scarcity of academic research on insurance companies, the second chapter of this dissertation suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable. Chapter 3: Analyzing bank ratings: key determinants and procyclicality While upgrading financial regulations and supervision in order to prevent future crises, many authorities are being confronted with the fact that risks taken in the process of financial intermediation are difficult to observe and assess from outside the bank. In the absence of tight regulations, this opaqueness exposes banks to runs and systemic risk. In order to reduce this lack of transparency, credit rating agencies (CRAs) provide information that can help various stakeholders to evaluate the credit risk of issues and issuers. Even though CRAs have been criticized a lot in the latest crisis, for many observers of financial markets, credit ratings continue to play an essential role. Morgan (2002) shows that Moody s and S&amp;P have more split ratings over financial intermediaries, suggesting that banks are more difficult to rate because of their opaqueness. This additional lack of transparency is linked to the banks asset base and their high leverage, which create agency problems and further increase uncertainty over their assets. So far the research linked to ratings of financial institutions is rather limited. The third chapter of this dissertation presents a joint examination of how different factors influence the assignment of S&amp;P and Moody s long term bank ratings using a unique data set covering different regions, bank sizes, and bank types. In doing so, we include new bank and country specific variables. Furthermore, we include measures of the business cycle in our analysis to determine whether long term bank ratings tend to be related to the cycle after conditioning on a set of variables. Using annual data on US and European banks rated by S&amp;P and/or Moody s, we find that the bank ratings of both agencies exhibit a different sensitivity to the business cycle. Finally, we check our findings on a sample of banks that are rated by both rating agencies while controlling for potential sample selection bias. Our findings are highly relevant for various bank stakeholders, who often tend to assume that Moody s and S&amp;P have equivalent rating scales and rating processes. This paper shows clear evidence that this is not necessarily the case. Moody s and S&amp;P seem to have different rating determinants, different sensitivity towards the business cycle and behave differently when rating banks that are rated by both of them. We believe that the findings of this dissertation are highly relevant for various bank stakeholders and academics. As such, we hope that the outcome of our three chapters will be used in further discussions on the regulation of financial institutions, the role of ratings and rating agencies and finally, on how to reduce the tension field between theory, regulation and economic reality.status: publishe

The development of a simple and intuitive rating system under Solvency II

Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission's planned reform of the regulation of insurance companies is well underway. One of its consequences will be a shift in focus to internally based models in determining the regulatory capital needed to cover unexpected losses. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, this paper suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. The paper provides an interesting modelling of non-financial European companies rated by S&P. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable.IB52 IE50 Solvency II Insurance Credit scoring External ratings Internal ratings