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Papers by Simone Casellina

Many studies have questioned the reliability of banks' calculations of riskweighted assets (RWA) ... more Many studies have questioned the reliability of banks' calculations of riskweighted assets (RWA) for prudential purposes. The significant divergences found at international level are taken as indicating excessive subjectivity in the current rules governing banks' risk measurement and capital requirement calculations. This paper emphasises the need for appropriate metrics to compare banks' riskiness under a risksensitive framework (either Basel 2 or Basel 3). The ratio of RWA to total assetswhich is widely used for peer analyses-is a valuable starting point, but when analysis becomes more detailed it needs to be supplemented by other indicators. Focusing on credit risk, we propose an analytical methodology to disentangle the major factors in RWA differences and, using data from Italian banks (given the inadequate degree of detail of Pillar 3 reports), we show that a large part of the interbank dispersion is explained by the business mix of individual institutions as well as the use of different prudential approaches (standardised and IRB). In conclusion we propose a simple data template that international banks could use to apply the framework suggested.

Journal of Economics and Business, Nov 1, 2020

Communications in Nonlinear Science and Numerical Simulation

Nonlinear Economic Dynamics Conference ‐ NED 2021, 2021

Workshop MDEF 2006, Modelli Dinamici per l'Economia e la Finanza, 2006

XXIX Convegno AMASES, 2005

Since January 1st 2018 the IFRS9-Financial Instruments (International Financial Reporting Standar... more Since January 1st 2018 the IFRS9-Financial Instruments (International Financial Reporting Standards; BCBE (2015) and ECB (2017)), issued in 2014 by the International Accounting Standard Board (IASB), substitutes the previous IASB39- Financial Instruments. The IFRS9 introduces new challenges for a more reliable and ex-ante well-balanced and prudential assessment of banking book credit risk, that has to be segmented and forward-looking at estimating bank's potential losses. On one hand, according to the accounting standard provision (IFRS9), the ex-ante assessment concerns expected losses due to impairment events of debtors, or rather significant improvements of their creditworthiness. On the other hand, according to the prudential standard (Credit Risk Directive, CRD (2013), and Credit Risk Regulation CRR (2013)), capital requirements should be consistent with unexpected losses (i.e. the difference between the ...

According to a not so weak analogy with the population dynamics, the credit portfolio of a bank c... more According to a not so weak analogy with the population dynamics, the credit portfolio of a bank can be conceived as a population which reshapes through time also under the effects of the business cycle forces. Day after day the population sample changes in size and configuration. New borrowers enter (births) the system while being allocated to given classes of credit risk. Persistent borrowers migrate across such classes due to changes in their creditworthiness if classified as performing or possible recovery from default positions. Some of them may also exit the system, either because they have reached the maturity (regular exits) or because the recovery process had been closed. The present paper presents a Montecarlo approach for the simulation of the credit portfolio of a bank as an of open system with renewal and migration. The outcomes are then compared with the standard approach for the estimation of transition matrices which assumes the system to be closed (i.e. the cohort ap...

Over the past 25 years, the market for housing finance in industrial countries has changed and de... more Over the past 25 years, the market for housing finance in industrial countries has changed and developed greatly and the literature concentrates primarily on two countries: the US and UK. As regards the euro area, the analysis and comparison of statistics on EU mortgage and housing markets are particularly interesting as well as data and information from several third countries such as the United States (see, e.g., the report of the European Mortgage Market Federation (EMF), the Working Papers of European Central Bank). The reactions of these markets to macroeconomic impulse as changes in monetary policy, in terms of both prices and quantities (i.e. interest rates level and numbers of new contracts), could have a large impact on the balance sheets of banks, families as well as construction industrial sectors (see EMF, 2012). In the context of Italian market, the Italian anti-usury law provides that a maximum threshold is calculated for interest rates to apply for funding. This threshold varies with the technical form of financing: mortgages, leasing, employee loans and more. Moreover, the threshold varies each quarter and it is obtained for each technical form, increasing the average rate charged in the previous quarter. Due to recent developments in credit markets, the mortgage one is considered since it represents one of the most important financial market, at least in Italy, where banks were more oriented toward a traditional business and families plan to buy a house as a primary investment option. The residential mortgages market presents several characteristics that make it attractive to employ microeconomics analytical tools to study its dynamics. A large number of producers (banks) supply highly standardized goods. Customers can easily obtain all the relevant information useful to compare different offers and banks have at their disposal a rich set of information to evaluate the credit worthiness of the counterparties. In this market two broad kinds of mortgages contracts are offered: fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs) and a meaningful and complete database of Banca d'Italia (BI) collects the relative information on Financial Institutions (FIs) in Italy (1997:q1-2011:q4) distinguishing between these two operations. This database shows that the relative importance of these markets recently displayed significant fluctuations since in 2005 fixed interest rate mortgage loans were about 10% while in 2009 they raised up to 70% and, moreover, interesting dynamics were observed in the market share for these contracts and in the difference of their prices. 1 The views expressed in the article are those of the authors and do not involve the responsibility of the their Institutions.

