How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses.
We propose a tractable, model-based stress-testing framework where the solvency risks, funding liquidity risks and market risks of banks are intertwined.
The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures.
Stress testing is an important tool used by financial authorities and entities around the world to evaluate potential risks to the financial system. Kartik Anand, Guillaume Bédard-Pagé and Virginie Traclet discuss different stress-testing approaches, with emphasis on the innovative and analytically rigorous model developed by the Bank of Canada: the MacroFinancial Risk Assessment Framework (MFRAF). They also present the stress-test results obtained in the context of the 2013 Canada Financial Sector Assessment Program led by the International Monetary Fund, including the important contributions made by the use of MFRAF in the exercise.
We examine the safety of government bonds in the presence of Knightian uncertainty amongst financial market participants. In our model, the information insensitivity of government bonds is driven by strategic complementarities across counterparties and the structure of trading relationships.
