Risk Simulation in Banking - Revision history

Simon: /* Bailouts: */

2021-01-20T18:21:20Z

‎Bailouts:

Simon at 18:15, 20 January 2021

2021-01-20T18:15:58Z

Show changes

Simon at 15:45, 20 January 2021

2021-01-20T15:45:22Z

Simon: /* Conclusion: */

2021-01-20T15:44:41Z

‎Conclusion:

Simon at 15:43, 20 January 2021

2021-01-20T15:43:15Z

Simon at 15:42, 20 January 2021

2021-01-20T15:42:07Z

Simon: /* Results: */

2021-01-20T15:39:58Z

‎Results:

Simon at 15:33, 20 January 2021

2021-01-20T15:33:10Z

Simon: /* References: */

2021-01-20T15:17:41Z

‎References:

Simon at 14:59, 20 January 2021

2021-01-20T14:59:47Z

@@ Line 55: / Line 55: @@
 ===Bailouts:===
-Due to the risk of snowball effects, Governments oftentimes intervene when they see the danger of a financial institutions going insolvent. Therefore, I modeled a bailout option where one can put the maximum number of bailouts per year.
+Due to the risk of snowball effects, Governments oftentimes intervene when they see the danger of a financial institutions going insolvent. Therefore, I modeled a bailout option where one can put the maximum number of bailouts per year. In reality However, there would obviously not be a fixed upper limit, but the number of bailouts would depend on the political will, the financial ability of a state and the size of the collapse.
 ==Results==

← Older revision		Revision as of 15:45, 20 January 2021
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	Again, one is able to observe significant reductions in the average default probability. After the first three tests it seems likely that the effect is dominated by the willingness to bail out, which appears to be the single biggest influencer when it comes to reducing the number of bankruptcies in the model.		Again, one is able to observe significant reductions in the average default probability. After the first three tests it seems likely that the effect is dominated by the willingness to bail out, which appears to be the single biggest influencer when it comes to reducing the number of bankruptcies in the model.
		+
		+
		+

@@ Line 91: / Line 91: @@
 Again, one is able to observe significant reductions in the average default probability. After the first three tests it seems likely that the effect is dominated by the willingness to bail out, which appears to be the single biggest influencer when it comes to reducing the number of bankruptcies in the model.
 ==Conclusion:==
@@ Line 101: / Line 105: @@
 Also, as mentioned before, the Liabilities in form of customer deposits usually need to be canceled first before they can be accessed by the depositor. A more sophisticated model for bank runs should include a concept like Duration to model the in-  and outflow of liquidity in a more realistic, day-to-day way.
 It is for these two reasons that the Liquidity and Equity Quotas I observed in the balance sheet information seem to be too low for effectively reducing default risks in my model. However, thinking about the incentive problems that come with bailouts it would not be advisable to only rely on the tool of government money for avoiding a financial crisis.
 =Code:=

@@ Line 1: / Line 1: @@
-=Risk Simulation in Banking=
+=Risk Simulation in Banking:=
 ==Problem:==
@@ Line 87: / Line 87: @@
+===Test 4: Increasing Equity, Liquidity and the willingness to bail out:===
-[[File:Bailouts, equity, liquidity.png|600px|thumb|right|]] ===Test 4: Increasing Equity, Liquidity and the willingness to bail out:=== In the last testing sequence, I tested the impact of all three variables together.
+[[File:Bailouts, equity, liquidity.png|600px|thumb|right|]] In the last testing sequence, I tested the impact of all three variables together.
 Again, one is able to observe significant reductions in the average default probability. After the first three tests it seems likely that the effect is dominated by the willingness to bail out, which appears to be the single biggest influencer when it comes to reducing the number of bankruptcies in the model.

@@ Line 61: / Line 61: @@
 ==Results:==
-===Test 1: increasing bailout willingness:=== [[File:Bailouts.png|600px|thumb|right|]] The first simulation run was done using a Liquidity-, and Equity multiplicator of 1, a uniformly distributed interval of ϵ [0; 0.5] for the deposit outflows and an interval of ϵ [0.8; 1.2] for the Brownian motion. The maximum number of bailouts per year was initially set to 0.
+===Test 1: increasing bailout willingness:===
 Each setting, I run 50 times, with one run simulating 10 years, giving a sample size of 500 bank years per setting. After that, the number of possible bailouts was increased by 2. The willingness to bail out struggling financial institutions does have a significant influence both on the expected number of defaults same as on the standard deviation. With a maximum of 4 bailouts, the probability for a default nearly halves from 1,98 to 1 per 10-year interval, while standard deviation decreased from 3,09 to 1,60.
+===Test 2: Increased Liquidity:===
-[[File:Liquidity.png|600px|thumb|right|]] ===Test 2: Increased Liquidity:=== Secondly, I simulated the effect an increase in liquidity would have on the default probability.
+[[File:Liquidity.png|600px|thumb|right|]] Secondly, I simulated the effect an increase in liquidity would have on the default probability.
 Not surprisingly, an increased liquidity reduced the average default probability and its standard deviation. However, the results have not been as robust as in the case of the bailouts.
@@ Line 74: / Line 75: @@
+===Test 3: Increasing Equity:===
-[[File:Equity.png|600px|thumb|right|]] ===Test 3: Increasing Equity:=== I tested which influence increasing Equity would have on the default probability.
+[[File:Equity.png|600px|thumb|right|]] I tested which influence increasing Equity would have on the default probability.
 Same as in the case of Liquidity, the results show a slight decrease in default probability for increasing Equity. However, for an increase in Equity by 100%, one would expect a more extreme decrease in the average number of bankruptcies.

