MoR Project

As part of this project you will need to answer all the questions shown below. You should assume
that your analysis is conducted on 1st December 2015. All the data you need to collect (see below)
will have to be consistent with such date. State any assumptions, if any, you need to make to carry
out your calculations and explain why, in your opinion, they are sensible.

A. Questions

1. Systemic risk.

a. Explain in no more than 200 words the purpose and findings of the European
Banking Authoritys (EBA) 2014 EU-wide stress testing exercise.1

b. Assume you are an analyst at the European Central Bank and are asked to determine
the systemic risk of the borrowers assigned to your group (see details in Section E).
All the borrowers are banks included in the 2014 stress testing exercise. To find a
banks systemic risk, compute the average loss (AL) of the banks stock when the
banking system is in distress.2 Use daily stock returns from 2007. The system is
assumed to be in distress when the return of the (value weighted) stock index
formed by all the banks in the relevant country reported in Table D.1 falls below its

95% VaR quantile ( ). Value weighting is done with the current market
capitalisation of each bank ( ). Formally, the definition of AL can be based on the
idea of expected shortfall,

= ( | < )

where is the stock return of bank i. Based on the above measure, which bank is
more systemic and why? Which factor drives your conclusion: bank size ( ) or

conditional loss (( | < ))?

c. In addition, determine the systemic risk of each bank in your sample with an
alternative indicator ( ) obtained by measuring the impact of the banks distress
on the banking system.

= ( | < )
=1

where n is the number of banks in the relevant country reported in Table D.1.3 Are
and consistent with one other? Should they be? Comment on the
differences and similarities, advantages and disadvantages of these two measures of
systemic risk.

2. Credit risk and stress testing.

1
See http://www.eba.europa.eu/-/eba-publishes-2014-eu-wide-stress-test-results
2
See Acharya and Richardson (2009), p. 290 for further details.
3
Though defined differently, SLi is based on the concept of CoVaR. See Adrian and Brunnermeier (2011) for
further details.

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 a. With the CreditMetrics model compute absolute VaR and ES, under normality and
with Monte Carlo, for the portfolio of loans assigned to your group. Time horizon 1
year. Confidence interval 95%. Assume the term structure of interest rates is flat and
equal, for each rating, to the 5 year zero coupon government bond yield of the
relevant country plus a credit spread.

b. In addition, compute the absolute VaR and ES under the following stress scenarios.
Consider the effect of each scenario separately and then all combined.
i. Assume stressed PDs computed as the maximum PD for each rating
observed over the 2007-2012 period in Moodys (2015) exhibit 30.
ii. Assume the 5 year zero government bond yield is the same as the 2014-
2016 average of the adverse scenario shown on Table 2 in ESRB (2014).
iii. Assume credit spreads increase, for each rating, by the same percentage as
the increase in PDs from the current value to the stressed values obtained
under scenario 2.b.i.
iv. Compute moving average correlations of stock returns for the borrowers in
your portfolio from 2007. The time window of the moving average should be
one year. Correlations should be computed with daily frequency. In
CreditMetrics assume the maximum moving average correlations for each
pair of borrowers over the observation period.

3. Essay (max 1,500 words): Comment on the implications of Brexit and Grexit for a UK bank
from a risk management perspective. Draw information from academic papers, industry
papers (e.g. from regulators and practitioners) and the financial press. The essay should
include an executive summary of no more than 100 words and a full list of references. The
summary and the references should not be included in the word count.

All calculations should be done in Excel. The spread sheet should be tidy and easy to read. The Excel
file should also include all the raw data indicated in the data section below. The data provider and
data identifiers (i.e. DataStream or Reuters securities codes) should be reported so that we can
verify what you have done. In the spreadsheet you should clearly explain what you are doing. You
should label data/results and comment on your calculations. Answers to each sub-question should
be summarised in a Word document, which should also include the essay. Each answer should be
clearly labelled with the number of the sub-question it refers to.

B. Data

This section will give you additional guidance on where to find relevant data.

1.1. Stock prices, adjusted for dividends and splits, can be found in Yahoo Finance, Bloomberg or
Reuters (help line 0800 442 000 for the last one). If you are unfamiliar with these data
services please contact the data providers for help.

1.2. Treasury yields and credit spreads from Bloomberg. See procedure in Section F.

1.3. Credit ratings for each loan in your portfolio. These can be found on the Moodys website
(www.moodys.com ). Simply select look up a rating from the Research and Ratings tab.
You will need to register with Moodys to have access to the rating information.
Registration is free. Alternatively, you can use Bloomberg or other data services available at
the Centre.

