ESRB publishes a working paper that shows the news as a rich source of data on distressed firm links that drive firm-level and aggregate risks. The authors developed a machine learning methodology that takes text data as input and outputs a data-implied firm network. The news tends to report about links in which a less popular firm is distressed and may contaminate a more popular firm. This constitutes a contagion channel that yields predictable returns and downgrades. Shocks to the degree of news-implied firm connectivity predict increases in aggregate volatilities, credit spreads, default rates, and declines in output. The results of this paper enable the estimation of accurate measures of firm-level and aggregate risks.
The news-implied networks include a vast majority of links recorded in the currently available data sets. In contrast to the currently available networks, however, news-implied networks capture a wider range of firms and links and are available in high frequencies. On an aggregate level, the authors show that news-implied firm networks capture information about contagion and uncertainty effects that drive aggregate outcomes. The first set of results shows that demand-side considerations incite the news to report about firm links that actively transmit risks across firms and lead to contagion. The next set of results shows that the information contained in news-implied firm networks is highly predictive of aggregate outcomes. Finally, the results show that news-implied firm networks capture information that is not contained in alternative networks. All in one, the results of this paper enable the estimation of accurate measures of firm-level and aggregate risks.
Related Link: Working Paper (PDF)
Keywords: Europe, EU, Banking, Securities, Research, Technology, Machine Learning, Fintech, Natural Language Processing, Risk Measurement, Sentiment Analysis, ESRB
The Australian Prudential Regulation Authority (APRA) released an update on the timelines for revisions to the market risk prudential standards and the implications for the broader capital framework.
Three global standard-setters launched a joint consultation that reviews the margining practices during the COVID-19 pandemic and identifies potential areas for further policy work.
The Bank of England (BoE) published the Statistical Notice 2021/09 requiring additional information from firms and software vendors to assist in the onboarding and testing phases for migrating statistical reporting to the BEEDS portal.
The European Banking Authority (EBA) published the final draft regulatory technical standards on gross jump-to-default amounts and on residual risk add-on under the Capital Requirements Regulation or CRR.
The Financial Conduct Authority (FCA) published the final rules on the Investment Firms Prudential Regime (IFPR) to streamline and simplify the prudential requirements for solo-regulated UK firms authorized under the Markets in Financial Instruments Directive (MiFID).
The European Supervisory Authorities (ESAs) have delivered to the European Commission (EC) the final report on the draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR).
The European Banking Authority (EBA) published an advice to the European Commission (EC) on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance (CMDI) framework.
The Financial Stability Oversight Council (FSOC) released a report in response to the U.S. President's Executive Order on climate-related financial risk.
The Bank for International Settlements (BIS) published a paper that examines the business models and the associated risks posed by big technology firms foraying into financial services sector.
The Bank for International Settlements (BIS) announced the development of an Asian Green Bond Fund, in collaboration with the development financing community, to channel global central bank reserves to green projects in Asia Pacific.