@@ Line 1: / Line 1: @@
-== Risk Simulation in Banking ==
+==Problem:==
 Modern Banking is a highly volatile business with interdependencies not only to other banks, but to the economy as a whole, too. It is therefore that most of the economic crisis of the past century had been accelerated or caused entirely by the financial sector.
 Because of the interdependencies and to avoid snowball effects when one financial institute tumbles, regulators began to introduce different sorts of safety mechanisms.
 My goal is, to simulate the German banking market and deduct default probabilities with varying extends of banking regulation in place.
-'''Approach:'''
+==Approach:==
 [[File:Regression Graph.png|200px|thumb|left|]]
@@ Line 23: / Line 22: @@
-'''Method:'''
+==Method:==
 I simulated geometric Brownian motions with a uniformly distributed multiplicator of m ϵ [0.8; 1.2] over 10 years for three of my four variables to represent the natural fluctuation of capital.  The range for the multiplicator was arbitrarily set and could be specified further by a regression of the yearly change of the balance sheet information. Estimating the actual volatility of the yearly changes of the variables and introducing this information into the model would significantly increase the validity of the simulation.
-=Detailed description:=
+==Detailed description:==
 There are basically two ways a bank can go bankrupt:
-'''Bank runs:'''
+===Bank runs:===
 The first one is called a bank run. When customers lose trust in their bank, they might go and grab their deposits in order to save their money. Since the concept of fractional-reserve banking requires banks to only hold a share of it’s deposits as liquid cash,  too many people collecting their deposits can dry up liquidity. The bank is forced to quickly sell their assets (even under their market value) to pay out their deposits. Once there is no more liquidity, the bank will need to file bankruptcy.
@@ Line 44: / Line 43: @@
-'''Asset Price Shock:'''
+===Asset Price Shock:===
 The other main way for a bank to become bust is due to shocks to asset prices. If prices of the financial assets of the bank deflate while the deposits values are contractually fixed, the equity needs to decrease in order to balance out the financial statement. Once the asset prices dragged the equity to zero, bankruptcy is almost inevitable.
@@ Line 55: / Line 54: @@
-'''Bailouts:'''
+===Bailouts:===
 Due to the risk of snowball effects, Governments oftentimes intervene when they see the danger of a financial institutions going insolvent. Therefore, I modeled a bailout option where one can put the maximum number of bailouts per year.
-=Results:=
+==Results:==
-[[File:Bailouts.png|600px|thumb|right|]]'''Test 1: increasing bailout willingness:''' The first simulation run was done using a Liquidity-, and Equity multiplicator of 1, a uniformly distributed interval of ϵ [0; 0.5] for the deposit outflows and an interval of ϵ [0.8; 1.2] for the Brownian motion. The maximum number of bailouts per year was initially set to 0.
+[[File:Bailouts.png|600px|thumb|right|]] =Test 1: increasing bailout willingness:= The first simulation run was done using a Liquidity-, and Equity multiplicator of 1, a uniformly distributed interval of ϵ [0; 0.5] for the deposit outflows and an interval of ϵ [0.8; 1.2] for the Brownian motion. The maximum number of bailouts per year was initially set to 0.
 Each setting, I run 50 times, with one run simulating 10 years, giving a sample size of 500 bank years per setting. After that, the number of possible bailouts was increased by 2. The willingness to bail out struggling financial institutions does have a significant influence both on the expected number of defaults same as on the standard deviation. With a maximum of 4 bailouts, the probability for a default nearly halves from 1,98 to 1 per 10-year interval, while standard deviation decreased from 3,09 to 1,60.
-[[File:Liquidity.png|600px|thumb|right|]]'''Test 2: Increased Liquidity:''' Secondly, I simulated the effect an increase in liquidity would have on the default probability.
+[[File:Liquidity.png|600px|thumb|right|]] =Test 2: Increased Liquidity:= Secondly, I simulated the effect an increase in liquidity would have on the default probability.
 Not surprisingly, an increased liquidity reduced the average default probability and its standard deviation. However, the results have not been as robust as in the case of the bailouts.
@@ Line 76: / Line 75: @@
-[[File:Equity.png|600px|thumb|right|]]'''Test 3: Increasing Equity:''' I tested which influence increasing Equity would have on the default probability.
+[[File:Equity.png|600px|thumb|right|]] =Test 3: Increasing Equity:= I tested which influence increasing Equity would have on the default probability.
 Same as in the case of Liquidity, the results show a slight decrease in default probability for increasing Equity. However, for an increase in Equity by 100%, one would expect a more extreme decrease in the average number of bankruptcies.
@@ Line 88: / Line 87: @@
-[[File:Bailouts, equity, liquidity.png|600px|thumb|right|]]'''Test 4: Increasing Equity, Liquidity and the willingness to bail out:''' In the last testing sequence, I tested the impact of all three variables together.
+[[File:Bailouts, equity, liquidity.png|600px|thumb|right|]] =Test 4: Increasing Equity, Liquidity and the willingness to bail out:= In the last testing sequence, I tested the impact of all three variables together.
 Again, one is able to observe significant reductions in the average default probability. After the first three tests it seems likely that the effect is dominated by the willingness to bail out, which appears to be the single biggest influencer when it comes to reducing the number of bankruptcies in the model.
@@ Line 100: / Line 99: @@
-=Conclusion:=
+==Conclusion:==
 [[File:Chain reaction vs bail out.PNG|400px|thumb|right|]]
 Within the limitations of the model, bailing out struggling institutions seems to be the most promising way of government intervention when it comes to reducing the likeliness of a financial crisis. An increase in the maximum allowed number of bail outs from 0 to 4 reduced the average bankruptcy number in 10 years by almost 50%. Note that an increased willingness to bail out does not have a direct effect on the base probability for bankruptcies. However, bailed out institutions are not able to kick off a chain reaction of bankruptcies and therefore reduce the overall probability of default (picture on the right).

