CAHIER D ÉTUDES WORKING PAPER N 43. Franco Stragiotti and Štefan Rychtárik

Transcription

1 CAHIER D ÉTUDES WORKING PAPER N 43 Lqudy rsk monorng framework: A supervsory ool Franco Srago and Šefan Rychárk Decemer 2009

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3 Conens Inroducon Mehodology The foundaon: he rsk facor marx Balance shee rsk facors Marke rsk facors Rsk facor weghs deermnaon The frs pllar: he peer score Varales Calculaon The second pllar: he me score Varales Calculaon Applcaon and examples of he resuls Lqudy rsk profle of ndvdual anks Lqudy marx Evoluon of he scores over me Decomposon of he scores Aggregaed resuls Relevance of dfferen rsk facors n o Evoluon of he rsk facor relevance over me Conclusons...33 References Annex A De secures valuaon harcus ( v ) B Herfndahl-Hrschmann ndex composon ( h ) C Rsk parameers ( r ) D Ls of varales, ndexes and arevaons E Bankng acvy accordng o counry and currency F Sress parameers ( α ) G Daa sources and daa proceedng H Peer score, concenraon of rsk facors and ank s sze I Correlaon scaerplos asses and lales

4 Lqudy rsk monorng framework: A supervsory ool Franco Srago Šefan Rychárk Decemer 2009 Asrac Over he las 12 monhs, he supervson of lqudy has ecome one of he mos dscussed ssues y he cenral anks and he fnancal marke auhores. The ojecve of hs paper s o descre he off-se lqudy monorng framework recenly mplemened as one of he supervsory ools of he Banque cenrale du Luxemourg. In our approach, he lqudy poson of every ank s descred y wo dfferen scores ha ake no accoun he ank s lqudy poson across peer anks as well as over me. The framework has hree major oupus. Frs of all, helps supervsors o denfy anks wh weaker lqudy posons. Secondly, he scores can e decomposed among 21 rsk facors. Fnally, he framework creaes a ass o draw conclusons aou he general rends whn he Luxemourg ankng secor for he purpose of ensurng fnancal saly. Unlke common supervsory scorng sysems generally ased on anks alance shee and prof and loss daa, our framework negraes on- and off-alance shee daa and general and dosyncrac marke daa as well as macroeconomc daa. Keywords: Lqudy rsk, Sress-es, Bankng secor, Prudenal supervson, Scorng sysem, Off-se supervson JEL classfcaon: G01, G21 Banque cenrale du Luxemourg, [email protected] Banque cenrale du Luxemourg, [email protected] (from : [email protected]) We have enefed from a valuale feedack provded y Dr. Adelazz Roulaah and Roderck Dunne. We are also hankful for he commens of Marc Ronkar, Roman Perrard, Ralf Feuch and also o Ele Flaer who helped us wh he preparaon of he marke daa. The vews expressed n hs paper are personal vews of he auhors and do no necessarly reflec hose of he Banque cenrale du Luxemourg. The prncpal componen analyss descred n he Box 1 was performed wh a use of Tanagra (open source sofware: hp://erc.unv-lyon2.fr/~rcco/tanagra/fr/ anagra.hml) 2

5 Résumé non-echnque Dans cee éude, nous décrvons le sysème de monorng des lqudés ulsé en an qu oul de la survellance des lqudés effecuée par la Banque cenrale du Luxemourg. Ce sysème d évaluaon de la lqudé des anques ndvduelles es asé sur une approche de comparason muuelle. La suaon en maère de lqudé de chaque anque de la Place es comparée selon deux dmensons drecrces. D un coé, nous comparons les anques analysées du pon de vue des varales de lqudé respecves (approche de marce). D un aure coé, nous comparons les varales de lqudé pour chaque anque dans le emps. Cee méhodologe nous perme de répondre à deux quesons crucales pour oues les anques: () Quelle es la poson relave de chaque anque par rappor aux aures anques en maère de lqudé? () Quelle es l évoluon de la poson de lqudé d une anque dans le emps? Les réponses à ces quesons son présenées sous la forme de deux "scores" calculés pour l ensemle des anques de la Place fnancère. Nos calculs son asés sur pluseurs ypes de données. Nous avons ulsé des données lan e hors-lan provenan des rappors sasques e prudenels. Ces données compales nous on perms d analyser la suaon ndvduelle de chaque anque. Nous avons auss ulsé des données du marché fnancer (prx d acon de la socéé mère e sa volalé, valeur des ndces oursers prncpaux e l écar enres les dfférens aux d nérê), ans que des données macroéconomques (ndcaeur de confance des consommaeurs au Luxemourg, ndcaeurs de confance économque des pays respecfs pulés par l OCDE e les "specal drawng rghs" du FMI). Cee méhode qu consse à ulser auss en des données du marché fnancer que des données macroéconomques nous ade à consdérer la suaon générale de la mason mère, les condons sur des marchés fnancers e les développemens macroéconomques qu conruen ensemle à la poson de l ené locale en maère de lqudé. Les scores calculés pour oues les anques locales nègren quan à eux quare groupes de varales ayan un ceran mpac sur cee poson: () la suaon de l ené luxemourgeose, () la suaon de sa mason-mère, () le développemen sur les marchés fnancers e (v) le développemen macroéconomque général. Pour effecuer des analyses praques des anques ndvduelles, les scores peuven êre décomposés en faceurs de rsque spécfques en prenan en consdéraon la conruon respecve de ces faceurs aux scores. Cela nous perme d denfer les sources de prolèmes poenels, qu peuven êre dosyncraques ou généraux. Néanmons, la décomposon des scores ex pos a denfé des caracérsques communes des anques en suaon de sress pendan l auomne 2008 (Box 2). De l aure coé, une analyse agrégée des faceurs de rsques nous perme de rer des conclusons sur le développemen du seceur ancare luxemourgeos. En ce qu concerne les derners résulas (sepemre 2009), la suaon de la plupar des anques en maère de lqudé s es amélorée pendan les deux derners rmesres, mas rese oujours mons favorale qu avan le déu de l année Les anques don la suaon es plus favorale, son en général des anques avec des sommes de lan plus mporanes. En concluson, on peu dre que : () les plus grandes anques de la Place son généralemen en peu plus lqudes que les anques de pee alle, () la suaon ndvduelle des anques de oue alle es mons favorale qu avan le déu de la crse. 3

6 Inroducon Monorng lqudy n cred nsuons has een a rsng maer of deae among regulaors snce he egnnng of he lqudy crunch n Augus 2007, n parcular wh respec o he ankng secor, where several auhors focused on macro sress es exercses [Van den End 2008, Boss e Alera 2007]. Neverheless, he leraure on frameworks adoped y cenral anks and fnancal regulaors on monorng lqudy rsk of sngle anks s scarce. In hs conex, a paper ssued y Bank of Japan [2009] ackles he ssue of lqudy monorng n he ankng secor. In hs analyss, he cenral ank perspecve s hghlghed as well as complexy of lqudy rsk, and as a consequence, he dffcules emedded n he monorng process self. Assessmen of lqudy rsk ased on ndcaors (wh a dynamc, forward-lookng perspecve) has een proposed y he Fnancal Servces Auhory (FSA) [2009] hrough s consulaon papers on srenghenng lqudy sandards, whch also propose a se of mercs for lqudy monorng. In hs laer dscusson papers, several ssues arse regardng comparaly across dfferen anks as well as he prolems relaed o he nrnsc value of such lqudy mercs exrapolaed from her economc and fnancal conex. Marke developmens from hs perod have also remnded us aou he rcky naure of lqudy rsk. Based on hs experence, hs sudy conrues o he exsng leraure as consders lqudy rsk from a dfferen perspecve, namely as a relave prolem. Indeed, our framework does no defne a hreshold elow whch a ank would e consdered as llqud. Our assessmens are always relave, snce hey resul from comparsons. In hs conex, we eleve ha, n order o evaluae he lqudy poson of a ank, s reasonale o compare s lqudy varales n wo aspecs. On one hand, he lqudy varales of a ank are compared o he lqudy varales of smlar anks, f he laer can e denfed. On he oher hand, hese varales are compared o he lqudy varales of he ank self over me. In oher words, we focus on wo prncpal dmensons n our analyss: () he defnon and evaluaon of he lqudy poson of a seleced ank across a su sample of smlar anks prevously denfed hrough a marx-ased approach and () he defnon and evaluaon of he lqudy poson of a seleced ank y comparng o s pas lqudy. Ths laer dmenson negraes a scenaro-ased se of weghed ndcaors comned wh a se of marke and macroeconomc daa, for each ank locaed n Luxemourg. The oucome of hs process s a scorng-ased sysem whch allows us o evaluae he relave degree of lqudy rsk of each ank a a ceran pon n me and helps us o undersand he naure of lqudy rsk y decomposng no ndvdual rsk facors. As hghlghed y he FSA [2009], comparaly across anks mples he use of sandardzed mercs. These mercs would rgger a ased assessmen of her lqudy profle when appled o a heerogeneous populaon of anks n erms of sources of lqudy rsk. Smlar raos may mply dfferen lqudy rsk levels across dverse usnesses. Ths s rue for he Luxemourg ankng secor, whch s characerzed y a large numer of susdares and ranches of foregn ankng groups whch ofen focus on several nche usnesses (e.g. cusody, prvae ankng and covered ond ssuance). A se of ndcaors denfed as relevan for each usness acvy was defned parly on he ass of Rychárk Š. [2009]. Moreover, he peculary of he Luxemourg ankng secor requres he ncluson n he scorng process of a se of raos assessng he lqudy and (o a ceran exen) he fnancal suaon of he ankng group as well as he 4

7 economc suaon of he counry of orgn of he local eny. Ths allows for a more comprehensve and more realsc assessmen of he local eny s lqudy poson. As regards he choce of macro varales, we negrae resuls of several sudes. The defnon of a suse of varales whch are sgnfcan for he assessmen of he lqudy profle of each ank orgnaes from several analyses. The choce and he relave leraure wll e dscussed n he relaed paragraphs. The oservaon of he ndvdual scores suggess ha n he auumn of 2008, mos of he anks locaed n Luxemourg have experenced her ghes lqudy suaon snce For a majory of he anks, he resuls for Sepemer 2009 show eer lqudy posons han a year ago, u hese reman less favourale han efore On a peer ass, he lqudy poson of several gger anks ends o e a lle more rous han ha of he res of he ankng secor. 2 Mehodology Ths sudy s ased on a panel of 145 anks (all anks locaed n Luxemourg a he me he sudy was conduced) and on an hsorcal reference daase. 1 Our daaase ncludes oh alance shee daa and fnancal marke and economc ndcaors. The mehodology consss of one ass foundaon and wo core pllars: - The foundaon consss of a rsk facor marx approach ha allocaes a se of lqudy rsk facors wh respecve weghs o each ank, ased on s usness acves (see secon 2.1 The foundaon: he rsk facor marx). - The frs pllar evaluaes he lqudy poson of a seleced ank vs-à-vs ha of smlar anks ( peers ). Thus, arues a peer score o each ank, ased on he seleced se of lqudy rsk facors. Ths score s calculaed on he ass of each ank s on- and off- alance shee fgures compared o he oher anks for dfferen me perods (see secon 2.2 The frs pllar: he peer score). - The second pllar assesses he curren lqudy poson of a seleced ank over me vs-à-vs s hsorcal values. I defnes a me score for each ank, whch negraes oh a mcro- and a macro-componen. (see secon 2.3 The second pllar: he me score). These scores can e furher analysed ank y ank as hey change over me and hey can also e decomposed o denfy he man lqudy rsk facors for every ank (see secon 3.1 Lqudy rsk profle of ndvdual anks). Moreover, he framework can e used as a ool n general ankng secor analyss e.g. for fnancal saly purposes (see secon 3.2 Aggregaed resuls) 2.1 The foundaon: he rsk facor marx Dfferen ypes of ankng acves are ofen relaed o dfferen sources of lqudy rsk. Therefore, he analyss or he quanfcaon of lqudy rsk needs o e alored o he se of local ankng acves. The BCL prevous research [Srago, F. 2009] showed ha 1 1Q / Q / 2009 for he marke daa and 4Q / Q / 2009 for he on- and off-alance shee daa 5