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 1.4. You can find PD and LGD information in Moodys (2015) Annual Default Study: Corporate
Default and Recovery Rates 1920-2014.

1.5. Balance sheet information for each company in your portfolio: See Yahoo Finance,
Bloomberg or balance sheet data from the web sites of the companies in your portfolio.

C. Admin

As part of the assessment for this project you will need to submit:
1. an Excel spreadsheet with all your calculations.
2. a Word document with a separate answer to all the above questions.
3. a Power Point presentation with a summary of your analysis.

By 2pm on Monday 11th April you should submit, via Blackboard, all the three documents above.
You can do so by going to the course documents of the Management of Risk module. Then select
group project and upload the files (you can find instructions on how to do this by clicking the
"student support" tab and checking the material under "Submitting work online via the Blackboard
Assignment tool"). The group number as well as the names of the group members should be clearly
indicated on all the documents.

The Power Point presentation should be divided into a number of parts equal to the number of
members in your team. These parts should be clearly indicated in the Power Point slides submitted
the day before the presentation. The examination panel will decide which student will present which
part, immediately before the beginning of your presentation.

Presentations will take place on Tuesday 19th and Wednesday 20th April 9:00 to 18:00 in G03-4 (see
presentation schedule below). Each presentation will last for approximately 30 minutes. In the first
20 minutes you should discuss the case with Power Point slides. Each team member must participate
in the presentation (approximately 4 minute speaking time each). In the remaining 10 minutes there
will be questions from the examination panel based on your case and the material covered in the
lectures.

In the presentation, you should briefly discuss your answers to the above questions (ideally 1-2
slides per question). You can support your answers with references to the financial press, academic
literature, industry reports, news reports, Bloomberg/Reuters reports, etc.. Try to keep your
presentation simple. You do not need to go through your calculations as these are available in your
spreadsheet, which will be evaluated separately. However, questions on the spreadsheet may be
asked by the examination panel so you should carry with you a copy of it and be ready to illustrate
how calculations have been done and under what assumptions. All group members should know
how each part of the analysis has been done. Each group member is expected to be able to answer
questions on any part of the analysis.

The assessment for this project will be based on the following parameters:

o Technical proficiency (40%): quality of analysis, clarity of Excel spreadsheet, calculations and
results in the spreadsheet appropriately commented on, clarity and completeness of summary
report (i.e. the Word document).
o Presentation (20%): clarity of slides, timing/planning (you are advised to plan your presentation
carefully as groups will not be allowed more than 20 minutes to go through their slides).

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o Group cohesion (20%): do group members give the impression they have been working together
as a team?
o Individual performance (20%): clarity, conciseness, self-confidence,

If you have queries concerning the project you can contact me during my normal office hours. Please
bear in mind that data collection is your responsibility and forms part of the assessment for your
project.

Misconduct

All team members should share the work as equally as possible. If a student is not doing his/her part
the rest of the team should let me know. Uncooperative students may be asked to work alone on a
new project.

Timetable of Presentations

Tuesday 19th April, G03-4.

Group 1: 09:00-09:30 Group 7: 14:10-14:40

Group 2: 09:40-10.10
Group 3: 10:20-10:50
Group 4: 11:10-11:40
Group 5: 11:50-12:20
Group 6: 13:30-14.00
Group 8: 14:50-15:20
Group 9: 15:40-16:10
Group 10: 16:20-16:50

Wednesday 20th April, G03-4.

Group 11: 09:00-09:30 Group 17: 14:10-14:40

Group 12: 09:40-10.10
Group 13: 10:20-10:50
Group 14: 11:10-11:40
Group 15: 11:50-12:20
Group 16: 13:30-14.00
Group 18: 14:50-15:20
Group 19: 15:40-16:10
Group 20: 16:20-16:50

Group 1 Group 2
Loren Mamedova Sean Harper
Nawin Vipawatanakul Thomas Bowrey
Yuxing Qu Hristo Marikin
Zhihao You Dina Ghanma
Jingjie Li Liviu Ioan

Group 3 Group 4
Vi Nguyen Terence Jim
Munira Md Ridza Calum Bruce
Gloria Tsvetanova Kwan Mok
Apoorva Ramanathan Berke Batman
Oluwabukola Smart Lucas Angibeau

4
Group 5 Group 6
Chun Chan Nathan Lee
Yick Hau Devi Hartuti
Yelena Volossatova Yongxi Liu
Nurgul Dilmanova Jieran Zhou
Hian Lim Juncheng Jiang

