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By Mark Carey, René M. Stulz

Until approximately two decades in the past, the consensus view at the reason behind financial-system misery used to be particularly easy: a run on one financial institution may perhaps simply flip to a panic related to runs on all banks, destroying a few and disrupting the monetary system.  when you consider that then, despite the fact that, a chain of events—such as emerging-market debt crises, bond-market meltdowns, and the long term Capital administration episode—has pressured a rethinking of the dangers dealing with monetary associations and the instruments to be had to degree and deal with those hazards. The dangers of monetary Institutions examines a number of the hazards affecting monetary associations and explores quite a few easy methods to aid associations and regulators extra correctly degree and forecast possibility. The contributors--from educational associations, regulatory corporations, and banking--bring a variety of views and event to the problem. the result's a quantity that issues a manner ahead to bigger monetary balance and higher hazard administration of economic associations.

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Extra resources for The Risks of Financial Institutions

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Washington, DC: Federal Reserve Board. Unpublished working paper. , and T. Schuermann. 2006. A general approach to integrated risk management with skewed, fat-tailed risk. Journal of Financial Economics, forthcoming. Scholes, M. S. 2000. Crisis and risk management. American Economic Review 90: 17–21. , S. Usher, D. LaGattuta, and J. Youngen. 2001. A comparables approach to measuring cashflow-at-risk for non-financial firms. Journal of Applied Corporate Finance, Winter, 100–109. Stulz, René. 2002.

Basak and Shapiro (2001) examine the effect of this gaming at the level of the institution on financial markets. They show that strict VaR limits could induce banks to take on more risk in bad states of the world, that is, after VaR limits have been breached, which could cause higher volatility in financial markets. On the other hand, Cuoco and Liu (2006) argue that the VaR limit should be implemented on a dynamic basis. They find that capital requirements advocated by the Basel Committee can be very effective in curbing the risk of trading portfolio and inducing truthful revelation of this risk.

Define xi as the variable of interest, say the relative change in the MRC. 8 percent. We can then compare this volatility with what we would obtain under 20. The pairwise correlation coefficients are not independent because the correlation matrix must obey positive-definiteness conditions. We also report the average of positive entries and the average of negative entries. These must obviously be greater than the grand average, and reflect the average correlation between banks that have positive or negative correlations.

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