8 Luxemourg ankng secor s characerzed y a raher hgh level of specalzaon. Several anks are acve n a few hghly specfc acves, such as cusodan or deposory anks, covered ond ssuance anks, ec The average level of acves s no ofen characerzed y less han wo usness acves per ank. Ths mples ha anks may no e merely classfed y allocang a ank o one and only usness acvy. Smlarly, even f here are some ypcal comnaons of usness lnes (e.g. prvae ankng and fducary deposs, cusody and asse managemen), o cluser anks locaed n Luxemourg no several peer groups would necessarly resul n an oversmplfcaon of realy. To avod, he mehodology presened n hs paper s founded on a marx of weghed lqudy rsk facors, ranslaed no ndcaors and mapped for every ank n he sample. For hs purpose we have seleced and defned 14 on- and off- alance shee rsk facors and 7 marke rsk facors. We eleve ha hese 21 rsk facors cover, alogeher, even hough wh dfferen mporance, a large specrum of he poenal sources of lqudy sress relevan for he anks acve n Luxemourg. For he calculaons of he scores, hese rsk facors were ransposed o concree varales,.e. he rsk ndcaors (Fgure 1). 2 Ths chaper descres he reasons ehnd he selecon of rsk facors and her ranslaon no ndcaors. Frs, we focus on he alance shee rsk facors (Tale 1) and hen on he marke rsk facors (and Tale 3). Fgure 1 Balance shee and marke rsk facors Balance shee rsk facors (14) Acvy / Busness lne Balance shee rsk ndcaors Marke rsk facors (7) Macroeconomc or dosyncrac marke facor Marke rsk ndcaors Balance shee rsk facors Snce he characer of lqudy rsk depends also on he ype of usness run y anks, s necessary o denfy he man ankng acves locaed n Luxemourg. Our man sources of nformaon were: () regulaory reporng daa, also reaed y a prncpal componen analyss (Box 1), () annual repors of he anks, (), quesonnares 3, (v) meengs wh anks, (v) on-se vss and (v) oher sources (e.g. The Luxemourg Bankers Assocaon 4 ). The aggregaon of he knowledge acqured va hese dfferen channels, allowed us o denfy 6 leadng usness lnes: Luxemourg real: he man componen of hs acvy s he local (Luxemourg) orgn of he anks clen ase. Ths consss on he collecon of deposs from locally 2 Ls of all varales, ndexes and arevaons used n he paper are n Annex D 3 See Srago [2009] 4 For more nformaon on hs organzaon please vs: 6

9 esalshed households and small and medum-sze enerprses. On he asse sde focuses on provdng creds, ncludng morgage loans, o he same caegory of clens. Generally hree ypes of anks are acve n hs segmen: () domesc Luxemourg anks, () some of he mullne nernaonal ankng groups and () Bausparkassen. Wealh managemen: hs defnes manly prvae ankng acves, whereas he geographc orgn of clens s less relevan. Indeed, prvae clens deposs orgnae manly from oher counres. Ths acvy s ofen relaed o asse managemen servces oserved n anks off-alance shees as well as from deposs from prvae clens. These servces are ofen provded hrough a specal eny (susdary or ranch) of a large nernaonal ankng group or as a par of a mullne susdary. Many of he anks acve n hs usness provde he lqudy surplus o memers of he paren ankng group. Inernaonal corporae ankng: we refer here o he provson of creds and syndcaed loans o large nernaonal enerprses or fnancal holdngs usually locaed n several counres. These asses are ofen denomnaed n euro or US dollars. Banks nvolved n hs acvy are characersed y a large cred ook, raher heerogeneous from a geographcal pon of vew. However, he corporae ankng ofen mples sgnfcan volumes of corporae deposs on he anks alance shees, or funds receved from he paren ankng group. Invesmen fund and nvesor servces: mosly concerns fund admnsraon, cusodan and deposory funcons. Banks acve n hs usness area have usually large off-alance shees and a ceran volume of acvy wh nvesmens funds on he asse and laly sde of he alance shee. In general, cusodan anks are raher specalsed; hs usness lne s usually comned only wh asses and lales relaed o he fund ndusry. Asse managemen for her own ankng group: The asses of hese anks are domnaed y dfferen ypes of secures, manly de nsrumens and srucured fnance producs. In a numer of cases consss of reasury acves on ehalf of he group as well as radng. Laly sde can e characersed y nra-group or nerank deposs as well as ssuance of de nsrumens. Issuance of secures: smlarly o he prevous usness lne, hs acvy can e ofen undersood as a sraegy of a ankng group o use s Luxemourg eny o ssue de on ehalf of he group. These ssuances are manly covered onds gven he favourale local legslaon. The lqudy receved from he ssuance s generally ransferred o he paren ankng group or nvesed n de secures. All hese leadng ankng acves are furher ranslaed no lqudy rsk facors o capure he lqudy rsk resulng from respecve usness lnes (Tale 1). Apar from hese man usness lnes, some oher acves were denfed as poenal sources of lqudy sress. These are mosly laly drven facors e.g. deposs from nvesmen funds, deposs from off-shore cenres (OECD, 2007) and fducary deposs. These acves were also ranslaed no rsk facors. Fnally, regardng he hos characer of Luxemourg ankng secor and general condons n he euro nerank marke, addonal lqudy rsk facors were added o our analyss. Fnally, we have denfed 14 rsk lqudy facors ha can e defned y on- and off-alance shee daa (Tale 1). 7

10 Tale 1 Balance shee rsk facors Rsk facor Type of rgger Descrpon Freeze of nerank marke Capal markes shock Real run n Luxemourg Macro Macro Idosyncrac Banks are no wllng o lend o each oher whch leads o a susanal decrease of nerank posons, oh long and shor. Fall n de secures prces resuls n a decrease n he value of lqud asses. Whdrawal of ceran volume of household deposs, rggered y rumours. Prvae run Idosyncrac Whdrawal of ceran volume of prvae deposs, rggered y rumours. Corporae run Idosyncrac Whdrawal of ceran volume of corporae deposs rggered y rumours. Whdrawals y funds Issuance prolems Cusodan operaonal ssues Commed cred lnes Foregn exposures Idosyncrac Macro / Idosyncrac Idosyncrac Idosyncrac Macro Whdrawal of fund deposs rggered y anks rang downgrade or as a resul of fund redempons Prolems o rase fundng y new ssuance rggered eher y unfavourale marke condons or anks rang downgrade. Due o operaonal ssues n selemen he ank runs no overngh lqudy shorage. Generous loans commmens gven durng favourale marke condons are drawn down y he counerpares. Cred rsk prolems n foregn counry / currency exposures resul n a lqudy prolem. Fducary deposs Legslave Due o changes n regulaon, fducary deposs ecome more volale. Off-shore cenres Eurosysem refnancng Group lqudy Legslave Idosyncrac Group dosyncrac Due o srcer regulaon of off-shore cenres, some of he flows ecome more volale. Condons of accessng he Eurosysem lqudy ecome srcer (e.g. collaeral crera and harcus) Neng of he poson wh anks from he paren ankng group Defnon of he alance shee rsk ndcaors In hs secon we defne our 14 alance shee rsk ndcaors. We use hem oh as an npu o calculae he peer score n he frs pllar and as an npu for me score calculaons n he second pllar. They are ased exclusvely on avalale on- and offalance shee daa. The values of he alance shee ndcaors are specfc for every ank ( ) and every perod ( ). 5 The 14 ndcaors share wo major common characerscs. Frs, n order o make he lqudy raos comparale among dfferen anks, he denomnaor usually conans he nformaon aou he sze of he ank (TA ). Second, snce he concep of lqudy uffer seems o e one of he crucal facors n lqudy rsk, we have nroduced a varale of lqud asses ( LA ), whch s an mporan componen n all lqudy ndcaors. Our defnon of lqud asses ( LA ) conans cash (T ), cenral anks recevales ( C c ), shor erm deposs wh oher anks ( 1Y 1Y C ) and wh relaed pary anks ( C rp ) and de 5 To make he formulas n hs secon more readale, we do no nclude ndexaon of and, sll he values of he ndcaors are ank and me specfc. 8

11 secures porfolo ( S j ). To ake no accoun he volume of secures pledged n Eurosysem and used n refnancng operaons, he amoun orrowed from he cenral anks ( D ) s deduced from lqud asses. c LA K 1Y 1Y = T + Cc + C ( 1 v Y ) + C rp C (1 v 1Y ) + rp C d =1 [ S d (1 vd )] Dc 1 (1) As regards he de secures porfolo ( S d ), we apply a se of valuaon harcus ( v d ) for dfferen ypes of ssuer and he soveregn rang of he counry of he ssuer. Snce no daa aou overngh deposs are avalale, we also apply harcus on 1Y 1Y C and C rp o ake no accoun he volume of Nosro accouns avalale a any momen n me. 6 Accordng o he European Cenral Bank [2006], more dversfed fundng sources may have a posve mpac on a ank s rsk profle. We use he Herfndahl-Hrschmann concenraon ndex ( h 7 ) as a proxy for he dversfcaon of fundng of ndvdual anks. The more concenraed are a ank s lales, he lower s he dversfcaon effec. For each rsk ndcaor, α represens he sress parameer. As regards rsk facors of a general naure (e.g. freeze of he capal markes, capal marke shock) he sress parameers are appled symmercally o all anks. For rsk ndcaors ha are more dosyncrac (e.g. household, prvae or corporae run), he sress parameers ( α ) are calculaed for ndvdual anks o ake no accoun he dfferen volaly of her alance shees. 8 Freeze of nerank marke In hs scenaro, we smulae a suaon where anks are no wllng o lend o each oher. Ths leads o a susanal decrease of nerank posons, oh long and shor. LA 1Y C ( 1 v 1 Y C ) α (( D h( TA mn( α ( D rp rp D ) ( C D ), α ( C rp C rp ))) C )) (2) 1Y Frs we deduc he nerank componen [ C ( 1 v 1 ) ] from he lqud asses ( LA ) o Y C avod he doule counng of nerank asses ncluded n he defnon of lqud asses ( LA ). Aferwards, he modfed lqud asses are adjused y he ne nerank poson D C ) excludng he poson wh he anks elongng o he same ankng group ( ( rp D rp C ) and normalsed y he oal asses (TA). As a resul, anks eng shor on he nerank marke suffer from hs scenaro, whle anks eng ne lqudy provders mprove her lqudy poson. 6 For more deals aou valuaon harcus (v) see Annex A. 7 For more deals aou he composon of Herfndahl-Hrschmann ndex (h) see Annex B 8 For more deals aou sress parameers ( α ) see Annex F 9

