The University of Southampton
University of Southampton Institutional Repository

Essays on financial stability

Essays on financial stability
Essays on financial stability
The thesis analyses dynamics of systemic risk and contagion in securitization, interbank and derivatives markets, and the subsequent implications for financial stability and macroprudential policy. In doing so, three distinctive lines of research are pursued. First, we examine the impact of securitization on bank stability and systemic risk. Following this, we analyse distress spillover from the OTC derivatives market into the interbank market, due to the interaction between margin procyclicality in OTC derivatives markets, and funding liquidity risk in the interbank market. Finally, we develop a macroprudential stress test, that explicitly links liquidity risk and solvency risk of banks, as well as account for interconnectedness among them.

We provide evidence that securitization activities are destabilizing at both the individual bank level and the banking system level, and tend to increase commonality of asset returns among banks leading to increased interconnectedness and systemic risk. Moreover, we show that distress due to margin procyclicality in the OTC derivatives market can spillover to the interbank market leading to episodes of systemic liquidity risk. We also show that central clearing might increase the possibility of systemic liquidity risk due to tight margin requirements and the timing of cash flows required from banks. Further, using the proposed stress test, we effectively identify the systemic vulnerability of individual banks and the resilience of the banking system as a whole to economic shocks.

The results of this thesis have far-reaching policy implications. First, given the current increasing pace in monetary policy tightening, our findings on the destabilizing effect of securitization activities are of great interest to policy makers in their attempts to revive securitization markets, as they provide a framework for regulators to think about the effects of securitization at both the bank level and the banking system level. Moreover, our findings on the negative consequences of margin requirements should inform regulators about the importance of striking the balance between limiting counterparty credit risk through tight margin requirements, and the side effect of increasing the possibility and magnitude of systemic liquidity crises. Finally, the proposed stress test provides an effective tool for the banking system supervisors to analyse the current state of the system stability and to monitor the evolution of contagion and systemic risk within the system.
University of Southampton
Bakoush, Mohamed
661c4408-3dde-4b6e-9964-6dd7175e5813
Bakoush, Mohamed
661c4408-3dde-4b6e-9964-6dd7175e5813
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362

Bakoush, Mohamed (2019) Essays on financial stability. University of Southampton, Doctoral Thesis, 225pp.

Record type: Thesis (Doctoral)

Abstract

The thesis analyses dynamics of systemic risk and contagion in securitization, interbank and derivatives markets, and the subsequent implications for financial stability and macroprudential policy. In doing so, three distinctive lines of research are pursued. First, we examine the impact of securitization on bank stability and systemic risk. Following this, we analyse distress spillover from the OTC derivatives market into the interbank market, due to the interaction between margin procyclicality in OTC derivatives markets, and funding liquidity risk in the interbank market. Finally, we develop a macroprudential stress test, that explicitly links liquidity risk and solvency risk of banks, as well as account for interconnectedness among them.

We provide evidence that securitization activities are destabilizing at both the individual bank level and the banking system level, and tend to increase commonality of asset returns among banks leading to increased interconnectedness and systemic risk. Moreover, we show that distress due to margin procyclicality in the OTC derivatives market can spillover to the interbank market leading to episodes of systemic liquidity risk. We also show that central clearing might increase the possibility of systemic liquidity risk due to tight margin requirements and the timing of cash flows required from banks. Further, using the proposed stress test, we effectively identify the systemic vulnerability of individual banks and the resilience of the banking system as a whole to economic shocks.

The results of this thesis have far-reaching policy implications. First, given the current increasing pace in monetary policy tightening, our findings on the destabilizing effect of securitization activities are of great interest to policy makers in their attempts to revive securitization markets, as they provide a framework for regulators to think about the effects of securitization at both the bank level and the banking system level. Moreover, our findings on the negative consequences of margin requirements should inform regulators about the importance of striking the balance between limiting counterparty credit risk through tight margin requirements, and the side effect of increasing the possibility and magnitude of systemic liquidity crises. Finally, the proposed stress test provides an effective tool for the banking system supervisors to analyse the current state of the system stability and to monitor the evolution of contagion and systemic risk within the system.

Text
Bakoush 2018 PhD Thesis Final - Version of Record
Restricted to Repository staff only until 28 January 2021.
Available under License University of Southampton Thesis Licence.

More information

Published date: 2 January 2019

Identifiers

Local EPrints ID: 428060
URI: https://eprints.soton.ac.uk/id/eprint/428060
PURE UUID: 4ecb7fbf-623f-47e8-a496-e323b3541b55
ORCID for Mohamed Bakoush: ORCID iD orcid.org/0000-0001-9624-9828
ORCID for Simon Wolfe: ORCID iD orcid.org/0000-0001-9815-9535
ORCID for Enrico Gerding: ORCID iD orcid.org/0000-0001-7200-552X

Catalogue record

Date deposited: 07 Feb 2019 17:30
Last modified: 06 Aug 2019 00:36

Export record

Contributors

Author: Mohamed Bakoush ORCID iD
Thesis advisor: Simon Wolfe ORCID iD
Thesis advisor: Enrico Gerding ORCID iD

University divisions

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of https://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×