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
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).