Periodic Reporting for period 1 - FINREALNETS (“FINancial and REAL Sector NETworks in Europe”)
Période du rapport: 2016-06-01 au 2018-05-31
There is both empirical and theoretical evidence that active risk management of banks, aiming to keep a constant probability of default, makes banks’ book value leverage procyclical and may induce the system into overvaluation or devaluation loops, depending on the sign of the initial shock (Adrian and Shin 2013, 2009). These shock amplifying effects of leverage procyclicality are in line with FINREALNETS’ macro-prudential policy objectives, because they are more or less pronounced depending on bank's promptness to comply with capital adequacy rules (Tasca and Battiston 2012). Moreover, those effects are subject to the market liquidity of revalued assets. Although these fire-sales-related feedback effects were present in the internal multi-round models (Battiston et al. 2016b), little attention has been paid to the post-shock credit-portfolio management and optimisation strategies of banks conditional to the existing risk-based regulatory framework (Koehn and Santomero 1980; Nielsen 2015; Crouhy, Galai, and Mark 2000). A better understanding of the assumptions on individual banks’ portfolio diversification strategies are key for estimating market procyclicality effects in network-based stress-test models(Tasca and Battiston 2016). Therefore, in the FINREALNETS framework the fellow started to investigate the issue of portfolio diversification vs overlap, which had not been fully explored yet in hosting team.
One of the researcher’s objectives under FINREALNETS was to acquire sufficient skills in stress-test modelling and algorithm writing. Therefore, she studied the available Matlab code written for the paper Battiston et al. (2016b). The existing Matlab code focuses on the contagion via interbank leverage network with different distress propagation mechanisms (DebtRank, Eisenberg&Noe and Default Cascades) providing different outputs in terms of systemic vulnerability.