12 Capal markes shock In hs second marke scenaro we es he anks sensvy o a fall n asse prces. For hs purpose we nroduce a new marx of valuaon harcus, applyng dfferen harcus accordng o he ype of ssuer and he soveregn rang of he counry of orgn of he ssuer. 9 The rao s defned as a share of sressed lqud asses ( LA s ) over he alance shee oal (TA ). Household run n Luxemourg LA s (3) TA The whdrawal of he real deposs s one of he mos common lqudy rsk channels. In hs ndcaor we assume he lqud asses ( LA ) o e used o face an ouflow of deposs y Luxemourg households ( D ). LU h LA α D h( TA α D LU h LU h ) (4) Unlke he sress parameers of prevous raos appled equally o all anks ( α ), sress parameers n hs scenaro are ank specfc ( α ) and depend on he hsorcal volaly of he respecve em, n hs case, household deposs. 10 The applcaon of such an approach wll dfferenae eween anks wh hgher and lower volaly of deposs. Prvae run The srucure and he logc of hs scenaro s he same as he prevous one. The only dfference s n he use of prvae ankng deposs ( D p ) nsead of he Luxemourg households deposs ( D ): LU h h LA α D p ( TA α D p ) (5) Corporae run Smlarly o all run scenaros, we deduc he sressed value of deposs, n hs case he deposs y he corporae clens ( D ), from he lqud asses. c h LA α D c ( TA α Dc ) (6) 9 For more deals aou sress valuaon harcus see Annex A 10 For more deals aou sress parameers ( α ) see Annex F 10

13 Whdrawals y funds Snce he nvesmen fund ndusry s very mporan n Luxemourg, many anks have o deal wh he volaly of mporan amouns of deposs y nvesmen funds. In hs scenaro we surac he deposs y relaed pares funds ( rp D f ), we are assumng ha own ankng group enes ehavour would no conrue o lqudy sress of anoher group eny: LA α ( D h( TA α ( D f f rp rp D f D f ) )) (7) Issuance prolems Negave ond marke developmen or dosyncrac facors can have an mpac on he roll-over of he shor-erm de nsrumens ( B 1 Y ). Banks wh hgher lqud asses ( LA ) and hgher fundng dversfcaon are less sensve o hs scenaro. h LA α B 1Y ( TA α B1 Y ) (8) Cusodan operaonal ssue Banks provdng cusodan servces generally face a shor-erm lqudy rsk as a resul of selemen prolems, when hey need o rdge he cash-flows y nra-day cred. The proaly and he magnude of such ssue s parly a funcon of he volume of asses under cusody ( OF f ) and anks would lkely e usng her lqud asses ( LA ) n hs case. LA α OF LA f (9) Commed cred lnes usage The lqudy rsk s parally defned as he loss of aly o fund ncreases n asses (Basel 2000, 2008). Increased raes of use of commed cred lnes ( C g ) can e a resul of unexpeced lqudy needs of corporae clens e.g. arsng afer ghenng of he lendng condons. LA α C hta g (10) Foregn exposures Many anks locaed n Luxemourg are exposed o deors n foregn counres or hold asses n foregn currences. 11 Snce n hs scenaro he lqudy rsk s raher a resul of a 11 For daa on foregn counres / currences exposures see Annex E 11

14 cred even raher han marke rsk, we consder he counry facor o e more mporan han he currency facor (Tale 2). Tale 2 Exposures n foregn counres / currences y soveregn rang Counry of deor AAA Non-AAA AAA Baselne rsk Much hgher rsk Currency of counry of deor Non-AAA Hgher rsk Much hgher rsk Followng hs logc, we focus on he las column and we neglec he denomnaon of he exposure. Such an approach should address he fac ha many deors from non-aaa counres are funded n EUR or USD. LA α TA TA α TA oc oc (11) In hs scenaro we do no dfferenae eween creds or secures of oher ypes of exposures; all s aggregaed under oal asses (TA). Fducary deposs Fducary deposs 12 are an mporan fundng source for many anks locaed n Luxemourg. However hey make a volale source of fundng and are also parly dependen on he ankng regulaon. h LA α D fd ( TA α D fd ) (12) Off-shore cenres In hs scenaro we smulae a neng of he posons wh he clens from off-shore cenres (OECD, 2007). LA α (( TL h( TA (mn( α ( TL OF OF rp TL rp OF TL ) ( TA OF ), α ( TA OF rp OF TA rp OF )) TA OF ))) (13) Eurosysem refnancng Snce Augus 2007, he man refnancng operaon (MRO) and, a couple of monhs laer, he long erm refnancng operaon (LTRO) ecame mporan fundng channels for many of he Euro-zone ankng groups. The mporance of hese operaons grew also parly due o more favourale valuaon harcus appled on dfferen ypes of secures, ncludng srucured fnance nsrumens. The sysem of valuaon harcus plays a crucal 12 For a defnon of fducary deposs please vs: hp:// 12

15 role n hs fundng channel and s a compeence of he ECB (European Cenral Bank, 2008). To ake no accoun hese crcumsances, we have nroduced an ndcaor reflecng a scenaro n whch he lqudy orrowed from he Eurosysem ( D c) mus e replaced y he ank s lqud asses ( LA ). h LA α D c ( TA α Dc ) (14) Group lqudy In prevous scenaros (e.g. fund deposs whdrawal) we have excluded possle negave effecs comng from he paren ankng group. Neverheless, recen experence shows ha hs aspec should e aken no consderaon. In our las scenaro we smulae a suaon where he paren ankng group s no wllng or no ale o provde fundng o s Luxemourg eny. Bascally a neng of he alance shee poson wh he anks from he paren ankng group akes place. LA 1Y rp C ( 1 v 1 Y rp C h( TA mn( ) ( rp C rp, rp D D )) rp C ) (15) As n he nerank scenaro, we adjus he lqud asses o avod he doule counng of he rsk parameer (nra-group posons) n he defnon of he lqud asses. In he ne nra-group poson we nclude only creds o relaed anks ( rp C ), and deposs from he relaed anks ( rp D ), and oher enes from he group (e.g. funds and fnancal holdngs) are excluded. The oal poson normally ncludes secures ssued y relaed anks, and some off-alance shee ems (e.g. collaeral, loan commmens). Secures ssued y relaed anks are no ncluded as hey smply canno e need. As regards he off-alance shee ems, no enough daa s avalale. Alhough he srucure of hs rao s smlar o he one referrng o he freeze of he nerank marke (.e. oh calculae wh neng of he poson ), he mehodology of her mpac s dfferen. In he nerank scenaro, he ne poson (shor or long) led symmercally o a decrease or o an ncrease n he lqud asses. In he nra-group scenaro, anks canno enef from her ne long poson wh he paren ankng group. Ths s ecause he lack of capacy or wllngness of he moher ankng group o provde fundng (.e. he concep of he scenaro) does no mply repaymen of he loans provded y Luxemourg enes. As a resul, hs rsk ndcaor comes wh a zero wegh for he anks ha are ne lqudy provders. 13

16 Box 1: A prncpal componen decomposon of he Luxemourg ankng secor We have nvesgaed anks locaed n Luxemourg y he means of a daa mnng echnque called prncpal componen analyss 13 (PCA). The purpose of hs analyss s o denfy and possly solae smlar anks accordng o her major characerscs. Ths echnque allows us o draw general conclusons n erms of man lqudy rsk drvers for he local ankng secor. Based on hese conclusons, we defne several rsk facors (and he relaed ndcaors). For he purposes of PCA analyss, he alance shees of he local anks are dsaggregaed n a numer of ems accordng o her relevance n erms of lqudy rsk. Asses and lales are analyzed separaely. The alance shee ems are consdered n relave erms: each alance shee em s dvded y he oal asses n order o elmnae as from he resuls n favour of larger anks. The reason for hs choce s ha our neres les n he composon of he anks alance shee raher han n her asolue sze. These resuls are descred n Char Char 1: PCA - Asses sde Secures holdng 5 PCA Axs 2 - Explaned volaly: 11% PCA Axs 1 - Explaned volaly: 14% Cred o relaed pares Cred o non-relaed anks Source BCL, auhors calculaons Cash holdngs Daa mnng refers o a se of varous sascal echnques whch allow for he exploaon of large daaase reposores. The advanage of hese echnques s he possly offered o vsualze relaonshps eween varales n an n-dmensonal marx y reducng hs marx complexy (from n o usually 2 or 3 dmensons). These new dmensons are eer f o capure he varaly whn he daaase. For more nformaon on hese echnques and her nerpreaon, see e.g. suden_uorals/prncpal_componens.pdf and hp:// Inuon_jp.pdf 14 The correlaon scaerplos n Annex I provde an explanaon for he exsng relaonshps across he man componens of axs 1 and 2. 14

17 In he char, Axs 1 descres 14% of he sample s asse volaly whereas and Axs 2 descres 11% of he oal sample volaly. In he char each ule pon represens one ank, whereas he sze of he ule represens s oal asses 15. Sascally, he choce of he mos relevan axes s usually ased on Kaser s creron: herefore 5 axes should e reaned. Anyway, for he purpose of vsualzaon, only 2 axes are ncluded n he analyss, as suggesed y he Scree s es resuls. On he rgh hand sde of Char 1 we denfed anks granng cred o relaed pares. These anks are usually no parcularly acve n he ner-ank marke. Indeed, we could argue ha creds o relaed pares and creds o non-relaed anks are hghly negavely correlaed acves, as hey le on he same axs a he oppose exremes. The man componens of axs 2 are nvesmens n secures and cash holdngs, he former eng more relevan n order o characerze he sample. In addon, emerges from he oservaon of Char 1 ha larger anks are more prone o gran creds o relaed pares. For a eer comprehenson of he characerscs of he local ankng secor we negrae axs 3 n our descrpon. Axs 3 s characerzed y a posve correlaon wh he caegory creds o oher fnancal nsuons 16 and creds o corporaes. Ths analyss hghlghs ha: - Local anks are eher acve as provders of lqudy o he paren ankng group or dsrue her excess lqudy n he ner-ank marke. These wo acves seem o e muually exclusve. We could argue ha s raher unlkely ha he same ank would e exposed o an ner-ank marke squeeze and o a moher company conagon : hence he need for wo separae scenaros. - The holdng of a large porfolo of secures s also a represenave acvy of anks locaed n Luxemourg. Ths jusfes he need for a capal marke shock scenaro and for a Eurosysem refnancng scenaro. - The provson of cred o oher fnancal nsuons as well as o corporaes s an mporan acvy. In parcular he ype of exposure o counres characerzed y lower rang s of poenal neres n our analyss. - As regards he relave mporance whn he local ankng secor, larger anks ofen gran creds o relaed pares. In Char 2 we nvesgae he lales sde of anks locaed n Luxemourg. The level of granulary s hgher as we separae a parcular ype of fnancal produc called fducary deposs from oher ypes of deposs. The char elow llusraes our fndngs. We oserve ha axs 1 descres roughly 18% of he sample s volaly whle axs 2 descres 15% of he oal sample volaly. As n he prevous char, each ule pon represens one ank, whereas he sze of he ule represens s oal asses. 15 By consderng he sze of he oal asse we address o some exen he ssue of lqudy rsks from a perspecve ased on each anks relave mporance n he local ankng secor. 16 In Luxemourg hs caegory ncludes manly cred o nvesmen funds. 15

