A macro-prudential policy maker can manage risks to financial stability only if currentand future risks can be reliably assessed. We propose a novel framework to assessfinancial system risk. Using a dynamic factor framework based on state-space methods, we model latent macro-financial and credit...

The use of macro stress tests to assess bank solvency has developed rapidly over the past few years. This development was reinforced by the financial crisis, which resulted in substantial losses for banks and created general uncertainty about the banking sector's loss-bearing capacity. Macro...

We examine the financial stability implications of covered bonds. Banks issue covered bonds by encumbering assets on their balance sheet and placing them within a dynamic ring fence. As more assets are encumbered, jittery unsecured creditors may run, leading to a banking crisis. We provide...

The macroprudential regulatory framework of Basel III imposes the same capital and liquidity requirements on all banks around the world to ensure global competitiveness of banks. Using an agent-based model of the financial system, we find that this is not a robust framework to achieve...

Systemic risk now occupies centre stage in discussions of bank regulatory reform. Systemic risk is often seen as a problem of size, operational complexity, interconnectivity and contagion. It is less often discussed in terms of the institutional framework of legal rules and principles within...

We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. We also show that variance decompositions define weighted, directed networks, so...

This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price...

This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relativemerit of price versus quantity rules, showing how they target different incentives for risk creation.When banks differ in credit...