Elizaveta Sizova

Banking, Risk Management, Financial Regulation, Financial Markets, Corporate Finance

Strategic Risk-Modelling by Banks: Evidence from Inside the Black Box (with Mike Mariathasan and Ouarda Merrouche)

Regulators condition bank capital on risk but struggle to measure risk accurately. Capital requirements thus rely heavily on inputs from banks’ internal risk models. Using novel hand-collected data we show that banks’ modelling choices alter the level and accuracy of reported Value-at-Risk (VaR). There are systematic differences in VaR and VaR violations for the chosen simulation method, holding period and historical data size. Hence, banks can get systematically lower capital requirements through their modelling choices. Our findings support the hypothesis of strategic modelling and corroborate recent evidence on banks’ adoption of similar models making the financial system more vulnerable.

Rebalancing of Currency Hedging and the Impact on Exchange Rates (with Olav Syrstad and Ingebjørg Hansen Sævareid)

We study the connection between currency-hedged investments of non-bank financial institutions (NBFIs), global return and exchange rates. A change in the value of foreign investments leads institutional investors to buy or sell domestic currency in order to align with the preferred hedge ratio. To identify this rebalancing mechanism, we use transaction-level data for Norwegian NBFIs. We find that lower portfolio return leads investors to sell domestic currency that in turn results in the depreciation of G10 currencies against USD. Our findings establish a relevant determinant of exchange rates in the economies with large currency-hedged foreign investments.

Norges Bank Governor's Speech

Central Bank Liquidity Lines: Implications for Financial Markets and Banks' Behaviour

Central bank liquidity lines have been on a rise since the global financial crisis as a tool to provide foreign currency liquidity and prevent negative spillovers in times of stress. Through these lines, the source central bank provides source currency to recipient-country banks via the recipient central bank who bears credit risk and monitors these banks. Despite its large size, empirical evidence on local effects of central bank liquidity lines is limited. I study the Foreign and International Monetary Authorities (FIMA) Repurchase Facility introduced by Fed in 2020 and how the Hong Kong Monetary Authority (HKMA)’s unique use of this facility has affected local financial markets and banking sector. Using daily hand-collected data from the HKMA press releases, I document worse financial market and bank equity performance following the HKMA’s change in terms of the facility and US dollar allotments in 2020. At the same time, I find support for local currency appreciation suggesting an important policy trade-off.

Currency Mismatch on Bank Balance Sheets and Exchange Rates (with Aleksei Oskolkov and Marcos Sorá)

Does Credit Market Structure Matter for Monetary Policy Transmission? (with Peter Han)