Group 7 Group 8
Yu Bu Jingwen Tao
Lin Peng Zhuolin Yang
Tongtong Lu Jingyu Yin
Tingting Chen Jialin Wu
Mo Sun Jin Zhu

Group 9 Group 10
Anqi Hu Jieming Zhang
Kaixuan Zhan Yiming Li
Zixiang Zhou Hengjie Luo
Wanyue Yang Lingqi Kong
Zhili Hou Dongyue Lu

Group 11 Group 12
Nurul Radin Yujia Qin
Yiwen Long Kunzhao Zhang
Cheng Zhang Lan Zhang
Victor Popescu Ruiping Hou
Yongyi Xue

Group 13 Group 14
Natik Gultekin Mitch Bishop
Mohamed Alqassab Thanh Nguyen
Yang Liu Karan Patel
Boh Wong Neil Stevenson
Louis Chattalas Mitchell Ward

Group 15 Group 16
Mohammad Alim Diogo-Jose Ventura
Liam Wilson Nefeli Kazakou
Edward Wilkins Giorgos Zinonos
David Taylor Elisavet Eftychiou
Nicholas Hill Christina Christoforou

Group 17
Meiyu Jin
Ming Xiong
Tianqi Zhou
Rumen Gargov
Jiahui Lyu

5
D. Stock indices

The Table below shows the banks that should be used to form stock indices for a selection of
countries in the EBA stress testing exercise.

Table D.1
Country Bank Name Symbol ISIN
France BNP Paribas BNP.PA FR0000131104
Groupe Crdit Agricole ACA.PA FR0000045072
Natixis (subsidiary of Groupe BPCE) KN.PA FR0000120685
Socit Gnrale GLE.PA FR0000130809
Germany Aareal Bank AG ARL.F DE0005408116
Deutsche Bank AG DBK.F DE0005140008
Commerzbank AG CBK.F DE000CBK1001
Italy Banca Carige S.P.A. CRG.MI IT0005108763
Banca Piccolo Credito Valtellinese CVAL.MI IT0000064516
Banca Popolare Dell'Emilia Romagna BPE.MI IT0000066123
Banca Popolare Di Milano PMI.MI IT0000064482
Banca Popolare di Sondrio BPSO.MI IT0000784196
Credito Emiliano S.p.A. CE.MI IT0003121677
Mediobanca MB.MI IT0000062957
Intesa Sanpaolo S.p.A. ISP.MI IT0000072618
UniCredit S.p.A. UCG.MI IT0004781412
Banca Monte dei Paschi di Siena BMPS.MI IT0005092165
Banco Popolare BP.MI IT0005002883
Unione Di Banche Italiane UBI.MI IT0003487029
Portugal Banco Comercial Portugus BCP.LS PTBCP0AM0007
Banco BPI BPI.LS PTBPI0AM0004
Spain Banco Santander SAN.MC ES0113900J37
Banco Bilbao Vizcaya Argentaria BBVA.MC ES0113211835
Banco Popular Espaol POP.MC ES0113790531
Banco de Sabadell SAB.MC ES0113860A34
Bankinter BKT.MC ES0113679I37
Sweden Nordea Bank AB (publ) NDA1V.HE FI0009902530
Skandinaviska Enskilda Banken AB SEB-A.ST SE0000148884
Svenska Handelsbanken AB SHB-A.ST SE0007100599
UK Royal Bank of Scotland Group plc RBS.L GB00B7T77214
HSBC Holdings plc HSBA.L GB0005405286
Barclays plc BARC.L GB0031348658
Lloyds Banking Group plc LLOY.L GB0008706128

