Discussion of "Finding Comfort in Stress Tests" by Fernandes, Igan and Pinheiro Alex Michaelides Imperial College and CEPR
October 2015
Alex Michaelides Imperial College and CEPR ()
October 2015
1 / 10
Motivation
Motivation starts from a Bernanke (2013) speech: “(Stress tests) provided anxious investors with something they craved: credible information about prospective losses at banks. Supervisors’public disclosure of the stress test results helped restore con…dence in the banking system and enables its successful recapitalization.”
Alex Michaelides Imperial College and CEPR ()
October 2015
2 / 10
Motivation
Motivation starts from a Bernanke (2013) speech: “(Stress tests) provided anxious investors with something they craved: credible information about prospective losses at banks. Supervisors’public disclosure of the stress test results helped restore con…dence in the banking system and enables its successful recapitalization.” Is complete transparency always and everywhere optimal?
Alex Michaelides Imperial College and CEPR ()
October 2015
2 / 10
Motivation
Motivation starts from a Bernanke (2013) speech: “(Stress tests) provided anxious investors with something they craved: credible information about prospective losses at banks. Supervisors’public disclosure of the stress test results helped restore con…dence in the banking system and enables its successful recapitalization.” Is complete transparency always and everywhere optimal? Answer partly depends on whether information is revealed during the process and this is what this paper does through an event-study analysis
Alex Michaelides Imperial College and CEPR ()
October 2015
2 / 10
Motivation
Motivation starts from a Bernanke (2013) speech: “(Stress tests) provided anxious investors with something they craved: credible information about prospective losses at banks. Supervisors’public disclosure of the stress test results helped restore con…dence in the banking system and enables its successful recapitalization.” Is complete transparency always and everywhere optimal? Answer partly depends on whether information is revealed during the process and this is what this paper does through an event-study analysis Conclusion of paper is that useful information is released to the market and therefore broadly consistent with Bernanke’s interpretation
Alex Michaelides Imperial College and CEPR ()
October 2015
2 / 10
Challenges
Will not argue with results: nice data sets and convincing empirical analysis
Alex Michaelides Imperial College and CEPR ()
October 2015
3 / 10
Challenges
Will not argue with results: nice data sets and convincing empirical analysis Instead focus on raising certain questions through my private experience following the events in Cyprus, and as (partly) reported in Economic Policy piece in 2014: “Cyprus: from boom to bail-in”
Alex Michaelides Imperial College and CEPR ()
October 2015
3 / 10
Challenges
Will not argue with results: nice data sets and convincing empirical analysis Instead focus on raising certain questions through my private experience following the events in Cyprus, and as (partly) reported in Economic Policy piece in 2014: “Cyprus: from boom to bail-in” Main question for authors in what follows: do they expect their results to hold always and everywhere? Basically, do they expect similar …ndings outside the US?
Alex Michaelides Imperial College and CEPR ()
October 2015
3 / 10
Transparency
June 2012 blog in Cyprus: do you need a stress-test done by Blackrock/PIMCO if the sovereign has no backstop? “Protecting bank executives” or “Common knowledge generating risks to …nancial stability”? And if risks to …nancial stability exist, who, how and for how long performs the stress tests?
Alex Michaelides Imperial College and CEPR ()
October 2015
4 / 10
Cost of Delay CDS spreads in Troika countries
2500
2000
1500
Basis1000 Points
500
0 10/10/2006
14/11/2007
18/12/2008
CYPRUS
Alex Michaelides Imperial College and CEPR ()
22/01/2010
GREECE
26/02/2011
IRELAND
01/04/2012
PORTUGAL
06/05/2013
10/06/2014
SPAIN
October 2015
5 / 10
Limits to transparency?
Can common knowledge create a bank run when backstop not pre-speci…ed? What would happen if same event study was done for Cyprus? Or Greece in summer of 2015? No Cumulative abnormal returns to talk about, just a rapid slide in value of bank shares
Alex Michaelides Imperial College and CEPR ()
October 2015
6 / 10
Importance of Politics
Even with independent central bank (doubt in many countries either legally or in practice), politics can be important in making holes bigger
Alex Michaelides Imperial College and CEPR ()
October 2015
7 / 10
Importance of Politics
Even with independent central bank (doubt in many countries either legally or in practice), politics can be important in making holes bigger Cost of delay in Cyprus in 2012 or in Greece in 2015
Alex Michaelides Imperial College and CEPR ()
October 2015
7 / 10
Regulatory arbitrage and cross-border banking
Blackrock had done analysis for Cypriot branches in Greece
Alex Michaelides Imperial College and CEPR ()
October 2015
8 / 10
Regulatory arbitrage and cross-border banking
Blackrock had done analysis for Cypriot branches in Greece PIMCO chosen to do analysis in Cyprus
Alex Michaelides Imperial College and CEPR ()
October 2015
8 / 10
Regulatory arbitrage and cross-border banking
Blackrock had done analysis for Cypriot branches in Greece PIMCO chosen to do analysis in Cyprus Redenomination/currency mismatch risk if Grexit happened
Alex Michaelides Imperial College and CEPR ()
October 2015
8 / 10
Regulatory arbitrage and cross-border banking
Blackrock had done analysis for Cypriot branches in Greece PIMCO chosen to do analysis in Cyprus Redenomination/currency mismatch risk if Grexit happened Methodology di¤erences between PIMCO and Blackrock (eg discount rate on assets)
Alex Michaelides Imperial College and CEPR ()
October 2015
8 / 10
Regulatory arbitrage and cross-border banking
Blackrock had done analysis for Cypriot branches in Greece PIMCO chosen to do analysis in Cyprus Redenomination/currency mismatch risk if Grexit happened Methodology di¤erences between PIMCO and Blackrock (eg discount rate on assets) Regulatory arbitrage and negative good will of 3.4 billion euros
Alex Michaelides Imperial College and CEPR ()
October 2015
8 / 10
Quality of institutional and administrative environment
Why does the central bank need to rely on black box private sector models? What does that tell you? Should heterogeneous private sector models be necessary or should central banks from other countries be performing this task?
Alex Michaelides Imperial College and CEPR ()
October 2015
9 / 10
Quality of institutional and administrative environment
Why does the central bank need to rely on black box private sector models? What does that tell you? Should heterogeneous private sector models be necessary or should central banks from other countries be performing this task? Does information leak during the process? Sovereign debt rating example (Michaelides et al, JFE 2015).
Alex Michaelides Imperial College and CEPR ()
October 2015
9 / 10
Quality of institutional and administrative environment
Why does the central bank need to rely on black box private sector models? What does that tell you? Should heterogeneous private sector models be necessary or should central banks from other countries be performing this task? Does information leak during the process? Sovereign debt rating example (Michaelides et al, JFE 2015). Can information be used for political advantage through media leakages?
Alex Michaelides Imperial College and CEPR ()
October 2015
9 / 10
Quality of institutional and administrative environment
Why does the central bank need to rely on black box private sector models? What does that tell you? Should heterogeneous private sector models be necessary or should central banks from other countries be performing this task? Does information leak during the process? Sovereign debt rating example (Michaelides et al, JFE 2015). Can information be used for political advantage through media leakages? Does …nancial stability and crisis management improve in such an environment?
Alex Michaelides Imperial College and CEPR ()
October 2015
9 / 10
Conclusion
Do authors expect their results to translate to non-US environments? Like the Eurozone crisis for example?
Alex Michaelides Imperial College and CEPR ()
October 2015
10 / 10