18 Char 2: PCA Lales sde 3 Deposs from nvesmen funds and capal PCA Axs 2 - Explaned volaly: 15% 2 1 Deposs from corporaes, households and pulc admnsraons Deposs from relaed pares and fducary deposs PCA Axs 1 - Explaned volaly: 18% Deposs from corporaes, households and pulc admnsraons - Source BCL, auhors calculaons We noce ha he larges anks are locaed n he rgh hand sde of he char, whch s characerzed y anks recevng deposs from relaed pares and fducary deposs. On he lef hand sde, lower quadran, of he char we oserve anks recevng manly deposs from households and corporaes. These anks are acve n he local real as well as n prvae ankng usness. Ther alance shee szes are raher lmed f compared wh he res of he sample. I appears ha a ceran numer of anks could e affeced y a ank-run even, oh on he corporae and he household sde. An even whch could poenally h he local ankng secor could also orgnae from changes n regulaons. Such an even could affec a numer of large players. On he lales sde, he populaon s characerzed y a hgher degree of heerogeney. Neverheless, n general, he resuls show ha anks akng deposs from relaed pares are raher nacve n he households and corporae usnesses. These wo acves are negavely correlaed. The conclusons we draw from he oservaons are he followng: - Heerogeney s hgher across he populaon as regards he laly sde. - Household deposs and deposs from relaed pares are muually exclusve acves. Two scenaros should e envsaged o cover hese wo poenal lqudy rsks. - A scenaro nvolvng a whdrawal of fducary deposs could heorecally affec he larges anks. - Banks acve as cusodan, whose alance shee s manly drven y deposs from nvesmen funds, should e separaely nvesgaed, as hey ncur shor erm lqudy rsk n her cusodan usness. 16

19 2.1.2 Marke rsk facors The marke rsk facors are ncluded n our framework for hree man reasons. Frs, accordng o Prncples for Sound Lqudy Rsk Managemen and Supervson (BIS 2008), supervsors should also use he marke nformaon n he process of lqudy rsk assessmen. 17 Second, he hos characer of he Luxemourg ankng secor mples raher hgh dependence of he local enes on he overall suaon of he paren ankng group 18. Therefore he plan on- and off-alance shee daa repored y hese local enes n he large majory of cases do no conan enough nformaon o complee he pcure of her lqudy poson. Gven ha we do no have drec access o nernal documens, repors or oher nformaon as regards he lqudy poson of he paren ankng group, we deemed approprae o nclude among he lqudy raos a se of ndcaors whch could e a proxy for he lqudy profle of he paren company. Fnally, he economc leraure sresses he exsence of several facors as predcors for fnancal crses whch could poenally h he ankng secor 19. In general he elowmenoned papers ofen negrae he perspecve and forecasng power of he suggesed ndcaors. In hs regard our sudy does no rely on he dea of causaly n he defnon of he se of macro economc ndcaors o e ncluded n our framework. However, we derve from he aove-menoned approaches he poenal causal relaonshps and lnkages eween a ank and he deeroraon of s group/counry economc/fnancal suaon. In hs conex, he negraon of he rsk facors n our framework, as suggesed y he leraure, s a frs sep n he process of formulang a more precse lnkage eween hese varales and her role as early warnng ndcaors. These are ndeed he canary n he mne ha sgnal an ncreased proaly of occurrence of a suaon of sress n a specfc ankng group/counry. In hs conex, one wdely acceped phenomenon s he so-called wn crses even. Ths laer refers o he jon accrued proaly of ankng and currency crses happenng smulaneously. Kamnsky and Renhard [1998] dscuss he lnkages and hghlgh poenal cause-effec relaonshp eween hese wo crses. Moreover, hey defne a se of economc and fnancal varales n order o deec possle common paerns n erms of orgn of ankng and currency crses. They fnd ha ankng crses lead currency crses and, n general, ndcaors of real economy acvy do a eer jo n forecasng ankng crses. In addon, her resuls show ha he fscal secor s n general no a srong predcor for eher ype of crses. In he conex of he aove menoned analyss, Kamnsky [1999] proposed a se of early warnng ndcaors for currency and ankng crses. The auhor emphaszes he role of excessve capal nflows, whch could lead o excessve exposures of anks o sock and real esae markes. Ths ehavour could poenally make anks more vulnerale o asse ules. In order o capure a leas parly he ule urs accrued rsk phenomenon, 17 Prncple 15: Supervsors should supplemen her regular assessmens of a ank s lqudy rsk managemen framework and lqudy posons y monorng a comnaon of nernal repors, prudenal repors and marke nformaon 18 These specfc characerscs of each local ankng secor should e aken no consderaons also accordng o Kamnsky and Renhard [1999] and Hermosllo [1999], ced. 19 For a revew of early warnng ndcaors n ankng crses see: Gayán and Johnson [2002], ced. 17

20 he sock marke of he counry of reference s added o he ndcaors. Moreover, he role of real exchange rae emerges as a es ndcaor for ankng and currency crses. Furhermore, Sanor [2003] n hs sudy denfes smlar channels for ankng crses and conagon. As n Kamnsky and Renhard, he fnds ha slow economc growh and hgh cred growh are oh assocaed wh an accrued lkelhood of a ankng crss. Smlar conclusons were made y Jurča and Zeman (2008) who denfed he real GDP, exchange rae and 3-monhs ner-ank marke rae as he hree mos mporan exernal varales for he ankng secor n hs conex. As regards he mporance of he spread eween he secured vs. unsecured ner-ank markes as a measure for a lqudy squeeze, Esenschmd and Tapkng [2009] fnd ha he wdenng of hs spread s lnked o a fundng lqudy rsk. In he paper he auhors exclude he possly ha an ncrease n proales of counerpary defaul could e he cause of ner-ank spread wdenng. Lnzer and Schmd [2007] found smlar resuls y nvesgang he spread of he Euro Over-Ngh Index Average and he European Cenral Bank polcy rae. In hs case, he wdenng of hs spread was an ndcaor of a suaon of sress n he ner-ank marke. The negraon n our model of he spread eween he Eurepo vs. Euror ner-ank marke raes allows he capurng of a shared feaure of lqudy rsk common o anks acve n he nerank marke. In case of wdenng of he spread, anks acve n he ner-ank marke wll all e affeced y he deeroraon of hs ndcaor, herefore worsenng he overall score of hese anks vs-à-vs her peers and over me. Moreover, gven ha he ner-ank marke s a conagon channel for fnancal crses, as suggesed y Degryse and Nguyen [2004] and Sanor [2003], he monorng of sress n hs channel s crcal o he cenral ank. Based on he leraure and daa avalaly, we have defned four man ndcaors for marke rsk: fnancal markes, nerank marke, macroeconomc condons and currency ssues. Defnon of he marke rsk ndcaors Lke he alance shee par of our framework, he marke rsk facors need o e ranslaed no ndcaors wh hree levels of specfcy. Whle he frs wo ndcaors (namely Euror / Eurepo spread and Luxemourg consumer confdence ndcaor) are appled symmercally o all he anks, he nex hree ndcaors (economc senmen, sock exchange ndex and specal drawng rghs) are common for anks orgnang from he same counry. The fnal wo ndcaors (sock prce and sock prce volaly) are relaed o he paren ankng group. Euror / Eurepo spread The analyss negraes a measuremen of he lqudy n he nerank marke. Ths ndcaor s defned as he spread eween Euror 3 monhs and Eurepo 3 monhs (unsecured vs. secured marke raes). The Euror-Eurepo spread was seleced, as mos anks are hosed n he Euro-area counres. Ths ndcaor deecs a lqudy squeeze: a wdenng of he spread eween he wo raes mples a dryng-up of lqudy n he nerank marke. 18

21 Consumer confdence ndcaor of Luxemourg The worsenng of he Luxemourg consumer confdence ndcaor could affec ndrecly he lqudy poson of he anks as he repuaon rsk for he fnancal place could rgger foregn deposs whdrawals. Ths ndcaor s calculaed and pulshed y he Banque cenrale du Luxemourg. I measures he conjuncure as perceved y consumers. I s mehodologcally ndependen of GDP or oher macroeconomc varales, alhough here s a correlaon wh economc growh. The ndcaor s calculaed as an average of a se of answers o four quesons concernng () he fnancal suaon of Luxemourg households for he nex 12 monhs, () percepon of general economc condons over he nex 12 monhs, () evoluon of unemploymen for he nex 12 monhs and (v) savngs aly for he nex 12 monhs. Economc senmen ndcaor of he counry of he ankng group The OECD leadng economc ndcaor capures he poenal deeroraon of he real economc condons n he counry of orgn of he ank 20. Indeed, lqudy rsk n ankng acvy may also orgnae from macroeconomc crses. Ths relaonshp may arse from a downfall effec of an economc downurn on ankng ooks, hrough varous ransmsson mechansms. The deeroraon of economc condons worsens he qualy of anks cred ooks, hence decreasng orrowers aly o repay her loans. Ths could have an mpac on he flow of lqudy o anks. Sock exchange ndex The sock exchange ndex s he man sock exchange ndex of he counry where he head of he ankng group s locaed. I should ac as rgger for he asse-prce-relaed ssues hghlghed n a numer of ced papers. Moreover, he ndex performance should capure an ncrease n lqudy rsk hrough a general deprecaon of sock prces: hs effec s lkely o affec he relave sock prce performance of each ankng group. Specal Drawng Rghs Specal Drawng Rghs (SDR) 21 ake no accoun he deeroraon of he currency value over me, and evenually hghlgh he occurrence of a suaon of sress n a specfc currency. The rao used s he recprocal of he SDR per currency un rae. I should negrae he poenal relaonshp eween ankng and currency crses. Sock prce of he paren company and s volaly 22 The dosyncrac aspec (repuaon rsk) of lqudy rsk s capured n our model y he use of anks sock prces. The moher company sock prce and s mpled volaly 23 represen a proxy for he flucuang prce for lqudy ha each ank has o pay on he 20 For a more dealed revew of he mehodology ehnd hs ndcaor, we refer o Nlsson [2000], ced. 21 For furher explanaon see Annex G. 22 I s mporan o menon ha no all he paren companes of he local enes are lsed n a regulaed sock marke. Some of hem are governmen or prvaely-owned. When hs case occurs, he ank s smply scored accordng o he resdual marke varales. Anyhow, hs s he case for 70 anks. 23 Ths daa s no avalale for all he anks n Luxemourg ankng secor, as some of he anks are nonlsed. For non-lsed anks, hs ndcaor comes wh he wegh of 0. 19