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 E. Portfolios

The Table below shows the portfolios assigned to the groups. Each portfolio is made of two loans
with the characteristics reported in the Table. Assume that all loans are senior unsecured and
denominated in local currency. The loans are pure discount (i.e. zero coupon) obligations.
Table E.1
Maturity Principal
Group Country Borrower Symbol ISIN years Mln
1 France BNP Paribas BNP.PA FR0000131104 5 2
France Groupe Crdit Agricole ACA.PA FR0000045072 5 2
2 UK Royal Bank of Scotland Group plc RBS.L GB00B7T77214 5 3
UK HSBC Holdings plc HSBC.L GB0005405286 5 3
3 UK HSBC Holdings plc HSBC.L GB0005405286 5 4
UK Barclays plc BARC.L GB0031348658 5 4
4 France Natixis (subsidiary of Groupe BPCE) KN.PA FR0000120685 5 5
France Socit Gnrale GLE.PA FR0000130809 5 5
5 UK Barclays plc BARC.L GB0031348658 5 6
UK Lloyds Banking Group plc LLOY.L GB0008706128 5 6
6 Germany Deutsche Bank AG DBK.F DE0005140008 5 7
Germany Commerzbank AG CBK.F DE000CBK1001 5 7
7 Germany Aareal Bank AG ARL.F DE0005408116 5 8
Germany Commerzbank AG CBK.F DE000CBK1001 5 8
8 Italy Banca Carige S.P.A. CRG.MI IT0005108763 5 9
Italy Mediobanca MB.MI IT0000062957 5 9
9 Italy Credito Emiliano S.p.A. CE.MI IT0003121677 5 10
Italy Mediobanca MB.MI IT0000062957 5 10
10 Italy Banca Piccolo Credito Valtellinese CVAL.MI IT0000064516 5 2
Italy Intesa Sanpaolo S.p.A. ISP.MI IT0000072618 5 2
11 Italy Intesa Sanpaolo S.p.A. ISP.MI IT0000072618 5 3
Italy UniCredit S.p.A. UCG.MI IT0004781412 5 3
12 Italy UniCredit S.p.A. UCG.MI IT0004781412 5 4
Italy Banca Monte dei Paschi di Siena BMPS.MI IT0005092165 5 4
13 Italy Banca Monte dei Paschi di Siena BMPS.MI IT0005092165 5 5
Italy Banco Popolare BP.MI IT0005002883 5 5
14 Italy Banca Popolare Di Milano PMI.MI IT0000064482 5 6
Italy Unione Di Banche Italiane UBI.MI IT0003487029 5 6
15 Portugal Banco Comercial Portugus BCP.LS PTBCP0AM0007 5 7
Portugal Banco BPI BPI.LS PTBPI0AM0004 5 7
16 Spain Banco Santander SAN.MC ES0113900J37 5 8
Spain Banco Bilbao Vizcaya Argentaria BBVA.MC ES0113211835 5 8
17 Spain Banco Bilbao Vizcaya Argentaria BBVA.MC ES0113211835 5 9
Spain Banco Popular Espaol POP.MC ES0113790531 5 9
18 Spain Banco Popular Espaol POP.MC ES0113790531 5 10
Spain Banco de Sabadell SAB.MC ES0113860A34 5 10
19 Sweden Nordea Bank AB (publ) NDA1V.HE FI0009902530 5 2
Sweden Skandinaviska Enskilda Banken AB SEB-A.ST SE0000148884 5 2
20 Sweden Skandinaviska Enskilda Banken AB SEB-A.ST SE0000148884 5 3
Sweden Svenska Handelsbanken AB SHB-A.ST SE0007100599 5 3

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F. Appendix

Bloomberg procedure to download a borrowers 5 year credit spread

1. Go to Bloomberg and type on the command line the ISIN number of the borrower. Press
Enter
2. A list of securities issued by the borrower will be displayed. Click on the first entry, which
should be the borrowers equity.
3. Type DRSK on the command line. Press Enter. The screen that will be shown will give you
the 5-year model CDS spread (option 3) and the 5-year market CDS spread (option 4) in basis
points. Note down the market CDS spread. If it is not available, use the model CDS, which is
generated by Bloomberg. This will be your 5-year credit spread.

Bloomberg procedure to download the a countrys 5 year government bond zero coupon yield

1. In the command line type the name of the country of interest followed by sovereign zero 5
year, e.g. Germany sovereign zero 5 year. Then, among the list of options presented, click
on the 5 year one. Note that for the UK you should type UK sovereign strip curve on the
command line, and then select the relevant Treasury strip curve (this will give the zero
coupon curve across all maturities, including the 5 year one).
2. Enter HP on the command line. Press Enter.
3. The 5 year zero yield will be shown on the screen. Select the correct date, on top of the
screen (FROM/TO fields), to the get the relevant yield for the project.

References

Acharya and Richardson (2009) Restoring Financial Stability Wiley finance. Available at the UoR
library.

Gupton, G., C. Finger and M. Bhatia (1997) "CreditMetrics - Technical Document" available on
Blackboard.

European Systemic Risk Board (2014) EBA/SSM stress test: The macroeconomic adverse scenario.
https://www.eba.europa.eu/documents/10180/669262/2014-04-
29_ESRB_Adverse_macroeconomic_scenario_-_specification_and_results_finall_version.pdf

Moodys Investors Service (2015) Annual Default Study: Corporate Default and Recovery Rates,
1920-2014, available on Blackboard.