Featured Product

    BoE Paper Examines Impact of Systemwide Stress on Market-Based Finance

    July 12, 2019

    BoE published a working paper that presents a model for assessing the behavior of market-based finance in UK under system-wide stress. The core of this model is a set of representative agents, which correspond to key sectors of the financial system in UK. These agents interact in asset, funding (repo), and derivatives markets and face a range of solvency and liquidity constraints on their behavior.

    Market-based finance has been an increasingly important source of credit to the real economy since the financial crisis. The working paper describes characteristics of the market-based finance sector in UK, also presenting details of the assessment model, data used to parameterise the model, and results from the model. The model generates "tipping points" such that, if shocks are large, or if headroom relative to constraints is small, lower asset prices can cause solvency/liquidity constraints to bind, resulting in forced deleveraging and large endogenous illiquidity premia. The findings highlight the key role played by broker-dealers, commercial banks, investment funds, and life insurers in shaping these dynamics. 

    The model can generate an adverse feedback loop in which lower asset prices cause solvency/liquidity constraints to bind, leading intermediaries to pull funding, greater deleveraging, pushing asset prices lower still. This feedback loop has been illustrated via a stress scenario in which a deteriorating corporate sector outlook coincides with heightened redemptions from investment funds and tighter leverage limits at key intermediaries. This scenario highlights the potential interplay between solvency and liquidity constraints in shaping the response of asset prices in the model. The result notes that the reaction of a broker-dealers, which pulls significant reverse repo provision to "downstream" investors to meet its leverage limit, amplifies the shock substantially. Similarly, the behavior of the commercial bank intensifies the funding squeeze further. The results point to the solvency position of a life insurer as the key tipping point for the system. The authors of the paper suggest several avenues for future research. There may be value in using insights from this model to build summary indicators of the resilience of the system. One such indicator might involve keeping track of the stock of "unlevered" funding that might support market prices in an actual stress event.

     

    Related Links

    Keywords: Europe, UK, Banking, Insurance, Securities, Stress Testing, Market-Based Finance, Solvency and Liquidity Constraints, Repo, Systemic Risk, BoE

    Featured Experts
    Related Articles
    News

    APRA Consults to Standardize Submission Date for Quarterly Reporting

    APRA proposed to standardize quarterly reporting due dates for authorized deposit-taking institutions. The proposed standardized due date is 35 calendar days after the last day of the reference quarter, which will create a 14-calendar-day extension for credit unions and building societies.

    November 08, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: First Update for November 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to two questions. The answers provide clarifications on topics related to own funds and strong customer authentication under the revised Payment Services Directive or PSD2.

    November 08, 2019 WebPage Regulatory News
    News

    FED Proposes to Extend Initial Compliance Dates Under SCCL Rule

    FED published a proposal to extend, by 18 months, the initial compliance dates for foreign banks subject to the single-counterparty credit limit (SCCL) rule.

    November 08, 2019 WebPage Regulatory News
    News

    EBA Publishes Technical Package on Reporting Framework 2.9.1

    EBA published a new release of the reporting framework 2.9.1. This release includes validation rules, Data Point Model (DPM) data dictionary, XBRL taxonomy, and other supporting documents. Additionally, the release fixes some modeling issues on COREP Liquidity and FINREP.

    November 08, 2019 WebPage Regulatory News
    News

    EBA Publishes Methodology and Draft Templates for Stress Tests in 2020

    EBA published a package for the 2020 EU-wide stress test exercise for banks.

    November 07, 2019 WebPage Regulatory News
    News

    EC Publishes Results of Fitness Check of Reporting Requirements in EU

    EC published results of the fitness check of supervisory reporting requirements in financial services legislation in EU.

    November 07, 2019 WebPage Regulatory News
    News

    BCBS Assesses NSFR and LE Rules in Argentina and China as Compliant

    BCBS published reports that assess the implementation of net stable funding ratio (NSFR) and large exposures, or LE, framework in Argentina and China.

    November 07, 2019 WebPage Regulatory News
    News

    FSB Publishes Summary of Plenary Meeting in Paris

    At the meeting, the Plenary reviewed vulnerabilities in the global financial system, fintech developments (including developments in the crypto-asset markets), ongoing work of FSB, and the work program for 2020.

    November 07, 2019 WebPage Regulatory News
    News

    HKMA Highlights Technology Initiatives at the Hong Kong FinTech Week

    HKMA co-organized, with InvestHK, the Hong Kong FinTech Week 2019, which was a five-day flagship fintech event that attracted thousands of attendees worldwide.

    November 06, 2019 WebPage Regulatory News
    News

    ECB Report on Fallback Provisions in Contracts Referencing EURIBOR

    ECB published a report, by private sector working group on euro risk-free rates, presenting recommendations for fallback provisions in contracts for cash products and derivative transactions referencing EURIBOR.

    November 06, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 4118