22 fnancal marke o fund s acves. The rse of ceran needs for lqudy would mply, n case of scarcy of nernal funds, he recourse o fnancal markes, eher hrough de nsrumens or sock ssuances. Evenually, from a lqudy pon-of-vew, he sock prce should reflec he cos of ssung new capal n fnancal markes. Moreover, he prce of a sock should ncorporae marke percepon of rsk n he usness acves of he frm 24. Ths rsk percepon ncludes lqudy rsk. The sock prce of a ank should ac as a proxy for he marke percepon of rsk n he ank s underlyng acves. Cred defaul swap spreads could also e ncluded n he daase. However, accordng o Bysröm, H. [2005], he sock prce volaly has een found o e sgnfcanly correlaed wh CDS swaps. The lack of cred defaul swap rades for a large numer of anks was one amongs he man crera for our choce n favour of sock prces. I s a se of marke varales, whch could e classfed accordng o he followng marx (Tale 3) whch descres he componens of he marke rsk facor, he readh (markewde, counry specfc and dosyncrac) and he ype (fnancal vs. macroeconomc). Tale 3 Marke rsk ndcaors Fnancal markes Macroeconomc Common ndcaor across he sample Common for ankng groups from he same counry - EURIBOR-EUREPO spread - Reference sock exchange ndex - Consumer confdence ndcaor of Luxemourg - Economc senmen ndcaor (ESI) of he counry of orgn - Foregn exchange rae (SDR ) of he counry of orgn Idosyncrac (ank-specfc) - Sock prce - Sock prce volaly n/a Rsk facor weghs deermnaon Afer he rsk facor s seleced and ranslaed no rsk ndcaors we need o deermne he relave mporance of hese rsk facors o every ank for every perod. Balance shee rsk facors weghs The alance shee rsk facors wegh ( w, ) s a normalsed nermedary rsk wegh ( w, ) o sum up o 1, dependng on how many rsk facors are relevan for ndvdual anks: w, = K = 1 w, w, (16) 24 In hs overall assessmen performed y marke parcpans, lqudy rsk should also play a role. Whle we recognze ha sock prce dynamcs are affeced y several oher facors, such as rsk-performance consderaons, neverheless we expec a sharp sock prce deeroraon o sgnal a suaon of sress n he ank s usness profle. 20

23 The nermedary rsk wegh ( w, ) s a funcon of he relave share of he rsk parameer ( r, ) 25 over he lqud asses ( LA, ) and he volaly of hs parameer over me. w,, r sdev( r ) = * (17), LA r As a general rule, he hgher he mporance and he volaly of he rsk parameer ( r, ), he hgher he alance shee rsk facor wegh ( w, ). Ths allows us o negrae he effec of changes n ankng acvy no he alance shee of he anks over me. Marke rsk facors weghs Unlke alance shee rsk facors weghs ( w, ), he marke rsk facors weghs ( w, ) do no depend on he relave alance shee mporance and volaly of he rsk parameer, u on he numer of marke rsk facors. As some of he anks are no lsed and no sock prce daa are avalale, no all of he anks have he same numer of marke rsk ndcaors. As a resul, he marke rsk facors weghs ( w, ) are calculaed as a funcon of numer of marke rsk ndcaors avalale for every ank n dfferen perods. The weghs equal o eher 1/7, f all ndcaors are avalale, or o 1/5, f he ank s no lsed and hus he sock prce and s volaly are no avalale The frs pllar: he peer score The ojecve of he frs pllar s o provde a relave score from 1 (he es) o 9 (he wors) for every ank a a momen n me. Ths score s a weghed average of he poson of a ank s rsk ndcaor n he dsruon of rsk ndcaors calculaed for all relevan anks Daa The peer score s ased exclusvely on he daa from regulaory reporng,. e. he alance shee and off-alance shee daa of he Luxemourg enes. There s no reference o he paren ankng group rsk profle, o general fnancal marke or o macroeconomc developmen. Thus, he only rsk facors consdered n hs calculaon are he 14 alance shee rsk facors (see Tale 1). j j 25 The rsk parameer s he core varale of he rsk ndcaor, see Annex C 26 The marke facor weghs can e furher calraed accordng o characerscs of he local ankng secor 21

24 2.2.2 Calculaon In our framework, f he rsk facor wegh ( w, ) exceeds a defned hreshold 27, he rsk facor s consdered relevan and eners o he calculaon of he dsruon. A dsruon of every alance shee rsk ndcaor s calculaed, akng no consderaon only hose anks for whch ha ndcaor s relevan. Based on he relave poson of he ank s rsk ndcaor n he dsruon, a score s assgned. Ths s done separaely for each of 14 alance shee rsk facors (Fgure 2). Fgure 2 Peer score calculaon for Bank n n 0 Bank Dsruons of rsk facors whn relevan anks Rsk facor Bank 1 -n Rsk facor 1 0 Weghed average of posons n he dsruons across he anks A ank ges a alance shee rsk facor specfc peer score ( BRPS, ), unless s correspondng wegh w, s elow he hreshold. Accordng o he poson of he rsk ndcaor n he dfferen percenles of he dsruon, hs rsk alance shee facor peer score ( BRPS, ) spans from 1 o 9. The fnal peer score ( PS, ) s an average of he alance shee rsk facor peer scores oaned for dfferen rsk facors ( BRPS, ) weghed y her relave mporance and volaly ( w, ) K [ ],, w BRPS,, PS = (18) = 1 As a resul, he peer score depends only on a ank s relave lqudy poson whn he ankng secor, measured y he alance shee rsk facors, and doesn reflec possle changes of he ankng secor as a whole. 27 For he Luxemourg ankng secor, he hreshold of 0.05 was se ased on he exper s judgemen calraon. 22

25 In oher words, he peer score only provdes us wh nformaon aou an ndvdual ank s lqudy poson relave o s peers. I does no capure parallel rends n all he anks n he sample. Ths s capured y he second pllar, namely he me score. 2.3 The second pllar: he me score To complemen he frs pllar score, he ojecve of he second pllar s o provde a score relave o he ank s prevous experence. In hs exercse we do no compare he anks among hem (Fgure 2) u we confron he ank wh s pas lqudy posons (Fgure 3) Daa Compared o he frs pllar, for he me score we have added 7 exernal marke varales (Tale 3) o ake no consderaon developmens n he fnancal markes, suaon of he paren ankng group and general macroeconomc oulook for relevan counres. The nroducon of hese 7 exernal varales reduces he nerdependence of he peer score and he me score. As a resul, he dfference eween he wo pllars les no only n dfferen mehodology (peer comparson vs. comparson over me) u also n he varales consdered Calculaon As n he frs pllar, every ank ges a score whch spans from 1 (he es) o 9 (he wors) a a precse momen n me. In general, he me score ( TS, ) depends on he posons of a ank s rsk ndcaors n he dsruon of he respecve rsk ndcaors calculaed for prevous perods (Fgure 3). Ths s done separaely for alance shee and marke componens o calculae rsk facor specfc scores ( BRTS, and MRTS, j ) whn oh componens. As a resul, wo nermedary scores are assgned o every ank,.e. he alance shee me score ( BTS, ) and he marke me score ( MTS, ). Fnally, he me score ( TS, ) s a weghed average of he nermedary scores (Fgure 4). ma * MTS (19),,, TS = s * BTS +, j Where: s + ma = 1 (20) 28 K,, [ w BRTS ],, BTS = (21) = 1 K,, [ w j MRTS j ],, MTS = (22) j= 1 28 For he purpose of hs sudy, he weghs for he alance shee and marke componen are 0.5 oh. Ths reflecs her smlar mporance n he conex of he Luxemourg ankng secor. 23

26 Fgure 3 Tme score calculaon for Bank n n 0 Bank Weghed average of posons n he dsruons across he rsk facors Rsk facor,j Rsk facor 1 Dsruons of rsk facor for hs ank over me Bank 1 -n 0 As a resul, a every momen n me, each ank s characersed y wo scores. On one hand we can see he ank s lqudy poson, descred y reporng daa, whch depends prmarly on comparson among dfferen anks n Luxemourg ankng secor. On he oher hand we can oserve a dynamc pcure where every ank s analysed n erms of s own vulneraly on sandard alance shee scenaros under dynamc macroeconomc condons and general soundness of s paren ankng group. Fgure 4 Sequence of scores Rsk facor scores Inermedary scores Fnal scores Balance shee rsk facor peer scores w, Peer score BRPS, PS, Balance shee rsk facor me scores BRTS, w, Balance shee me score BTS, s Tme score Marke rsk facor me scores MRTS, j w, j Marke shee me score MTS, ma TS, 24

27 3 Applcaon and examples of he resuls Ths chaper demonsraes how he resuls could e analysed and wha conclusons could e drawn from he monorng framework. These resuls can e appled oh n he process of supervson of ndvdual anks and n general ankng secor lqudy rsk analyss for supervsory or fnancal saly purposes. 3.1 Lqudy rsk profle of ndvdual anks Analyss of he scores ( PS, and TS, ) can e decomposed no hree levels: () comparng he scores of all anks n a seleced me perod (Lqudy marx), () analysng changes of he scores of a seleced ank over me () decomposon of he scores of a seleced ank no ndvdual rsk facors Lqudy marx In every me perod all he anks can e dsplayed n a lqudy marx. If such analyss s done for 0, he supervsors are ale o spo he oulers, o eer focus her aenon and o allocae analycal resources more effcenly. The lqudy marx also conans a hrd dmenson of nformaon, whch s he sze of ndvdual anks represened y he sze of he ules (Char 3). Char 3 Example of a lqudy marx (Sepemer 2009) Tme score Peer score - Sze of he ule represens he sze of he alance shee - Source BCL, auhors calculaons 25

28 As he sze of a ank could e correlaed wh s sysemc mporance, such nformaon can e useful n he feld of fnancal saly, as well. To gve a praccal example, he resuls for he Sepemer 2009 dsplayed on he Char 3 could e analysed n he followng way. Alhough he gger anks are spread all over he marx, n he frs and of peer score (1-2) s domnaed y anks wh relavely greaer marke share. In oher words, excep for a few g anks he peer lqudy posons of Luxemourg enes do no generally depend on sze. From a me pon of vew, no ank fell no he es me score and. In general, hs means ha Luxemourg enes are n relavely more dffcul lqudy posons han s he enchmark of her 4 years hsory. The gges anks domnae he score ands from 4 o 8. From a supervsory pon of vew, aenon should e focused on he anks n he upper rgh hand corner, o analyse and undersand he reasons for her lqudy posons. Char 4 Cumulave marke share of anks n dfferen score ands 40% 35% 30% Cumulave marke share 25% 20% 15% 10% PS Sep-09 PS Sep-08 TS Sep-09 TS Sep-08 5% 0% Dfferen nervals of scores are on he horzonal axs - Source BCL, auhors calculaons Such conclusons are n lne wh he resuls of aggregaon of he marke share of anks n dfferen score ands (Char 4). As regards he peer score, anks wh scores eween 1 and 2 hold 26% of he asses of he Luxemourg ankng secor. In Sepemer 2008 he es peer score was assgned o anks holdng only 13% of he ankng secor. Ths mples ha as regards he lqudy, gger anks are recoverng more rapdly han he smaller ones. Smlar posve developmen can e oserved n he me score, where he peak shfed from he and of 7-8 o he and of 5 6. The fac ha n Sepemer 2009 he lqudy poson of he par of he marke domnaed y g anks was eer han he res of he Luxemourg ankng secor could have a salsng effec on lqudy rsk n he Luxemourg marke. Neverheless, for fnancal saly purposes, we have o ake no consderaon he me scores, whch have sll o recover from he fnancal crss. 26

