Financial Stability Review
Risk Assessment Articles
2003
2005 2004 2003 2002 2001 2000 1999 1998 1997
Financial
Stability: Maintaining Confidence in a Complex World
(64k)
(Issue 15, December 2003)
In his speech, delivered at the City of
Company-accounts-based
Modelling of Business Failures
(96k)
(Issue 15, December 2003)
Default by companies on their debt poses a risk to financial stability. To monitor the threat it is important to identify the companies with significant amounts of debt that have the highest probabilities of failing and consequently defaulting. This article discusses a company-accounts-based approach to modelling corporate failure with the aim of highlighting such companies. It finds that information on profitability, interest cover, capital gearing, liquidity, company size, industry, whether a company is a subsidiary and overall economic conditions can all help to explain which companies fail. This paper also illustrates how firm-level probabilities of failure from the model can be used to construct aggregate measures of financial risk and to monitor the distribution underlying those aggregate estimates.
Large
UK-owned Banks' Funding Patterns: Recent Changes and Implications
(104k)
(Issue 15, December 2003)
The large UK-owned banks have raised increasing amounts of funding from wholesale markets over recent years, as their customer lending has grown more rapidly than their customer deposits. This article reviews the changing, and increasingly diversified, funding strategies of the large UK-owned banks and highlights some issues relevant to the design of bank liquidity regulation.
Transparency
and Financial Stability
(200k)
(Issue 15, December 2003)
Improved information about macroeconomic fundamentals, the balance sheets of firms and financial institutions, and the conduct of policy have been central to recent efforts to improve financial stability. Strides have been made in recent years to improve the quantity and quality of data provision under the IMF’s Special Data Dissemination Standard (SDDS). Pillar III of the proposed Basel II Accord relies on disclosures by banks to exert market discipline through the price mechanism. Codes and standards on monetary, fiscal and financial policy seek to establish best-practice guidelines to clarify the objectives, role and process of policy. And countries have sought to publicise the extent of their disclosures through Reports on Observance of Standards and Codes (ROSCs) in an attempt to make a virtue of their ‘transparency about transparency’.
Large
Complex Financial Institutions: Common Influences on Asset Price
Behaviour?
(227k)
(Issue 15, December 2003)
In recent years, mergers, acquisitions and organic growth have resulted in the development of some large complex globally active financial groups, which, in an international financial centre such as London, deserve monitoring from a financial stability perspective. This article analyses the degree of co-movement in the asset prices of a selected group of large complex financial institutions (LCFIs), and assesses the extent to which LCFIs’ asset prices are driven by common factors. A relatively high degree of commonality is found between asset price developments of most LCFIs, although there are still noticeable divisions between sub-groups of LCFIs, both according to geography and primary business-line.
Predicting
Default Among UK Companies: a Merton Approach
(105k)
(Issue 14, June 2003)
One of the key risks to financial stability is widespread default by UK companies. This article discusses an approach to quantifying the risk of default in individual companies using up-to-date market-based information. It finds that this Merton approach provides a reliable, ordinal, ranking of companies on the basis of their likelihood of going into liquidation. This is likely to prove to be a useful tool in regular surveillance.
Assessing
the Strength of UK Banks Through Macroeconomic Stress Tests
(114k)
(Issue 14, June 2003)
This article describes the results of a range of macroeconomic stress tests carried out last year on large domestically based banks as part of the International Monetary Fund's (IMF's) Financial Sector Assessment Programme (FSAP) on the United Kingdom. Overall, the exercise suggests that the stability of the UK banking system is currently unlikely to be threatened by a range of plausible adverse events. But it also emphasises the importance for the authorities, and the banks themselves, of continuing to develop quantitative techniques that can be used to assess the resilience of the financial system to potential shocks.
Key Resources
|
Memorandum of Understanding between HM Treasury,
the Bank of England and the Financial Services Authority
Download PDF (50k) |
