How do banks adjust when faced with a sudden rise in capital requirements? The most frequent response, in the theoretical literature, is that they reduce lending or “deleverage” (see, e.g., Aiyagari and Gertler (1999); Gertler and Kiyotaki (2010). This is particularly true in crisis episodes when raising equity can be costly. However, in a new paper co-authored with Hans Degryse and Artashes Karapetyan, I show this is only part of the story. Banks may also ask borrowers to provide more collateral; collateralised exposures carry lower risk weights on average and hence enhance capital ratios. This requirement can adversely affect young and new borrowers that typically lack collateral to pledge and are also unlikely to have longstanding banking relationships.
Thomas Mathae, Stephen Millard, Tairi Room, Ladislav Wintr and Robert Wyszynski
How do firms respond to shocks? Do they first change the hours worked by their employees? Or the number of employees? Or wages? Or a combination? Does the shock matter? And the firm’s country? One way of answering these questions is to ask the managers within firms themselves. And this is exactly what the Wage Dynamics Network did, surveying firms in 25 European countries. Our research used this survey to answer these questions. We found that in response to negative shocks firms were most likely to reduce employment, then wages and then hours, regardless of the source of the shock. But, in response to positive shocks, firms were most likely to raise wages, then employment and then hours.
To consider Bitcoin volatility, we
look at 10-day returns (capital standards typically estimate market risk over a
10-day period) since 19 July 2010, when Bloomberg’s Bitcoin data start. We
compare Bitcoin with assets in three categories – currency pairs, commodities
and equities – and for each we have picked one low-volatility asset and one
more volatile asset. For currency pairs and commodities, we chose the most and
least volatile ones (in terms of standard deviation of 10-day returns) out of
the most liquid in each category. And we chose the most and least volatile FTSE
100 equities (again, in terms of standard deviation of 10-day returns).
For stable assets we expect a peaked distribution with short tails, as returns cluster near 0%. Figure 1 shows that Bitcoin has been more volatile than any other asset in our sample.
Figure 1
But people are often interested in the downside risk of assets. We therefore consider how Bitcoin’s Value at Risk (VaR) compares to other assets. VaR is the maximum loss over a given time interval under normal market conditions at a given confidence interval (eg 99%). A 10-day 99% VaR of -10% tells you that 99% of the time your 10-day return on the asset would be no worse than a 10% loss.
Figure 2 shows Bitcoin’s VaR is high, but the VaR of the other most liquid crypto-assets is higher. TRON’s VaR to date (-84%) is almost twice Bitcoin’s (-44%).
Figure 2
Giulio Malberti and Thom Adcock work in the Bank’s Banking Policy Division.
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