Benchmarking the European Central Bank’s Asset Quality Review and Stress Test: A Tale of Two Leverage Ratios

The following is an excerpt from a recent paper written by NYU Stern Professor Viral Acharya and Sascha Steffen:

Viral Acharya, NYU SternIn November 2014, the ECB published its asset quality review (AQR) and comprehensive assessment (ECB 2014), as well as capital shortfall estimates based on its stress test. These results differed widely from our earlier assessment (Acharya and Steffen 2014). Indeed, the two shortfall estimates are negatively correlated.

Calculations that we have recently completed suggest that the divergence between our numbers and those of the ECB can be explained by the continued reliance on static risk-weights in the regulatory assessment. In fact, using the projected losses in the adverse scenario employed by the ECB and applying a different (non risk-weights based, i.e. simple) leverage ratio gives results much closer to ours.
Shortfall measures

We compare two measures of capital shortfall, the “regulatory shortfall measure” as used by the ECB, and SRISK as calculated by NYU Stern School of Business Volatility Lab. Both concepts are conceptually similar as they estimate losses in a stress scenario and determine the capital shortfall between a prudential capital requirement and the remaining equity after losses.

Read full article as published by VoxEU

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MS in Risk Management Alumni Event Featured on the NYU Stern Homepage!

Engle Event 1Nobel Laureate and NYU Stern Professor Robert Engle spoke to MS in Risk Management students and alumni on his research and future global collaborations with the NYU Stern Volatility Institute.

On November 7, MS in Risk Management Academic Director Ingo Walter and Nobel Laureate and NYU Stern Professor Robert Engle discussed Professor Engle’s research with the NYU Stern Volatility Laboratory (V-Lab) and the global outlook of his measures.

Professor Engle spoke about recent market volatility, the results of European banking stress tests and volatility in the Chinese economy.  He noted that the Volatility Institute is in the process of opening a second location in China. “The idea is to create a global research community,” he said, through technology platforms such as the V-Lab.

Professor Engle also stated that having an “impact on application to firms and regulators is a measure of success.”

See the post here.

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MSRM Alum, Andrew Koh, to Speak at the 2014 RiskMinds Asia Conference

N12220351 KohRiskMinds Asia is part of the Global RiskMinds Event Series, one of the largest and most senior annual gatherings globally. The fourth RiskMinds Asia event was held in Hong Kong in 2013, and brought together over 65 of the most senior risk practitioners, academics and economists which gave delegates a comprehensive view of the latest trends in risk management.

In addition to determining the future for risk management at a very high level, RiskMinds Asia also offers in-depth coverage of all the below risk management topics and more:

  • Market Risk & Stress Testing
  • Credit Risk Modelling & Management
  • Liquidity Risk Management
  • Economic & Regulatory Capital Allocation
  • Operational Risk Management
  • Strategic, Regulatory & Enterprise-Wide Risk Management

The 2014 conference takes place November 17-20, 2014 in Singapore. For more information, please visit the RiskMinds Asia website here.

Andrew Koh is an alum of the MS in Risk Management Program, Class of 2010 and the MS in Global Finance Program, Class of 2008. Andrew is a thought leader, risk and governance expert. He has presented to boards, senior management and industry experts from central banks, government agencies, financial institutions and corporations in major conferences. Andrew has almost 25 years working in banking, finance, cards and payment sectors’ risk and governance related roles.

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NYU Stern Professor Edward Altman’s Research on Chapter 11 Bankruptcy is Cited

The following is an excerpt from the Wall Street Journal:

ealtmanThrough data collected from 1984 to 2013, New York University Professor Edward Altman found two factors are most indicative of a debtor filing again: its profitability upon its first emergence and its leverage. The data reveals that for recidivist debtors, their financial profiles upon exiting their first bankruptcy tended to resemble that of other firms as they entered bankruptcy—namely too much debt and too much leverage. This data supports what restructuring professionals have experienced anecdotally. Sometimes a plan is premised on the best available recapitalization structure, which is not necessarily the right structure.

Read the entire article here and additional coverage in the Wall Street Journal.

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NYU Stern Professor Nouriel Roubini Argues that the US is Keeping the Global Economy Afloat

The following is an excerpt from an op-ed titled “The Single-Engine Global Economy” by NYU Stern Professor Nouriel Roubini on Project Syndicate:

roubiniThe global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).

The second engine – the eurozone – has now stalled after an anemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.

Read the entire article here.

Additional coverage appeared on The Guardian and Livemint.

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Professor Viral Acharya’s Research on Eurozone Stress Testing is Highlighted

The following is an excerpt from the Financial Times:

Viral Acharya, NYU SternLast week, 25 banks failed the asset quality review (AQR) conducted by the European Central Bank for 130 of the eurozone’s largest banks. In the stress test performed by the European Banking Authority on 123 of the EU’s largest banks, 24 failed.

