ABSTRACT: 

This paper proposes a three-step segmentation procedure (TSSP) for detecting non-simultaneous structural breaks in return volatility and correlations within DCC–GARCH models, using the supremum Lagrange multiplier (SupLM) test to isolate multiple parameter shifts. By detecting breaks in unconditional correlations, our method identifies potential shift-contagion episodes. Monte Carlo simulations demonstrate the TSSP’s robust performance in detecting and locating both successive and common breaks affecting different subsets of parameters. Empirical application to equity and government bond returns in advanced and emerging economies reveals volatility shifts linked to the Global Financial Crisis, and shift-contagion associated with the European Sovereign Debt Crisis, and the post-Covid-19 pandemic interest rate hikes alongside the war in Ukraine in 2022.

Keywords: Financial Contagion - Change Point Detection - Multiple Structural Breaks - SupLM test - DCC-GARCH models.

ABSTRACT: 

This paper examines whether inflation targeting (IT) enhances the effectiveness of macroprudential policies in reducing banks’ contribution to systemic risk measured by SRISK. Using bank-level data for 47 countries, our regime-dependent panel regressions suggest that tools such as DSTI limits, the CCyB, conservation buffers, and leverage limits are relatively more effective under IT. Loan restrictions appear less effective, while loan-to-value (LTV) caps show impact only in post-GFC samples. Liquidity and reserve requirements reduce SRISK under IT in higher-frequency estimations. Our findings lend credence to the view that IT strengthens the role of macroprudential policy in mitigating financial stability risks.

Keywords: Macroprudential Policies - Banks - Systemic Risk - Monetary Policy - Inflation Targeting - SRISK - Delta CoVaR.

ABSTRACT:  

This study contributes to literature by analyzing the impact of financial inclusion (FI) on various bank risk dimensions, including systemic risk, which has been underexplored. We expand on recent research by examining, not only the type of financial services, but also the source of FI, particularly the role of non-commercial banks (NCB). Our findings reveal that in developing and emerging economies, credit expansions are linked to lower commercial banking risks, underscoring the benefits of loan diversification. However, while FI in deposits generally reduces individual banking risks, its effect on systemic risk is weaker in these countries, likely due to limited asset diversification.  Moreover, NCBs tend to increase systemic and idiosyncratic risks for commercial banks through competitive pressures in the loan and deposit markets. Our results suggest that coordinating macroprudential policies with credit developments further reduces systemic risk by discouraging excessive risk-taking when banks' capital is more at stake. Banks with stronger Basel capital ratios show reduced idiosyncratic risks, yet there is evidence that banks may relax these ratios to accommodate lending demands. These insights underscore the necessity for regulators to synchronize macroprudential policies with FI developments and consider NCB' role in financial stability.

Keywords: Financial Inclusion - Bank Regulation - Systemic Risk - Idiosyncratic Risk.

ABSTRACT: 

We apply the multivariate unobserved components model of Rünstler and Vlekke (2018)  to jointly estimate the cyclical and trend components of output, credit, and residential property prices in Ireland. We find that credit and house price cycles are subject to an average duration of about 15 years, considerably longer than the business cycle, estimated at 8.5 years. Compared to several alternative estimation methods, the estimates of house price and credit cycles combine strong early warning performance with superior real-time reliability. Our findings contribute to the monitoring of systemic risks in the Irish economy and the conduct of macroprudential policies.

Keywords: Business cycles - House prices cycles - Credit cycle - Unobserved components models - Vector Error Correction models - Hodrick–Prescott filter - Christiano–Fitzgerald filter - Macroprudential policies.

ABSTRACT: 

We develop a Quick Stress Testing (QST) methodology to provide high-frequency assessments of the resilience of the Irish banking system under different adverse macro-financial outlooks. The framework accommodates both internally generated scenarios–whose severity depends on the financial cycle–and externally provided ones. We estimate the capital depletion banks would face under such scenarios by interacting them with bank balance-sheet sensitivities to macroeconomic outcomes, derived from European Banking Authority (EBA) data. Through Monte Carlo simulations, we then ensure we are considering severe enough yet plausible scenarios. A key advantage of our streamlined methodology is that it can be applied more frequently than conventional stress-testing exercises. Results indicate that Irish banks remain adequately capitalised across diverse adverse scenarios.

Keywords: Stress Test - Countercyclical Capital Buffer (CCyB) - Monetary Policy Shocks - State-dependent Local Projections - Credit Cycle - Bank Resilience.