Thilo Liebig

Forecasting credit event frequency empirical evidence for West German firms

The main challenge of forecasting credit default risk in loan portfolios may be seen in forecasting the default probabilities and the default correlations. We derive a Merton-style threshold value model for the default probability which treats the asset value of a firm as unknown and uses a factor model instead. In addition, we demonstrate how default correlations can be easily modeled. The empirical analysis is based on a large data set of German firms provided by Deutsche Bundesbank. We find that default probabilities can be forecast given the values of risk drivers known at the point of time at which the forecast is made. In addition, correlations depend on the fit of the estimated default probabilities to the realized default rate for given points in time.

Diversifikation oder Spezialisierung — Eine Branchenanalyse der Kreditportfolios der Banken in Deutschland

Fur hilfreiche Kommentare und Anregungen zu fruheren Versionen dieses Aufsatzes danken wir Teilnehmern u.a. des Forschungsseminars der Deutschen Bundesbank (Marz 2004, Frankfurt), des Munsteraner Banken-Workshops (Mai 2004, Munster), der 66. Jahrestagung des Verbandes der Hochschullehrer fur Betriebswirtschaft (Juni 2004, Graz), der 19. Jahrestagung der European Economic Association (August 2004, Madrid), der 11. Jahrestagung der Deutschen Gesellschaft fur Finanzwirtschaft (Oktober 2004, Tubingen), des HypoVereinsbank Doktorandenseminars (November 2004, Paderborn), des 10. Symposiums Banking, Finance, and Insurance (Dezember 2004, Karlsruhe), der HypoVereinsbank Business Academy (April 2005, Munchen) sowie des Schmalenbach Arbeitskreises Strategieentwicklung und Controlling in Banken (Marz 2006, Frankfurt). Teile des vorliegenden Beitrages gehen auf gemeinsame Arbeiten mit Prof. Dr. Daniel Porath (Fachhochschule Mainz), Dr. Christoph Memmel (Deutsche Bundesbank) sowie PD Dr. Andreas Behr (Westfalische Wilhelms-Universitat Munster) zuruck. Alle verbleibenden Fehler und Unzulanglichkeiten gehen selbstverstandlich zu unseren Lasten.

SIFIs in the Cross Sea: How Are Large German Banks Adjusting to a Rough Economic Environment and a New Regulatory Setting?

In the aftermath of the financial crisis, policymakers at both global and national levels have begun to implement a range of regulatory measures designed to address systemic risk more consistently. One of the key elements of this has been a framework to contain the moral hazard and the negative externalities related to systemically important financial institutions (SIFIs). Regulators are seeking to make these institutions more resilient and to avoid future defaults. Another line of defense in this context is a more efficient restructuring and resolution regime. Against this backdrop, there has been increased interest on the part of policymakers in quantitative indicators measuring systemic importance. Based on indicator categories proposed by the Basel Committee on Banking Supervision (BCBS) we illustrate how, in principle, a set of indicators like this can be used to monitor the development of banks’ systemic importance over time. Overall, the set of indicators suggests that the systemic importance of large German banks has declined somewhat over the last 4 years. This finding appears to be driven mostly, however, by factors other than new policies directly addressing the too-important-to-fail-problem, chiefly the difficult economic environment. Therefore, it is still too early for a final judgment on the effectiveness of such policies. Given that credit rating-based measures of systemic government support suggest that large German banks are still benefitting from a substantial public subsidy, it may be necessary to consider additional policy measures over the medium term.

The Impact of Collateralized Debt Obligation Arbitrage on Tranching and Financial Leverage of Structured Finance Securities

For several years leading up to the outbreak of the financial crisis, growth in the use of arbitrage collateralized debt obligations (CDOs) was explosive. In this paper, we discuss potential sources of such arbitrage opportunities, in particular, potential gains due to “bond-like pricing”. For this purpose, we examine the risk profiles of CDOs in some detail, which reveals significant differences between CDO tranches and corporate bonds, in particular concerning a considerably increased sensitivity to systematic risks. Treating the structured products as single name instruments allows us to quantify these differences. We then price CDO tranches approximately with the Merton model, similar to corporate bonds. Using a sample CDO portfolio, we describe some opportunities for “CDO arbitrage” when investors consider corporate and CDO bonds as substitute investments and use bond-like pricing. We then discuss how tranches with high systematic risk can be generated and how CDO arrangers can exploit this to their advantage. It comes as no surprise that precisely these types of structures featured in many of the CDOs issued prior to the outbreak of the financial crisis.