29 3.1.2 Evoluon of he scores over me The lqudy marx can e analysed y sudyng he lqudy poson of a ank over me. On Char 5 we can oserve he rajecory of he posons of wo examples of anks n he lqudy marx. Bank A can e characersed as mullne and Bank B s a cusodan ank. As regards Bank A, from Decemer 2005 o June 2008, he ank has elonged o he group of he mos lqud enes whn he Luxemourg ankng secor (peer score elow 2.45). In hs perod, only he me score was sujeced o some volaly (eween 1.48 and 5.89) wh he es suaon n June 2007, jus efore he egnnng of he suprme urmol n he summer of The suaon has changed n March 2008, when he me score jumped from 4.6 o 6.65; sll wh a favourale peer score. Ths dfference eween he me and peer score can e explaned y he fac, ha he me score also conans he paren ankng group nformaon. In hs case, he ank sared o suffer from he ssues orgnang from he paren ankng group 6 monhs efore s peer poson deeroraed sgnfcanly (rose o 5.12). Ths developmen occurred n Sepemer 2008, when he ank came under a real sress n oh dmensons, peer and me. The sress peaked n Decemer 2008 (hsorcal maxmums of oh scores), and declned que rapdly durng he In Sepemer 2009, he ank s lqudy poson was very smlar o ha of March Char 5 Examples of changes of he ank s poson n he lqudy marx Jun-08 Dec-08 Sep-08 Dec Sep 2009 Dec-05 Sep-09 Tme score Dec Jun Peer score Bank A Bank B - Source BCL, auhors calculaons - The ules represen he las oservaon Bank B s que a dfferen example. Alhough a lo of volaly n oh scores occurred durng he las four years, here s no clear mpac of he fnancal crss on s lqudy poson. Indeed he ank acheved s es peer score n Decemer Moreover, as regards he me score, he evoluon of he alance shee componen couneralanced he 27

30 negave macroeconomc and fnancal marke developmens ha would worsen he score. From a lqudy rsk perspecve, hs mples a sor of couner-cyclcal ehavour of he ank; has decreased he alance shee rsk durng he adverse marke developmens. Such resuls can e also relaed o he specfc usness model of hs ank whch s manly acve as a cusodan and n nvesmen fund servces comned wh a ceran volume of fducary deposs. Char 6 Examples of he evoluon of he scores over me Bank A Bank B Bank C Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 peer me peer me peer me Bank D Bank E Bank F Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 peer me peer me peer me - Source BCL, auhors calculaons More examples of he evoluon of he scores are dsplayed n Char 6, and nclude Bank A and Bank B, already dscussed aove. The Bank C s a mullne ank acve n many ypes of ankng servces; Bank D s mosly acve n collecng corporae and fducary deposs and provdng he lqudy o enes of he paren ankng group; Bank E s a lqudy hu for he paren ankng group and Bank F s an example of pure cusodan ank Decomposon of he scores Snce he fnal scores ( PS, and TS, ) are weghed averages of scores calculaed for dfferen rsk facors ( BRPS,, BRTS,, and MRTS, ), we can calculae he conruon ( c, ) of each rsk facor o he fnal scores. In he case of he peer score such decomposon denfes he man alance shee rsk facors: BRPS = (23) PS, PS, c, 28

31 As regards he me score we can separae eween he marke and alance shee rsk facors. BRTS TS,, TS, TS c =,, m c, MRTS = (24) TS The decomposon of he scores helps us o undersand he man drvng forces of lqudy rsk separaely for each ank n he Luxemourg ankng secor. From a supervsory pon of vew and from an early warnng perspecve, such analyss s very mporan. Accordng o he ack-esng done on a sample of rouled anks, efore her ndvdual crss would unfold, he composon of he score of hese anks has changed sgnfcanly, whle he value of he score usually remaned raher sale a already hgh levels (Box 2). As an example of decomposon we ake Bank C, already dsplayed on he Char 6. The peer score has een raher sale over he whole perod, wh some volaly n auumn of 2008, whle he me score sared o grow y he end of The decomposon of hese scores helps us o denfy he man underlyng facors of such developmen. Char 7 Example of decomposon of he peer score (Bank C) 9.0 Group lqudy 8.0 Eurosysem refnancng Off-shore cenres Fducary deposs Foregn exposures Commed cred lnes Cusodan operaonal ssue Issuance prolems 3.0 Whdraw als y funds Corporae run Prvae run Real run n Luxemourg 0.0 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Capal markes crash Freeze of nerank marke - Source BCL, auhors calculaons The decomposon of he peer score (Char 7) suggess ha Bank C s a raher dversfed ank n erms of lqudy rsk. Unl Decemer 2007 he ank was exposed o he negave developmens a he capal markes, ogeher wh he exposures o counres wh lower rangs more han he oher anks n Luxemourg. From he egnnng of 2008, Bank C sared o e shor on he nerank marke. In hs perod he ank also ncreased s dependence on he Eurosysem refnancng operaons. Char 8 Example of decomposon of he me score (Bank C) Balance shee rsk facors Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 - Source BCL, auhors calculaons Group lqudy Eurosysem refnancng Off-shore cenres Fducary deposs Foregn exposures Commed cred lnes Cusodan operaonal ssue Issuance prolems Whdraw als y funds Corporae run Prvae run Real run n Luxemourg Capal markes crash Freeze of nerank marke Dec-05 Mar-06 Marke rsk facors Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 sock prce vloaly Sock prce SDR - counry of he group ESI - counry of he group EUR raes spread Reference sock ndex CCI - Luxemourg 29

32 From a me pon of vew (Char 8) oh he alance shee and marke rsk facors have een growng snce he auumn of 2007, apar from some volaly of he alance shee componen n On he alance shee rsk facors sde, he growng shor nerank poson and he dependence on he Eurosysem refnancng operaons were he man componens of he me score. On he marke rsk facors sde, Bank C suffered from almos all rsk facors, u aove all from a decrease of he sock prce of he paren underakng. In he las quarer, he ank mproved oh componens of he me score. On he alance shee sde, was due o a sgnfcan decrease of he shor nerank poson and he orrowng from he Eurosysem; on he marke sde, he ank enefed manly from he mprovemen of he macroeconomc condons of he counry of orgn. Box 2: Examples of he peer score decomposon of rouled anks The peer scores of anks ha underwen very serous lqudy pressure durng he auumn of 2008 were always very hgh (eween 7 and 9), whch means ha he lqudy posons of hese anks were consanly weaker han he average of he Luxemourg ankng secor. However, here are several oher anks wh consanly hgh peer scores, u whch dd no wness such negave developmens. Ths would lead us o conclude ha he value of he peer score alone s no a good predcor of maeralzaon of he lqudy rsk. However, he conruon of dfferen rsk facors n he peer score changed long efore hese anks came under serous sress (Char 9). Char 9 Decomposon of he peer scores of rouled anks 9 Bank X 9 Bank Y 8 8 Peer score Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Group lqudy Eurosysem refnancng Freeze of nerank marke Foregn exposures Oher rsk facors - Source BCL, auhors calculaons Boh anks faced one major common ssue. Whle her relave lqudy posons have een always weak, a some momen n me he anks swched from he lqudy dependence on he moher company o lqudy dependence on he Eurosysem. The comnaon of hree varales (consanly hgh peer score, no more fundng from he paren group and ncreasng dependence on he refnancng operaons whn he Eurosysem) was a sgn of he comng lqudy shock. 3.2 Aggregaed resuls The man ojecve of he framework s o denfy possle weaknesses n lqudy posons of ndvdual anks. Neverheless, serves also as a ass for drawng conclusons aou he relevance of dfferen rsk facors (sress scenaros) o he ankng secor as a whole. 30

33 3.2.1 Relevance of dfferen rsk facors n o One possle applcaon s he assessmen of he mos relevan rsk facor a o. The numer of anks wh c, larger han 0.05 for dfferen rsk facors s shown on Char 10. In oher words, for every rsk facor, we coun he numer of anks, for whch hs facor conrues o he fnal peer score y more han 5%., Char 10 Relevance of he rsk facors ased on he c > Numer of anks Whdraw als y funds Group lqudy Freeze of Prvae run Corporae Foregn nerank run exposures marke - Source BCL, auhors calculaons Fducary deposs Off-shore cenres Cusodan Commed operaonal cred lnes ssue Capal markes crash Eurosysem Issuance Real run n refnancng prolems Luxemourg Wh hs hreshold of conruon of 5%, he mos relevan scenaros are: whdrawal of deposs y nvesmens funds (52 anks), neng of he poson wh he paren ankng group (37 anks), nerank marke (32 anks) and he whdrawals of prvae ankng and corporae deposs (31 and 30 anks). However, rsk facors such as foregn lendng, fducary deposs and off-shore cenres sll affec 24 anks (Char 10). Such conclusons are n lne wh he general knowledge aou he Luxemourg ankng secor namely ha servces he fund ndusry and s acve n prvae ankng. The Luxemourg ankng secor s also very much a hos ankng secor; hs s refleced n he relevance of paren ankng group n erms of lqudy. Char 11 Numer of anks affeced y rsk facors wh dfferen c, (Sep-2009) Numer of anks Group lqudy Numer of anks Whdrawals y funds Foregn exposures 10 Freeze of nerank marke 5 Cusodan operaonal ssue 5 Prvae run Fducary deposs Corporae run Off-shore cenres - Source BCL, auhors calculaons However, n Char 10 we only see hose anks whch would e affeced y rsk facors (scenaros) wh a conruon of more han 5%. To denfy he mos relevan scenaro, we also need o analyse he mpac wh hgher values of c, (Char 11). In hs conex sensvy on depos whdrawals y nvesmen funds and dependence on he paren ankng group seem o e very relevan, as he numer of anks concerned does no 31

34 decrease sgnfcanly wh ncreasng c,. Even where he conruon exceeds 50%, 16 and 21 anks respecvely reman affeced y hese rsk facors. By conras, he relevance of he prvae ankng scenaro decreases more sgnfcanly wh he ncreasng c, (5 anks wh a conruon of more han 50%), meanng ha, even f many anks locaed n Luxemourg are nvolved n prvae ankng, hs scenaro emraces he mos mporan rsk facors for only a few of hem Evoluon of he rsk facor relevance over me Wh a consan c, 29 we can oserve he evoluon of he rsk facor relevance over me (Char 12). As a resul, we can analyse he poenal nfluence of he fnancal crss on he general rsk profle of he Luxemourg ankng secor. Char 12 Numer of anks affeced y rsk facors over me, wh consan c, - Source BCL, auhors calculaons The numer of anks exposed o he real run n Luxemourg s raher sale and does no sgnfcanly change durng he frs peak of he crss. I s a logcal consequence of he long erm naure of hs usness lne. Usage of Eurosysem lqudy s a very dfferen example. The numer of anks dependen on refnancng operaons wh he Eurosysem ncreased sgnfcanly durng he sress perod and decreased agan n March For hs purpose we se he consdered as relevan c, o 0.05, meanng ha conruon o he score of more han 5% s 32

