Systemic financial risk indicators and securitised assets: an agent-based framework

Andrea Mazzocchetti, Eliana Lauretta, Marco Raberto, Andrea Teglio, Silvano Cincotti

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2 Citations (Scopus)
45 Downloads (Pure)

Abstract

The paper presents an agent-based model of a credit economy which includes a securitisation process and a bailout mechanism for bank bankruptcies. Within this framework, banks are able to sell mortgages to a financial vehicle corporation, which finances its activity by creating mortgage-backed securities and selling them to a mutual fund. In turn, the mutual fund collects liquidity by selling shares to households and remunerates them with a monthly interest. The impact of this mechanism is analysed by means of computational experiments for different levels of banks’ securitisation propensity. Furthermore, we study a set of systemic risk indicators which have the aim of assessing the imbalances in the financial system. Two of them are the mortgage-to-GDP ratio and the capital adequacy ratio, which are constructed to detect only the on-balance sheet changes in banks’ credit exposure. We consider two additional indicators, similar to the previous ones with the only difference that they are also able to account for the off-balance sheet items. Moreover, we adopt an indicator, the so-called “virtuous–unvirtuous cycle” indicator, which, besides off-balance assets, targets also the GDP. The results show that higher securitisation propensity weakens the financial stability of banks with relevant effects on different sectors of the economy. Most importantly, the analysis of systemic risk reveals the important issue of designing suitable systemic risk indicators for predicting incoming financial crises, finding that an essential feature of these indicators should be to integrate banks’ off-balance sheet assets.
Original languageEnglish
Pages (from-to)9-47
Number of pages39
JournalJournal of Economic Interaction and Coordination
Volume15
Early online date4 Oct 2019
DOIs
Publication statusPublished - 1 Jan 2020

Bibliographical note

The final publication is available at Springer via http://dx.doi.org/10.1007/s11403-019-00268-z

Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.

Funder

The authors acknowledge EU-FP7 collaborative project SYMPHONY ( www.projectsymphony.eu ) under Grant No. 611875.

Keywords

  • Systemic risk
  • Systemic financial risk indicators
  • Securitisation
  • Housing market
  • Agent-based models

ASJC Scopus subject areas

  • Economics and Econometrics
  • Business and International Management

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