These latter had a capital shortfall under the adverse macroeconomic scenario amounting to €24.6bn – 0.09 per cent of assets worth €28tn, 70 per cent of the EU total. After allowing for capital raised or converted since the beginning of 2014, 14 banks remained short by €9.5bn – about 0.03 per cent of assets, according to the stress test.

On October 27, Professors Viral Acharya and Sascha Steffen published an alternative estimate, using a different methodology, for 39 publicly listed eurozone banks with a combined balance sheet of €12.5tn (a subset of the banks in the EBA stress test and the ECB’s AQR). They calculated a shortfall of €450bn at the end of 2013 – about 3.6 per cent of assets.

Both capital shortfall numbers are point estimates. Both are therefore bound to be wrong. Which one is likely to be closer to the true figure? I put greater faith in the estimate of Profs Acharya and Steffen. The EBA has a long record of stress tests that grotesquely underestimate the capital holes in EU banks. Both the AQR and the stress test relied heavily on national regulators and supervisors – the very entities on whose watch the excesses that led to the financial crisis were allowed to fester and compound.

Read the full article on the Financial Times here.

More information on Professor Acharya’s research was also highlighted this week in the Financial Times.

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MSRM Alumna to Speak at Business Insurance’s Annual “Women to Watch”

yvette connorBusiness Insurance’s annual Women to Watch identifies and recognizes individuals doing exceptional work in risk management, benefits management, commercial insurance and related fields.

The insurance industry traditionally has been a male-dominated sector, especially at the executive levels. But as we have seen from the women we have profiled in this annual feature throughout the past five years, there is a growing number of talented and dynamic female executives holding key positions within the sector.

As a result, as the years go by, it gets tougher for the panel of BI editors involved in the selection process to narrow down the field of candidates and select only a few honorees from the numerous nominations we receive.

We think you’ll agree, though, that the nominees selected have outstanding credentials and are exceptional leaders in their fields.

This year’s workshop and awards ceremony will be held on December 8-9, 2014 at Marriott Marquis, in New York City.”

MSRM Class of 2013 student, Yvette Connor, was named one of twenty five “Women to Watch” by Business Insurance Magazine in 2013. Yvette Connor is managing director of risk management advisory and insurance services at New York-based international consultant Alvarez & Marsal, a position she assumed in November 2013. This year, she will serve as the moderator for The Business Case for Gender Diversity: Why the Insurance Industry Needs More Women Leaders panel discussion.

Read more about the upcoming event here.

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Nobel Laureate and Professor Robert Engle Discusses Recent Market Volatility

The following is an excerpt from Fox Business:

Robert Engle NYU Stern“We’ve had about two weeks of spectacularly high volatility. However, when you think about it, it’s only high relative to the last two years. We haven’t seen this for two years. Before that, we had the financial crisis, which makes this small… There’s uncertainty about the future. And then, a news event comes along and it moves the markets… The thing that I thought was the new piece of information was that Europe looked worse than it had. Germany was slowing down and Angela Merkel said that we better tighten our belts, which I think the markets thought was just the wrong answer.”

Watch the video on Fox Business here.

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NYU Stern’s TRIUM Program is Ranked #1 by the Financial Times

The following is an excerpt from the Financial Times:

logoTRIUM_color_hi_res.LIFor the first time in six years, a new challenger has topped the FT’s ranking of executive MBA programmes.

The 2014 ranking of 100 programmes for working senior executives is headed by Trium, run by HEC Paris, the London School of Economics and Stern School of Business at New York University. The top five places continue to be dominated by intercontinental EMBAs.

Trium jumped three places to overtake the joint programme taught by Kellogg School of Management near Chicago and Hong Kong University of Science and Technology, which had been top of the ranking for five years. It is the first time Trium has headed the ranking and it is only the fourth programme to do so in 14 years.

Trium is ranked first for the work experience of its alumni before the programme, second for aims achieved and third for international course experience. The programme is second for average salary ($307,003) of alumni three years after graduation, just behind the Kellogg/HKUST programme.

Read the full article here.

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Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans By Professor Viral Acharya

Viral Acharya, NYU Stern

This paper shows that the sovereign debt crisis and the resulting credit crunch in the periphery of the Eurozone lead to negative real effects for borrowing firms. Using a hand matched sample of loan information from Dealscan and accounting information from Amadeus, we show that firms with a higher exposure to banks affected by the sovereign debt crisis become financially constrained during the crisis. As a result, these firms have significantly lower employment growth, capital expenditures, and sales growth rates. We show that our results are not driven by country or industry-specific macroeconomic shocks or a change in the demand for credit of borrowing firms. Thus, the high interdependence of bank and sovereign health and the resulting credit crunch is one important contributor to the severe economic downturn in the southern European countries during the sovereign debt crisis.

Read the full paper here.

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