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.

ABSTRACT: 

Event-study methods based on cumulative average abnormal returns (CAARs) are a standard tool for studying the financial effects of monetary policy announcements and regulatory interventions, yet they have not been applied to the question of how geopolitical events affect bank-level risk. We fill this gap using a panel of 1,931 financial institutions from OECD countries observed at daily frequency over 2000-2024. Geopolitical events are identified from the UCDP Georeferenced Event Dataset and classified by OECD involvement. We estimate abnormal returns from a market model and test their significance using the cross-sectional correlation adjustment of Kolari and Pynnönen, 2010. We then relate daily changes in CDS spreads, probabilities of default, ∆CoVaR, and conditional Value-at-Risk to abnormal returns and CAARs in panel regressions. The results show that statistically significant geopolitical events increase bank risk, even when cumulative abnormal returns are positive, and that transmission differs by OECD involvement. Placebo tests using adjacent non-event windows and robustness checks using alternative standard errors, conflict intensity measures, and news-based GPR indices support these findings. 

Keywords:  Geopolitical risk, financial stability, event study, abnormal returns, CDS spreads, ∆CoVaR, banking

ABSTRACT: 

We propose a multi-scenario stress-testing framework to evaluate and compare bank resilience across a wide range of macro-financial outlooks for European banks included in EU-wide stress-testing exercises conducted by the European Banking Authority (EBA). The approach exploits past stress-test results to estimate reduced-form sensitivities of CET1 capital to macro-financial conditions, enabling the approximation of stress test outcomes without relying on granular balance-sheet models. It also incorporates cross-border exposures and state-dependent scenario design based on the credit cycle, and evaluates outcomes jointly in terms of capital depletion and empirical likelihood. We find that CET1 depletion ranges between 3 and 6pps, with some scenarios combining relatively higher severity and plausibility. Accounting for cross-border exposures can add 1 to 1.5pps of additional depletion.

Keywords:  Stress Testing; Bank Capital; Cross-Border Exposures; Scenario Analysis; Financial Cycle; Empirical Plausibility; Banking Sector Resilience.

ABSTRACT: 

This paper examines how financial inclusion affects bank risk by disentangling three transmission channels: diversification, competition-induced weakening of credit standards, and regulatory arbitrage toward non-bank financial institutions. We introduce regulatory arbitrage as a distinct mechanism and quantify its relevance relative to alternative channels through which financial inclusion operates. Using local projections around bank-targeted macroprudential tightening, we identify the regulatory arbitrage channel and evaluate the effects of unexpected expansions in financial inclusion on bank risk measures. Our findings show that bank-targeted prudential regulation can unintentionally amplify bank risk --idiosyncratic and systemic-- by reallocating inclusion-driven financial services toward less-regulated intermediaries.

Keywords:  Financial Inclusion, Bank Regulation, Non-banking Financial Institutions, Systemic Risk, Banking Risk