Transcript Slide_template_blank - Department of Mathematics

Financial crisis and quantitative methods: problems and solutions
Are European
Deposit Protection Schemes
efficient enough?
Adamo Uboldi
Joint Research Centre
European Commission
Unit for Econometrics and Applied Statistics
Financial Econometrics for a Single Market and Competitiveness Policies
Financial crisis and quantitative methods: problems and solutions
Plan of the talk

Deposit Protection Schemes (DPS) in the EU

Reaction to the financial crisis

Efficiency of EU DPS

Quantitative tools and risk-based contributions
Deposit Protection in the EU
Financial crisis and quantitative methods: problems and solutions
AIM: to provide a safety net for depositors so that, if a credit
institution fails, they will be able to recover their bank
deposits up to a certain limit
HOW: Directive 94/19/EC on Deposit Guarantee Schemes (DGS)
and current amendment proposal
Directive 94/19/EC (I)
Financial crisis and quantitative methods: problems and solutions
Objectives
 Protection of depositors’ wealth
through the introduction of a minimum
threshold (€20,000 till October 08)
 Maintenance of confidence in the
EU banking system
through protection of stability, avoiding
a run on the banks
Directive 94/19/EC (II)
Financial crisis and quantitative methods: problems and solutions
Key provisions and implementation
 Member States have to ensure one or more officially recognised DGS
and ALL deposit-taking credit institutions must join DGS
EU has a total of 39 DGS (some MS have more than one DGS)
 Minimum coverage level set at € 20,000
MS apply different coverage levels from min. € 20,000 to max. € 103,000
 Obligation for DGS to repay depositors’ claims within three months
from triggering event (possible extension up to nine months)
90% of deposits and 70% of depositors have been repaid within 3 months
Current financial crisis (I)
Financial crisis and quantitative methods: problems and solutions
Quick response to crisis: DG-MARKT asked JRC to perform an early IA
on possible changes of coverage level
October 9th: delivery of a confidential Impact Assessment to feed
the amendment proposal of Directive 94/19/EC
as the situation of financial markets was requiring immediate actions, no
detailed IA was possible at that time…
Current financial crisis (II)
Financial crisis and quantitative methods: problems and solutions
Distribution of deposits
 65% of deposits
are currently
covered
 90% of deposits
would be
covered under
100K€ limit
Total amount of deposits (b€)
 80% of deposits
would be
covered under
50K€ limit
300
Not covered
Covered under 100K€
Covered under 50K€
Covered under 20K€
250
200
150
100
50
0
0-10
10-20
20-30
30-40
40-50
50-60
60-70
70-80
80-90 90-100 100-110 110-120 120-130 >130
Size of deposits (K€)
Current financial crisis (III)
Financial crisis and quantitative methods: problems and solutions
50K€
BE
Eligible deposits (m€)
188,791
100K€
Absolute exposure (m€)
66,172
BE
Eligible deposits (m€)
188,791
Absolute exposure (m€)
87,313
CZ
40,854
866
CZ
40,854
1,035
DK
106,029
9,986
DK
106,029
29,620
DE
1,615,946
530,812
DE
1,615,946
701,172
EE
2,590
137
EE
2,590
164
143,226
43,593
IE
143,226
66,820
IE
GR
98,926
27,816
GR
98,926
34,533
ES
575,940
160,284
ES
575,940
193,477
FR
839,391
-
FR
839,391
27,070
IT
511,527
-
511,527
-
CY
16,887
1,494
16,887
1,336
LV
5,115
323
LT
3,903
147
LU
86,734
40,435
HU
27,649
1,228
CY
LV
5,115
284
LT
3,903
141
LU
86,734
30,486
HU
27,649
1,059
MT
4,617
365
NL
264,839
23,249
AT
158,338
66,883
PL
63,934
4,588
PT
108,384
19,828
SI
10,760
3,261
SK
10,150
1,120
FI
68,948
17,248
SE
113,094
28,520
UK
1,728,510
-
EU 25 total
6,795,082
1,038,035
IT
MT
4,617
409
NL
264,839
55,906
AT
158,338
84,854
PL
63,934
5,370
PT
108,384
21,873
SI
10,760
3,332
SK
10,150
1,253
FI
68,948
21,541
SE
113,094
38,884
UK
1,728,510
261,259
6,795,082
1,679,510
EU 25 total
Investigating DGS
Financial crisis and quantitative methods:
problems and solutions
Efficiency
Quant.
Qualit.
Data
Triggering event
Intervention procedure
Authorities involved
Problems
Aggregation of data
Missing information
Heterogeneity of data
Overlapping with bankruptcy law
Deposits/Fund/Premiums
Dataset incomplete
Past DGS actions
Confidentiality
Payout delays
Definitions
Cross-border exposure
Late answers (DE missing)
DGS Actions
Financial crisis and quantitative methods: problems and solutions
Payout (16 DGS out of 37)
Types
Preventive (21 DGS out of 37)
 Since 1994 only 22/37 DGS
have intervened
 67 payouts (37 EU-15, 22 UK)
 27 preventive (26 EU-15)
 No cross-border cases
Triggering Event of Payouts
Financial crisis and quantitative methods: problems and solutions
 Following the Directive the
event triggering the payout in all
EU MS is the unavailability of
deposits
 The DGS intervenes only after
the declaration by the competent
authority
 No common rules
Financial Resources
Financial crisis and quantitative methods: problems and solutions
Funds
 Size known for all MS but DE
 Most of the ex-ante DGS
manage resources investing in
low-risk, liquid instruments
Borrowing
 Allowed in 30/37 DGS
 In 24 cases no explicit limit
set by law/regulation
Payout Delays
Financial crisis and quantitative methods: problems and solutions
Number
Amount
Scenarios Definition
Financial crisis and quantitative methods: problems and solutions

