We measure market reactions to announcements concerning liquidity regulation, a key innovation in the Basel framework. Our initial results show that liquidity regulation attracts negative abnormal returns. However, the price responses are less pronounced when coinciding announcements concerning...

Whether proprietary traders provide or take liquidity, and how their behavior evolves over the business cycle and across stocks, remains at the center of an ongoing debate. Using a unique dataset from the NYSE, we document that proprietary traders concentrate their trades in large and liquid...

We study banks' optimal equity buffer in general equilibrium and their response to under-capitalization. Making progress towards a "pecking order theory" for private recapitalizations, our benchmark model identifies equity issuance as individually and socially optimal, compared to deleveraging,...

We examine, conditional on structural shocks, the macroeconomic performance of different countercyclical capital buffer (CCyB) rules in small open economy estimated medium scale DSGE. We find that rules based on the credit gap create a trade-off between the stabilization of fluctuations...

Extending a standard credit-risk model illustrates that a single factor can drive both expected losses and the extent to which they may be exceeded in extreme scenarios, ie "unexpected losses." This leads us to develop a framework for forecasting these losses jointly. In an application to...

A parsimonious extension of a well-known portfolio credit-risk model allows us to study a salient stylized fact - abrupt switches between high- and low-loss phases - from a risk-management perspective. As uncertainty about phase switches increases, expected losses decouple from unexpected...

This paper provides a brief overview of the recent practice of stress testing banking institutions, focusing on capital adequacy. We argue that stress testing has been successfully used to mitigate bank opacity; quantify systemic risk under extreme but plausible stress; keep the participants...

Identifying the relevant risk factors and their interdependence is central to understanding the risk exposures and vulnerabilities of a financial institution. It is needed for risk management, solvency assessment and stress testing. We assemble a unique dataset of risk factors relevant for...

This paper deals with stress tests for credit risk and shows how exploiting the discretion when setting up and implementing a model can drive the results of a quantitative stress test for default probabilities. For this purpose, we employ several variations of a CreditPortfolioView-style model...

Most banks employ historical simulation for Value-at-Risk (VaR) calculations, where VaR is computed from a lower quantile of a forecast distribution for the portfolio's profit and loss (P\&L) that is constructed from a single, multivariate historical sample on the portfolio's risk factors. The...