← Older revision		Revision as of 15:17, 20 January 2021
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	=References:=		=References:=
		+	[https://www.db.com/ir/de/download/Deutsche_Bank_Geschaeftsbericht_2018.pdf] Deutsche Bank Balance Sheet
		+
		+	[https://www.dzbank.de/content/dzbank_de/de/home/unser_profil/investorrelations/berichte/2018.html] DZ Bank Balance Sheet
		+
		+	[https://www.kfw.de/KfW-Konzern/%C3%9Cber-die-KfW/Berichtsportal/Gesch%C3%A4ftsbericht/Archiv/2018/Zahlen-und-Fakten/] kfw Balance Sheet
		+
		+	[https://www.commerzbank.de/media/aktionaere/service/archive/konzern/2019_1/Geschaeftsbericht_2018_Konzern_DE.pdf] Commerzbank Balance Sheet
		+
		+	[https://www.hypovereinsbank.de/content/dam/hypovereinsbank/ueber-uns/pdf/investor-relations/Berichte/DE/2019/Geschaeftsbericht-HVB-Group-2018.pdf] Hypo Balance Sheet
		+
		+	[https://www.bayernlb.de/internet/media/de/ir/downloads_1/investor_relations_3/finanzberichte/2018_21/Internet_Konzernabschluss_2018.pdf] BayernLB Balance Sheet
		+
		+	[https://www.ing.de/binaries/content/assets/pdf/ueber-uns/presse/publikationen/geschaftsbericht-2018-der-ing-holding-deutschland-gmbh.pdf] ING Balance Sheet
		+
		+	[https://www.lbbw.de/konzern/news-and-services/finanzberichte/geschaeftsberichte/2018/lbbw_geschaeftsbericht_2018_89rj14f1q_m.pdf] LBBW Balance Sheet
		+
		+	[https://www.nordlb.de/die-nordlb/ueber-uns/konzernzahlen/] NordLB Balance Sheet
		+
		+	[https://www.nrwbank.de/export/sites/nrwbank/de/corporate/downloads/presse/publikationen/finanzpublikationen/Geschaeftsbericht-2018-Finanzbericht.pdf] NRWBank Balance Sheet
		+
		+	[https://www.deka.de/site/dekade_deka-gruppe_site/get/documents_E2071643585/dekade/medienpool_dekade/deka_gruppe/de/Dokumente/Investor%20Relations/Finanzpublikationen/Gesch%C3%A4ftsberichte/Gesch%C3%A4ftsbericht%202018.pdf] deka Balance Sheet
		+
		+	[https://www.rentenbank.de/dokumente/Geschaeftsbericht-2018-Deutsch.pdf] Rentenbank Balance Sheet
		+
		+	[https://www.pfandbriefbank.com/fileadmin/user_upload/downloads/investor_relations/reports/1903_pbb_GB18_FINAL_de.pdf] dt.Pfandbriefbank Balance Sheet
		+
		+	[https://www.hcob-bank.de/media/pdf_3/investorrelations/geschaeftsber/2018_4/gb2018/de_hcob_ifrs-konzern_geschaeftsbericht_2018.pdf] hcob Balance Sheet
		+
		+	[https://www.apobank.de/dam/jcr:a21ac04d-5727-4dfe-b642-7eb37794cab6/apobank-jahresfinanzbericht-2018.pdf] Apobank Balance Sheet

← Older revision		Revision as of 14:59, 20 January 2021
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	=Code:=		=Code:=
	[[File:Risk_in_Banking_Simulation_V1.xlsx]]		[[File:Risk_in_Banking_Simulation_V1.xlsx]]
		+
		+	=References:=