THE ART OF SIMULATION
1 Banking Risk 1 11 Single Bank Risk 4 12 The Basel Committee on Banking Supervision Approach to Regulation 14 121 The Basel I Framework 16 122 The Basel II Framework 18 123 Credit Counterparty Risk 20 124 Market Risk 25 125 Operational Risk 28 126 Basel III 30 13 Banking Risk Modeling and Stress Testing 33 14 Contagion 36 15 System Modeling 41 2 Simulation Models 45 21 Simulating Shocks: Idiosyncratic Shocks, or Exogenous Failure of Individual Banks 49 22 Simulating Shocks: Stress Testing 54 23 Simulating Shocks: Systematic Common Shocks 56 24 Simulating Shocks: Common Shocks 58 241 The Monte Carlo Method 59 242 Monte Carlo-Based Simulation Models 63 25 Estimation of Losses Variability and Assets Riskiness 70 251 Sector-Historical Approach 71 252 Market Values-Based Approach 72 253 Capital Requirements-Based Approach 76 254 Ratings-Based Approach 79 255 CAMELS—Z-Score Approach 80 26 Simulating Shocks: Correlated Risk Factors 82 27 Simulating Shocks: Combining Idiosyncratic and Common Shocks 87 28 Correlation 89 29 The Interbank Matrix 98 291 Interbank Matrix Estimation 110 292 Robustness Checks on the Maximum Entropy Hypothesis 119 210 Loss Given Default 127 2101 Constant LGD 128 2102 Stochastic LGD 129 2103 Endogenous LGD 130 211 Interbank Losses Attribution 132 212 Contagion Simulation Methods 133 213 Data and Applied Problems 140 3 Real Economy, Sovereign Risk, and Banking Systems Linkages 149 31 Effects of Bank Riskiness on Sovereign Risk 150 32 Effects of Sovereign Risk on Bank Riskiness 153 33 Linkages to the Real Economy 154 34 Modeling 156 341 Banks 156 342 Public Finances 158 35 Implementation 159 351 Public Finances 159 352 Banks 160 4 Applications 163 41 Testing for Banks–Public Finances Contagion Risk 163 42 Banking Systems Regulation What-If Tests 164 43 Banks’ Minimum Capital Requirements: Cost–Benefit Analysis 169 431 Costs 170 432 Benefits 172 44 Deposits Guarantee Schemes (DGS)/Resolution Funds Dimensioning 174 441 DGS 174 442 Resolution Funds 178 45 Computing Capital Coverage from Assets PD and Bank PD 178 46 Computing Banks Probability to Default from Capital Coverage and Assets PD 180 47 Risk Contributions and SiFis 182 471 Value at Risk (VaR) 183 472 Expected Shortfall (ES) 185 473 Conditional Value at Risk (CoVaR) 186 474 Marginal Expected Shortfall (MES) 189 475 Shapley Values 191 476 The Leave-One-Out Approach 193 477 Starting and Fueling Contagion: Risk Contribution Roles 199 48 The Regulator’s Dilemma 202