Retrenchment Strategy Essay Example for Free

Retrenchment Strategy EssaySince the beginning of the US pecuniary crisis in 2007, regulators in the United States and Europe have been frustrated by the difficulty in identifying the danger pictorial matters at the largest and most levered financial institutions. Yet, at the time, it was unclear how such data might have been utilise to make the financial system safer. This paper is an attempt to surface simple ways in which this development can be used to understand how deleveraging scenarios could play out. To do so the authors develop and test a model to analyze financial sector stability under different configurations of leverage and risk exposure across banks. They then apply the model to the largest financial institutions in Europe, focusing on banks exposure to free bonds and using the model to evaluate a number of policy proposals to reduce general risk.When analyzing the European banks in 2011, they show how a policy of targeted equity injections, if distributed appropriately across the most systemic banks, can importantly reduce systemic risk. The approach in this paper fits into, and contributes to, a growing literature on systemic risk. Key concepts include * This model can simulate the outcome of various policies to reduce fire bargain spillovers in the midst of a crisis. * Size caps, or forced mergers among the most exposed banks, do not reduce systemic risk very much. * However, modest equity injections, if distributed appropriately between the most systemic banks, can cut the vulnerability of the banking sector to deleveraging by more than half. * The model can be satisfactory to monitor vulnerability on a dynamic basis using factor exposures. About module in this ArticleRobin Greenwood is a Professor in the Finance unit at Harvard handicraft School. *Author AbstractWhen a bank experiences a negative shock to its equity, maven way to recurrence to target leverage is to sell assets. If asset sales occur at depressed prices, then one banks sales may impact other banks with common exposures, resulting in contagion. We propose a simple material that accounts for how this effect adds up across the banking sector. Our framework explains how the distribution of bank leverage and risk exposures contributes to a mannikin of systemic risk. We compute bank exposures to system-wide deleveraging, as well as the spillover of a single banks deleveraging onto other banks. We show how our model can be used to evaluate a variety of crisis interventions, such as mergers of heavy and bad banks and equity injections. We apply the framework to European banks vulnerable to sovereign risk in 2010 and 2011.