Financial Stability Review
Risk Assessment Articles
2005
2005 2004 2003 2002 2001 2000 1999 1998 1997
Credit
Correlation: Interpretation and Risks
(127k)
(Issue 19, December 2005
Two of the most significant developments in global credit markets
in recent years have been the rapid growth of the market for
collateralised debt obligations (CDOs), which repackage the
credit risk of bespoke asset portfolios into tranches and transfer
it from dealers to investors; and the development of markets
in tradable credit derivative indices and tranches of these
indices. As well as the individual default risk associated with
each asset in the underlying portfolios, investors and dealers
in tranches are also exposed to correlation risk — uncertainty
about the likelihood of defaults occurring in clusters. The
existence of traded prices for index tranches makes it possible
to infer market perceptions of correlation risk. This article
uses a CDO valuation model to explore the usefulness of such
information as a forward-looking indicator of risk to financial
stability. The article also investigates the particular correlation
risks taken by investors and dealers in CDOs, which may be relevant
to global financial stability given the scale of risk transfer
in recent years and the concentrated participation of large
banks and dealers in these
markets.
Stress
Testing as a Tool for Assessing Systemic Risks
(346k)
(Issue 18, June 2005
Stress testing exercises are widely used by financial institutions in assessing their exposures to credit and other risks. Stress tests can also help policymakers to gauge the potential implications of differing risks for the stability of the financial system as a whole. And in recent years, there has been a burgeoning interest in such systemic stress testing among central banks and international organisations. This article describes the systemic stress testing framework currently used by Bank staff.
Inter-Industry Linkages Between UK Life Insurers and UK Banks: An Event Study
(396k)
(Issue 18, June 2005)
Interlinkages between financial sectors are an important consideration in the assessment of the overall financial system. Whilst previous Reviews have focused primarily on the banking system, an article in the December 2004 Review provided a comprehensive qualitative assessment of the risks to financial stability arising from other UK-resident financial sectors. This article builds on that work by exploring the degree of co-movement in market prices as an indicator of linkages between sectors. The event study approach used in this article measures the extent of any spillover to UK banks' equity prices from specific events affecting the UK life insurance sector.
A Framework for Financial Stability
(188k)
(Issue 18, June 2005)
This is the text of a speech delivered by Sir Andrew Large, the Bank of England's Deputy Governor for Financial Stability, at the International Conference on Financial System Stability and Implications of Basel II on 18May 2005 in Istanbul.