35 4 Conclusons In hs paper we descred he off-se lqudy rsk monorng framework used y he Banque cenrale du Luxemourg. Our framework negraes several ypes of daa (regulaory reporng, fnancal markes, macroeconomc) and herefore, akes no accoun dfferen sources of lqudy rsk, ncludng poenal prolems a he moher company level or general marke sress. The mehodology s ased on a marx of 14 onand off-alance shee and 7 marke rsk facors assgned wh dfferen weghs o all ndvdual anks and hen evaluaed n relave erms. As a resul, he lqudy poson of every ank s descred y wo lqudy scores (comparson o he peers and comparson over me). The praccal applcaon of our framework can e summarsed n a followng way: Frsly, we have calculaed oh dmensons (peer and me score) of he lqudy poson of every ank locaed n Luxemourg. In hs marx, we could spo he anks whch are less lqud han her peers or less lqud han efore and evaluae he sysemc mporance of hese nsuons. Secondly, we have chosen several examples of anks wh dfferen usness models o demonsrae he evoluon of oh scores over he las four years. Such rend analyss proved o e mporan manly n he case of anks wh a weak lqudy poson. In hese cases, we need o dscrmnae eween consanly llqud anks and hose whch have deeroraed recenly. Thrdly, on an example of one ank, we have shown he poenal enefs of he closer analyss of he scores. By decomposng he scores, he mos relevan rsk facors can e denfed for each and every ank. We have also demonsraed he mporance of hs approach on examples of rouled anks, whch wnessed smlar paerns n he composon of he scores and n her change efore he escalaon of sress. Fnally, he relevan rsk facors of all anks locaed n Luxemourg can e aggregaed and sored y frequency of occurrence o deermne her general relevance o he ankng secor as a whole. In such analyss we could oserve rsk facors wh raher consan conruon (e.g. he real usness) and rsk facors, whose conruon depends more on recen marke developmens (e.g. dependence on he refnancng operaons wh he Eurosysem). As a resul, wo major ypes of nformaon can e drawn from he framework. Frsly, he mos vulnerale anks can e flered from he whole sample and can e recommended for furher supervsory analyss. Secondly, he mos relevan lqudy rsk facors for he Luxemourg ankng secor can e deermned. 33

36 References Bank of Japan [2009] The Bank of Japan s Approach o Lqudy Rsk Managemen n Fnancal Insuons, avalale a: hp:// Bank of England [2009] Specal lqudy scheme: nformaon and Specal lqudy scheme: marke noce, avalale a: hp:// Bank for Inernaonal Selemen [2008] Prncples for Sound Lqudy Rsk Managemen and Supervson BCBS, Sepemer 2008, avalale a : hp:// Bank for Inernaonal Selemen [2000] Sound Pracces for Managng Lqudy n Bankng Organsaons, BCBS, Feruary 2000, avalale a : hp:// Banque cenrale du Luxemourg [2009] Revue de salé fnancère 2008, avalale a hp:// fnancere_2008/nd ex.hml Banque de France [2008] fnancal saly revew, specal ssue: lqudy, avalale a : hp:// Boss, M., G. Krenn, M. Schwager and W. Wegschader [2004] Sress Tesng he Ausran Bankng Sysem Öeserrech Naonal Bank, 11/04, , also avalale on hp:// Bysröm, H. [2008] Cred defaul swaps and equy prces: he Traxx CDS ndex marke Lund Unversy, Commee of European Bankng Supervsors [2009] Inerm Repor on Lqudy Buffers & Survval Perods also avalale on hp:// Communcaons/Laes-news/CEBS-s-oday-pulshng-an-nerm-repor-on-lqu.aspx Chan D., e Al. [2007] The secures cusody ndusry European Cenral Bank, Occasonal Paper Seres, no. 68, Augus, also avalale on hp:// Degryse, H.A. and Nguyen, G. [2004] Inerank exposures: an emprcal examnaon of sysemc rsk n he Belgan ankng sysem Workng paper No By January 2004, CenER, Tlurg Unversy. Esenschmd, J. and Tapkng, J. [2009] Lqudy rsk prema n unsecured nerank money markes European Cenral Bank, Workng paper seres N / March European Cenral Bank [2006] EU Bankng srucures Ocoer 2006, also avalale a: hp:// 34

37 European Cenral Bank [2007] EU Bankng srucures Ocoer 2007, also avalale a: hp:// European Cenral Bank [2008] EU anks lqudy sress esng and conngency fundng plans, also avalale a: hp:// European Cenral Bank [2008] The Implemenaon of Moneary Polcy n he Euro Area. General Documenaon, Eurosysem moneary polcy nsrumens and procedures. Also avalale a: Fnancal Servces Auhory [2009] Srenghenng lqudy sandards 2: lqudy reporng consulaon paper 09/13, also avalale a: hp:// Fnancal Servces Auhory [2009] Srenghenng lqudy sandards 2: lqudy reporng consulaon paper 08/22, also avalale a: hp:// Fnancal Saly Forum [2000] Repor of he Workng Group on Offshore Cenres, 5 Aprl 2000 Frankel, J., and Shang-Jn W. [2004], Managng Macroeconomc Crses: Polcy Lessons, Chaper 7, n Economc Volaly and Crses: A Polcy-Orened Gude, eded y Joshua Azenman and Bran Pno, World Bank, Washngon DC. Gayán, A. and Johnson C. A. [2002], A revew of he leraure on early warnng sysems for ankng crses, Workng Papers N 183 Ocoer, Cenral Bank of Chle. Gelper, S. and Croux, C. [2007] The predcve power of he European Economc Senmen Indcaor, Workng paper, Kaholeke Unverse Leuven González-Hermosllo B. [1999] Developng Indcaors o Provde Early Warnngs of Bankng Crses Fnance & Developmen, IMF quarerly magazne, Volume 36, Numer 2, June, avalale a hp:// Jakuk, P. and Hermanek, J. [2008] Sress esng of he Czech ankng secor IES Workng Paper: 2/2008 Jurča, P. and Rychárk, Š. [2006] Sress esng of he Slovak ankng secor, Baec Volume XIV, 4/2006 Jurča, P. and Zeman, J. [2008]: Macro Sress Tesng of he Slovak Bankng Secor Naonal Bank of Slovaka, Workng Paper 1/2008. Kamnsky G. L., [1998] "Currency and ankng crses: he early warnngs of dsress" Inernaonal Fnance Dscusson Papers 629, Board of Governors of he Federal Reserve Sysem (U.S.). 35

38 Kamnsky, G. and al. [1998] Leadng Indcaors of Currency Crses IMF Saff Papers, 5 (1): Kamnsky, G. and Renhard, C. [1999] The wn crses: he causes of ankng and alance-of-paymen prolems Amercan Economc Revew 89: Lcak, M. [2006] Sress esng as a rsk managemen mehod Naonal ank of Slovaka, BIATEC, Volume XIV, 3/2006 Lnzer, T. and Schmd, S., [2007] Wha explans he rse n he EONIA spread? European Cenral Bank and Cenre for European Economc Research, 15h Feruary. Nlsson, R. [2000] Confdence ndcaors and compose ndcaors Organzaon for he Economc Co-operaon and Developmen (OECD).,. Nlsson, R. [2000] Counry specfc or harmonsed confdence ndcaors: EC and OECD pracces Organzaon for he Economc Co-operaon and Developmen (OECD). OECD [2000] A Progress Repor On he Jursdcons Surveyed y he OEDC Gloal Forum n Implemenng he Inernaonally Agreed Tax Sandard Avalale a: hp:// Rychárk, Š. [2009] Lqudy scenaro analyss n he Luxemourg ankng secor Banque cenrale du Luxemourg, Workng paper n. 41/ Sepemer. Sanor, E. [2003] Bankng crses and conagon: emprcal evdence Bank of Canada, Workng paper Shlens, J. [2009] A Tuoral on Prncpal Componen Analyss, Aprl 22, Cener for Neural Scence, New York Unversy, New York Cy, NY and Sysems Neuroology Laoraory, Salk Insue for Bologcal Sudes La Jolla, CA Smh L. I. [2002] A uoral on Prncpal Componens Analyss, Feruary 26, 2002, Deparmen of Compuer Scence, Unversy of Oago, New Zealand, avalale a: hp:// Srago, F. [2009] Sress esng and conngency fundng plans: an analyss of curren pracces n he Luxemourg ankng secor Banque cenrale du Luxemourg, Workng paper n. 42 / Decemer

39 Annex A De secures valuaon harcus ( v ) Our sysem of valuaon harcus s ased on he daa avalaly,.e. was no possle o se he harcus accordng o he maury or rang of secures. We assgn dfferen harcus o he ypes of secures classfed y wo dmensons: () ype of ssuer and () soveregn rang of he counry of he ssuer (Char 13). We recognse ha, n general, duraon and rang of sngle secures would e eer proxes for he calculaon of valuaon harcus. However, we prefer hs approach ased on he level of deal n he avalale daa. Noe ha here s no specal sysem of valuaon harcus for he de secures ssued y he relaed pares. For he fuure work we eleve ha hgher valuaon harcus should e appled on such secures, snce here s no evdence hey would ever e raded elsewhere han whn he respecve ankng group. Moreover, such secures are no elgle for he Eurosysem refnancng operaons. As regards changes occurrng n soveregn rangs across counres, hese changes are refleced n each quarerly updae. Therefore, hese changes are auomacally refleced n he lqudy uffer evaluaon. Char 13 Valuaon harcus 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% AAA AA, A BBB SPEC non-raed Cenral gv and cenral anks Oher pulc auhores Cred nsuons Oher ssuers Cenral gv and cenral anks Oher pulc auhores Cred nsuons Oher ssuers Cenral gv and cenral anks Oher pulc auhores Cred nsuons Oher ssuers Cenral gv and cenral anks Oher pulc auhores Cred nsuons Oher ssuers Cenral gv and cenral anks Oher pulc auhores Cred nsuons Oher ssuers Baselne Sress Snce no daa aou he overngh deposs are avalale, we have nroduced valuaon 1Y harcus of 0.5 and 0.2 for and o ake no accoun ceran volume of Nosro 1Y C C rp accouns avalale a any momen n me. 37

40 B Herfndahl-Hrschmann ndex composon ( h ) We have he Herfndahl-Hrschmann ndex o address he enefs of dversfcaon of fundng. We have denfed hree dmensons of dversfcaon: () ype of laly,.e. depos, ssued onds and oher lales () counry of orgn.e. Luxemourg and non- Luxemourg and () economc secor,.e. pulc admnsraon, cred nsuons, nvesmen and money marke funds, non-fnancal nsuons and households (Tale 1). We do no consder oher dmensons e.g. currency or maury. Tale 4 Composon of he Herfndahl-Hrschmann ndex Laly em Economc secor Counry of orgn Deposs Pulc admnsraon Luxemourg Deposs Pulc admnsraon Non-Luxemourg Deposs Cred nsuons Luxemourg Deposs Cred nsuons Non-Luxemourg Deposs Invesmen and money marke funds Luxemourg Deposs Invesmen and money marke funds Non-Luxemourg Deposs Non-fnancal nsuons Luxemourg Deposs Non-fnancal nsuons Non-Luxemourg Deposs Households Luxemourg Deposs Households Non-Luxemourg Issued onds All economc secors Luxemourg Issued onds All economc secors Non-Luxemourg Oher lales All economc secors Luxemourg For fuure work we sugges o ase he Herfndahl-Hrschmann ndex on he correlaon analyss. Such an approach would fne une he resuls, as dfferen anks could have dfferen composon of he HHI ndex alored o her usness. C Rsk parameers ( r ) Rsk facor Freeze of nerank marke Capal markes shock Real run n Luxemourg Prvae run Corporae run Whdrawals y funds Issuance prolems Cusodan operaonal ssue Commed cred lnes Foregn exposures Fducary deposs Off-shore ceners Eurosysem refnancng Group lqudy Rsk parameer Volume of ne nerank poson excludng relaed pares Value of de secures porfolo Sum of deposs y Luxemourg households Sum of prvae ankng deposs Sum of deposs y non-fnancal nsuons Sum of deposs y nvesmen funds Sum of shor-erm de secures ssued Sum of asses under cusody Sum of loan commmens gven Sum of exposures o clens from non-aaa counres Sum of fducary deposs Volume of ne poson wh he clens from off-shore ceners excludng relaed pares Sum of orrowngs from he cenral anks Volume of ne poson wh relaed pary anks 38

