Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/202857 
Year of Publication: 
2017
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 117
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
This paper investigates fire sales triggered by regulatory cliff effects induced by the loss of Capital Requirements Regulation (CRR) compliance on covered bonds. The loss of CRR compliant status leads to banks holding these covered bonds to lose several regulatory advantages, one consequence being a lower solvency. In our analysis, following the loss of CRR compliance, banks sell off their covered bonds in a fire sale, in an attempt to return to their initial solvency, resulting in losses of equity for the system as a whole. Further, we find that, for price impacts larger than a critical threshold, even small shocks lead to explosive fire sales and large losses of equity. While these losses can be averted if the banks allow their solvency levels to fall temporarily, other regulations, such as those relating to large exposures to other banks, could still trigger similar fire sales.
Abstract (Translated): 
Dette papir undersøger brandudsalg udløst af tab af SDO-status på realkreditobligationer - en såkaldt regulatorisk klippe-effekt. Tabet af SDO-status leder til, at bankerne, der holder obligationerne, mister flere regulatoriske fordele, som bl.a. sænker deres solvens. I vores analyse starter bankerne, efter tabet af SDO-status, et brandudsalg af realkreditobligationer i et forsøg på at nå tilbage til deres oprindelige solvens. Dette salg medfører kurstab, der resulterer i egenkapitaltab til systemet som helhed. Yderligere finder vi, at når prisfølsomheden er over et kritisk niveau, leder selv små stød til eksplosive brandudsalg og store tab af egenkapital. Selvom disse tab kan undgås, hvis bankerne tillader deres solvens midlertidigt at falde, kan andre regulative krav, fx i forhold til store engagementer mod andre kreditinstitutter, stadig lede til sammenlignelige brandudsalg.
Subjects: 
Fire Sales
Systemic Risk
Covered Bonds
Regulation
JEL: 
G18
G21
Document Type: 
Working Paper

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