Intensity Ratio =
Total Cost of Interv ention
Total Amountof Eligible Deposits
Scenario 1: High
Payout
Scenario 2:
Medium
IR = 3.24, highest in EU-12
IR = 0.81, 2003 failure in EU-12
Scenario 3: Small
IR = 0.035, highest in EU-15
Preventive
Scenario 4:
Medium
IR = 0.16, 2003 failure EU-15
Cross-border
Scenario 5:
Very High
Fictitious, due to lack of data
Scenarios Results EU-15
B
B
Financial crisis and quantitative methods: problems and solutions
Scenarios Results EU-12
BB
B
B
B
Financial crisis and quantitative methods: problems and solutions
Capability to cover interventions
Financial crisis and quantitative methods: problems and solutions



Coverage Ratio =
Size of Fund
Total Amountof Eligible Deposits
Resource Ratio =
Max imumAmountof Av ailableResources
Total Amountof Eligible Deposits
Robustness Indicator =
1
1
i
Depi RR
i
Coverage and Resource Ratio
Financial crisis and quantitative methods: problems and solutions
Intensity Ratio
Financial crisis and quantitative methods: problems and solutions
Cross-border exposures: branches
Financial crisis and quantitative methods: problems and solutions
Cross-border exposures: subsidiaries
Financial crisis and quantitative methods: problems and solutions
Risk-Based Contributions for EU DGS
Financial crisis and quantitative methods: problems and solutions
FINLAND
FRANCE
GERMANY
GERMANY
ITALY
PORTUGAL
PORTUGAL
SWEDEN
(Cooperative Banks)
(Saving Banks)
(Banks)
(Banks)
(Cooperative Banks)
AUSTRIA
GERMANY (Public Banks)
ITALY
(Cooperative Banks)
POLAND
ROMANIA
Risk-Based Contributions
Early-Warning Systems
Indicators
Financial crisis and quantitative methods: problems and solutions
•
The risk is assessed using indicators
•
The indicators are built using financial ratios based on balance-sheet data,
financial statement data or other types of accounting data
•
Current ratios are quite heterogeneous
Capital Structure / Solvency Profile
Classes of
Indicators
Riskiness / Exposure
Profitability / Income
Maturity transformation / Duration
Towards a common Risk-Based System
Financial crisis and quantitative methods: problems and solutions
Homogenous Framework: identification of a generalized formula for riskbased contributions ci of the i-th member
ci    i  x i
xi = i-th member’s contribution base (e.g. eligible or covered deposits…)
i = i-th member’s risk-based adjustment
 = fixed percentage determining the aggregated contribution (i.e. NOT
influenced by single members’ risk, common value for ALL members)
Indicators
Scores
Rating Class
i
France
Financial crisis and quantitative methods: problems and solutions
Indicators
Overall Amount
Scores ri
of Contribution
(OAC)
Correction i
Net Risk Amount
(xi + gi) ∙i
Contribution base
(xi + gi)
Net Share of
Risk (NSR)
Contribution
OAC ∙ NSR
Italy – Commercial banks
Financial crisis and quantitative methods: problems and solutions
Proportional
Quotas
Regressive
Quotas
Contribution
Quotas
Covered
Deposits
Dimension
Correction (ti)
Risk
Correction (i)
Indicators
(WAAI)
Contribution
Elasticity analysis
Financial crisis and quantitative methods: problems and solutions
Reliability and time evolution
Financial crisis and quantitative methods: problems and solutions
Real mathematical modelling...
Financial crisis and quantitative methods: problems and solutions
Merton framework: it assesses the credit risk of a bank by
characterizing the bank's equity as a call option on its assets.
 The bank has a certain amount of zero-coupon debt that will become due
at a future time T.
The bank defaults if the value of its assets is less than the promised
debt repayment at time T.
The equity of the bank is a European call option on the assets of the bank
with maturity T and a strike price equal to the face value of the debt. The
model can be used to estimate the risk-neutral probability of the bank.