41 D Ls of varales, ndexes and arevaons Rsk ndcaors Scores and parameers TA Toal asses PS Peer score TL Toal lales TS Tme score LA Lqud asses BTS Balance-shee me score T Cash MTS Marke me score C Creds / recevales, deposs made BRPS Balance-shee rsk facor peer score S De secures BRTS Balance-shee rsk facor me score D Deposs receved MRTS Marke rsk facor me score B w De secures ssued Rsk facor wegh h Herfndahl-Hrschmann ndex w Inermedary rsk facor wegh v Valuaon harcus r Rsk parameer α Sress parameer R Dsruon of relevan raos Indexes: c Conruon o he score d Type of de secury s Wegh of he alance-shee componen of he me score Banks ma Wegh of he marke componen of he me score h Households Indexes: p Prvae ankng rp Relaed pares j f Invesmen funds Tme c Corporae ankng Bank fd g OC 1Y LU Fducary Graned cred lnes Orgnang from non-aaa counres Wh maury less han one year Orgnang from Luxemourg Balance shee rsk facor Marke rsk facor s Sressed values E Bankng acvy accordng o counry and currency currency AAA non-aaa AAA non-aaa counry AAA AAA non-aaa non-aaa Mn Lower quarle Medan Upper quarle Max Average weghed y oal asses

42 F Sress parameers ( α ) Freeze of nerank marke 50% Capal markes shock Real run n Luxemourg Prvae run Corporae run Whdrawals y funds see Annex A sdev ( r, ) / r, sdev ( r, ) / r, sdev ( r, ) / r, sdev ( r, ) / r, Issuance prolems 50% Cusodan operaonal ssue 5% Commed cred lnes sdev ( r, ) / r, Foregn exposures 10% Fducary deposs 80% Off-shore ceners 80% Eurosysem refnancng 50% Group lqudy 80% G Daa sources and daa proceedng Ths framework used several daa sources. The on- and off-alance shee daa was aken from he prudenal and sascal regulaory reporng. The mos mporan consran n he defnon of he alance shee rsk ndcaors s he daa avalaly. We are fully aware of he fac ha he reporng daaase currenly avalale a he BCL whch s used n our sudy s no perfecly lqudy-rsk-orened. However, here s always a rade-off eween reporng urden for he secor and he value-added ha can e poenally produced y he regulaor. In he sense our prmary consran s he avalale se of daa. The macro ndcaors adoped n hs sudy have een gahered from several sources. Moreover, for he selecon of each ndcaor we followed he prncples of conssency (he ndcaors are nended o e equal over me and across he sample) and avalaly (when an ndcaor was no avalale a proxy was chosen for he analyss). Mos of he marke ndcaors are assgned o he Luxemourg enes accordng o s paren ankng group (sock prce and s volaly) and he counry of orgn (economc senmen ndcaors, specal drawng rghs and reference sock ndex). As a resul applcaon of such ndcaors s sensve o change of owner. To address hs ssue, we apply a new se of daa for he eny from he perod he owner has changed. The prevous scores reman unchanged. As descred n Tale 3, hs sudy negraes: The Specal Drawng Rghs (SDR) 30 The SDR s a currency un defned y he Inernaonal Moneary Fund. I s a vrual currency and represens a aske of currences whch s weghed accordng o he relave sze of he economy of a counry (measured y GDP) a a ceran pon n me. The 30 For a more dealed defnon of he Specal Drawng Rghs, please refer o he followng nerne address: hp:// 40

43 weghs are revsed on a regular ass y he IMF. In order o capure he relave mporance of exchange raes he use of specal drawng rghs (SDR) was preferred o a USD-ased exchange rae sysem, where all currences are convered n USD. Ths laer sysem lagged he mpac of currency movemens vs-à-vs oher non-usd currences. SDRs have een preferred due o her aly o capure foregn exchange rae movemens across a large currency sample as ours. The SDRs have he advanage o capure apprecaon/deprecaon of he seleced currences hrough a parameer whch s unque for all. A poenal as of our SDR-ased sysem s he valuaon of he SDR, whch s consruced on an economc srengh ass 31. Anyhow, gven hs revson process akes place every 5 years, we consder hs ndcaor o e conssen durng he perod of reference of hs sudy ( o ). As regards SDRs, hese ndcaors are conssen across he whole sample and are avalale for each ank across he whole perod of reference. The relaed hsorcal me seres have een downloaded from he offcal wese of he Inernaonal Moneary Fund 32. As regards he calculaons, we have used he relave changes of he quarerly averages of he respecve currency uns per SDR. A se of Economc Senmen Indcaors For anks havng her headquarers n a counry memer of he OECD, we negraed he leadng economc ndcaor 33. Ths ndcaor s avalale durng he perod of reference for all he locally esalshed anks whose paren company s esalshed n a counry memer of OECD. As concerns any anks whose headquarer s locaed whn a counry no covered y he OECD (or ha has no repored any daa for he perod of reference), we refer o he avalale proxes, as follows: Israel: he Sae of he Economy Index 34 Leanon: he Concden Indcaor 35 As regards hese laer counres we acknowledge he exsence of an ssue of conssency. Ths refers o he lack of harmonzaon of hese ndcaors wh he OECD mehodology 36. Neverheless, we eleve ha, for he purpose of hs exercse, he ndcaors adoped n hs sudy are good proxes for he underlyng rsk of he sampled ank wh respec o s home economy. 31 For he mehodology used o defne he aske of currency composng he SDR currency, please refer he followng wese : hp:// 32 hp:// 33 All he daa are downloadale free of charge from: hp://sas.oecd.org/index.aspx 34 For furher deals please vs: hp:// 35 As regards hs ndcaor we acknowledge he lms o harmonzaon due o he mplc dfference of perspecve (concden vs. leadng) of hese wo ndcaors. For he purpose of hs sudy and gven ha only one ank ncludes hs rao whn s se of marke daa, we eleve hs measure no o affec sgnfcanly our nvesgaon. 36 Ths ssue has already een nvesgaed y he OECD. For more deals aou hs opc please refer o: hp:// 41

44 A se of sock marke ndexes Ths se ncludes he man avalale sock marke ndcaors for each counry of orgn of each ank regsered n Luxemourg. The quarerly daa represen he 3 monhs average of he daly closng prces of each ndex. The followng ndexes were ncluded for he reference perod 37 (Tale 5). Tale 5 Reference sock marke ndexes Counry Sock ndex Numer of enes concerned Luxemourg LuxX 20 5 Belgum BEL 20 7 Ialy FTSE M Germany DAX France CAC Sockholm OMX Sockholm 30 8 Oslo OMX Oslo 20 2 Copenhagen OMX Copenhagen 20 1 San Paolo IBovespa 50 4 New York DJIA London FTSE Ahens FSTE Ahex 20 2 Isanul IMKB XU100 2 Tel Avv TA 100 Index 3 Lson PSE 20 2 Moscow MICEX 1 Shangha SSE Compose 4 Tokyo Nkke Torono S&P TSX 60 2 Reykjavk OMX Iceland 15 2 Amserdam AEX 25 3 Swzerland SMI 20 9 Fnland OMX Helsnk 25 1 We acknowledge he exsence of an nformaon as carred y he aove menoned ndexes n erms of represenng a far porra of each counry real economc suaon. The nformave power depends manly on he degree of effcency of each marke, on he share of he whole economc acvy represened y he marke capalzaon as well as from nvesors rraonal ehavour epsodes. Ale we canno exclude a as orgnang from hese facors, we eleve hese ndexes o e a far represenaon of he saus of he economc condons of he counry where each ankng group headquarers s locaed, a each specfc pon n me. The neres rae spread eween Euror and Eurepo 3 monhs maury Ths ndcaor s unque for each and every ank under he assumpon ha each ank, y eng locaed n he Luxemourg marke provdes or drans lqudy from he ner-ank 37 The hsorcal daa seres for hese sock markes are downloadale free of charge from several weses. 42

45 marke. An ndcaor for measuremens of marke lqudy s he spread eween he secured and he unsecured lendng 38. The ndcaor of Luxemourg Economc Acvy In order o capure he rend of he Luxemourg economy we negrae he daa for he conjuncure ndcaor 39. Ths ndcaor s conssen across he whole sample. The sock marke prce of each local ank s paren company The sock prce of each Luxemourg ank elongng o a ankng group lsed n a regulaed sock exchange marke has een ncluded n he marke ndcaors. The quarerly daa represen he 3 monhs average of he daly closng prces for each sock. Gven ha several ankng groups have regsered more han one eny n Luxemourg, he sock prce of he relaed ankng group s repeang several mes across he sample. Where he sock prce s no avalale, no oher nformaon s ncluded for he momen. We envsage n he fuure negrang poenally nformave marke daa such as ond spread of cred defaul swap spreads (when avalale). The laer should e however analysed o avod duplcy wh he sock prce volaly (see Bysröm 2005). The hsorcal me seres for each lsed paren underakng has een downloaded from Bloomerg. H Peer score, concenraon of rsk facors and ank sze The peer score does no seem o e affeced y he numer of relevan rsk facors, nor y he sze of he anks (Char 14). Char 14 Peer score, concenraon of rsk facors and ank sze Concenraon of rsk facors (HHI) R 2 = Peer score - Source BCL, auhors calculaons 38 For a echncal explanaon of he fxng of hs rae, hsorcal me seres and memer of he Euror panel please refer o: hp:// As regards he Eurepo, please refer o he followng nerne wese: hp:// 39 For more nformaon please vs he followng wese: hp:// download.php?url=/fr/sasques/mehodo_noes/mehodology_sascs.pdf&=explcaons méhodologques des sasques 43

46 I Correlaon scaerplos asses and lales Char 15: Correlaon scaerplo - asses Correlaon scaerplo (PCA_1_Axs_1 vs. PCA_1_Axs_2) secures holdngs cred o pulc admnsraons PCA_1_Axs_ ohers cred o corporaes cred o oher fnancal nsuons BCN cred o households creds o relaed pares cred o anks cash PCA_1_Axs_ Source BCL, auhors calculaons Char 16 correlaon scaerplo - lales 1 Correlaon scaerplo (PCA_1_Axs_1 vs. PCA_1_Axs_2) deposs from nvesmen funds and oher fnancal nsuons capal (non anks) PCA_1_Axs_ fducary deposs from relaed pares BCN fducary deposs from non-relaed pares deposs from households and pulc admnsraon corporae deposs deposs from anks deposs from relaed pares PCA_1_Axs_ Source BCL, auhors calculaons 44

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