SSRN Electronic Journal, 2020

Fifteen years after the introduction of the Basel II Accord, which thoroughly revised the capital... more Fifteen years after the introduction of the Basel II Accord, which thoroughly revised the capital framework for banks, internal models are a full part of the supervisory toolkit and the risk management framework of financial institutions. The debate around models has gone through different phases: strong support right before Basel II, seeking greater risk-sensitivity of capital requirements; material concern after the financial crisis, in the light of the high variability of internal models’ outcomes; and awareness at the current juncture of their important role in risk management and banking supervision. Despite all initiatives taken by banking regulators and supervisors, a number of questions on banks’ risk-weighted assets are still open. The aim of this paper is to provide a different perspective on some of those questions and set the conditions for shifting the attention from simple comparison across banks to an economic interpretation of their risk measures.

SSRN Electronic Journal, 2021

In many standard derivation and presentations of risk measures like the Value-at-Risk or the Expe... more In many standard derivation and presentations of risk measures like the Value-at-Risk or the Expected Shortfall, it is assumed that all the model's parameters are known. In practice, however, the parameters must be estimated and this introduces an additional source of uncertainty that is usually not accounted for. The Prudential Regulators have formally raised the issue of errors stemming from the internal model estimation process in the context of credit risk, calling for margins of conservatism to cover possible underestimation in capital. Notwithstanding this requirement, to date, a solution shared by banks and regulators/supervisors has not yet been found. In our paper, we investigate the effect of the estimation error in the framework of the Asymptotic Single Risk Factor model that represents the baseline for the derivation of the credit risk measures under the IRB approach. We exploit Monte Carlo simulations to quantify the bias induced by the estimation error and we explore an approach to correct for this bias. Our approach involves only the estimation of the long run average probability of default and not the estimation of the asset correlation given that, in practice, banks are not allowed to modify this parameter. We study the stochastic characteristics of the probability of default estimator that can be derived from the Asymptotic Single Risk Factor framework and we show how to introduce a correction to control for the estimation error. Our approach does not require introducing in the Asymptotic Single Risk Factor model additional elements like the prior distributions or other parameters which, having to be estimated, would introduce another source of estimation error. This simple and easily implemented correction ensures that the probability of observing an exception (i.e. a default rate higher than the estimated quantile of the default rate distribution) is equal to the desired confidence level. We show a practical application of our approach relying on real data. (JEL C15, G21, G32)

Journal of Economics and Business, 2020

Structural Change and Economic Dynamics, 2019

In 2014 the International Accounting Standards Board (IASB) promulgated the current International... more In 2014 the International Accounting Standards Board (IASB) promulgated the current International Financial Reporting Standards 9-Financial Instruments (IFRS9) that draw new lines for an ex-ante, reliable, unified and well-balanced credit risk assessment. Among others, two principles are of interest to this paper: that of segmented and prospective estimation of expected credit losses. Within the frame of a micro-simulation approach, this paper focuses on these issues while considering the evolution of a bank portfolio. The paper presents an algorithmic procedure developed on a realistic dynamic credit risk migration rates modelling of a portfolio as an open system with entries and exits that is consistent with the segmented and prospective IFRS9 principles. Although operating at the aggregate level of the migration matrix, combining accounting principles inspired to those of the IFRS9-baseline with the open systems modelling, the main conclusion is that it allows for a more reliable provision and ex-ante and forward-looking estimation of expected losses.

Communications in Nonlinear Science and Numerical Simulation, 2017

Bancaria, Jul 1, 2013

The credibility of prudential metrics as proxies for risk, i.e. the backbone of the Basel capital... more The credibility of prudential metrics as proxies for risk, i.e. the backbone of the Basel capital framework, is often called into question. From a regulatory side, ongoing works aim at strengthening the risk-sensitivity of capital requirements but, at the same time, banks’ autonomy is often limited by supervisory action (e.g. capital add-ons and floors).This might give rise to an inconsistent and even more complex framework. We argue in favour of an alternative solution that requires an higher awareness of regulators of the limits of risks measurement in banking, distinguishing the activities whose risks are measurable from those for which they are not, at this stage at least