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A Time Series Analysis of Financial Fragility in the UK Banking System

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  • Charles Goodhart
  • Pojanart Sunirand
  • Dimitrios Tsomocos

Abstract

This paper extends the model proposed by Goodhart, Sunirand, and Tsomocos (2003, 2004a, b) to an infinite horizon setting. Thus, we are able to assess how the model conforms with the time series data of the U.K. banking system. We conclude that, since the model performs satisfactorily, it can be readily used to assess financial fragility given its flexibility, computability, and the presence of multiple contagion channels and heterogeneous banks and investors.
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Suggested Citation

  • Charles Goodhart & Pojanart Sunirand & Dimitrios Tsomocos, 2006. "A Time Series Analysis of Financial Fragility in the UK Banking System," Annals of Finance, Springer, vol. 2(1), pages 1-21, January.
    • Handle: RePEc:kap:annfin:v:2:y:2006:i:1:p:1-21
    DOI: 10.1007/s10436-005-0030-y
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    1. Chichilnisky, G. & Heal, G. M. & Tsomocos, D. P., 1995. "Option values and endogenous uncertainty in ESOPs, MBOs and asset-backed loans," Economics Letters, Elsevier, vol. 48(3-4), pages 379-388, June.
    2. Dimitrios P. Tsomocos & Lea Zicchino, 2012. "On Modelling Endogenous Default," Chapters, in: The Challenge of Financial Stability, chapter 6, pages 134-152, Edward Elgar Publishing.
    3. Dimitrios P. Tsomocos, 2012. "Equilibrium Analysis, Banking and Financial Instability," Chapters, in: The Challenge of Financial Stability, chapter 4, pages 61-97, Edward Elgar Publishing.
    4. Dimitrios Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," FMG Discussion Papers dp450, Financial Markets Group.
    5. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios Tsomocos, 2005. "Procyclicality and the new Basel Accord - banks’ choice of loan rating system," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 537-557, October.
    6. Charles Goodhart & Pojanart Sunirand & Dimitrios Tsomocos, 2006. "A model to analyse financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 107-142, January.
    7. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2005. "A risk assessment model for banks," Annals of Finance, Springer, vol. 1(2), pages 197-224, September.
    8. Martin Shubik, 2000. "The Theory of Money," Working Papers 00-03-021, Santa Fe Institute.
    9. Goodhart, Charles A. E. & Sunirand, Pojanart & Tsomocos, Dimitrios P., 2004. "A model to analyse financial fragility: applications," Journal of Financial Stability, Elsevier, vol. 1(1), pages 1-30, September.
    10. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, vol. 55(2), pages 123-150, June.
    11. Jorge Aseff & Manuel Santos, 2005. "Stock options and managerial optimal contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 813-837, November.
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    Cited by:

    1. C. Goodhart & M. Peiris & D. Tsomocos & A. Vardoulakis, 2010. "On dividend restrictions and the collapse of the interbank market," Annals of Finance, Springer, vol. 6(4), pages 455-473, October.
    2. Oriol Aspachs & Charles Goodhart & Dimitrios Tsomocos & Lea Zicchino, 2007. "Towards a measure of financial fragility," Annals of Finance, Springer, vol. 3(1), pages 37-74, January.
    3. Gunnar Bårdsen & Kjersti-Gro Lindquist & Dimitrios P. Tsomocos, 2012. "Evaluation of Macroeconomic Models for Financial Stability Analysis," Chapters, in: The Challenge of Financial Stability, chapter 3, pages 32-58, Edward Elgar Publishing.
    4. Mizuho Kida, 2008. "A macro stress testing model with feedback effects," Reserve Bank of New Zealand Discussion Paper Series DP2008/08, Reserve Bank of New Zealand.
    5. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Papers 13607, National Bureau of Economic Research, Inc.
    6. Swamy, Vighneswara, 2013. "Banking System Resilience and Financial Stability - An Evidence from Indian Banking," MPRA Paper 49597, University Library of Munich, Germany.
    7. Frederik J.C. Beyers & Allan De Freitas & Kojo A. Essel‐Mensah & Reyno Seymore & Dimitrios P. Tsomocos, 2022. "A computable general equilibrium model as a banking sector regulatory tool in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 90(1), pages 93-120, March.
    8. Dale F. Gray & Carlos J. García & Leonardo Luna & Jorge E. Restrepo, 2011. "Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 6, pages 159-197, Central Bank of Chile.
    9. Carlson Mark A & King Thomas & Lewis Kurt, 2011. "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-31, June.
    10. Andreev, M. & Pil'nik, N. & Pospelov, I., 2009. "Rational Expectation Model of Modern Russian Banking System and the Strong Turnpike Property," Journal of the New Economic Association, New Economic Association, issue 3-4, pages 72-96.
    11. Hryckiewicz, Aneta & Kryg, Natalia & Tsomocos, Dimitrios P., 2023. "Bank resolution mechanisms revisited: Towards a new era of restructuring," Journal of Financial Stability, Elsevier, vol. 67(C).
    12. Swamy, Vighneswara, 2013. "Banking System Resilience and Financial Stability," MPRA Paper 47512, University Library of Munich, Germany.
    13. Agustín Saade & Daniel Osorio & Dairo Estrada, 2007. "An equilibrium approach to financial stability analysis: the Colombian case," Annals of Finance, Springer, vol. 3(1), pages 75-105, January.
    14. Pham, Thach N. & Powell, Robert & Bannigidadmath, Deepa, 2021. "Systemically important banks in Asian emerging markets: Evidence from four systemic risk measures," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    15. Goodhart, C.A.E. & Sunirand, P. & Tsomocos, D.P., 2011. "The optimal monetary instrument for prudential purposes," Journal of Financial Stability, Elsevier, vol. 7(2), pages 70-77, June.
    16. Dairo Estrada & Daniel Osorio, 2006. "A Market Risk Approach to Liquidity Risk and Financial Contagion," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 24(50), pages 242-271, June.
    17. Claudio E. V. Borio & Kostas Tsatsaronis, 2005. "Accounting, prudential regulation and financial stability: elements of a synthesis," BIS Working Papers 180, Bank for International Settlements.
    18. Marco Lombardi & Mr. Raphael A Espinoza & Fabio Fornari, 2009. "The Role of Financial Variables in Predicting Economic Activity in the Euro Area," IMF Working Papers 2009/241, International Monetary Fund.
    19. David Pérez-Reyna, 2009. "Una aproximación para analizar la estabilidad financiera por medio de un DSGE," Temas de Estabilidad Financiera 040, Banco de la Republica de Colombia.
    20. Charles A.E. Goodhart & Dimitrios P. Tsomocos & Xuan Wang, 2023. "Support for small businesses amid COVID‐19," Economica, London School of Economics and Political Science, vol. 90(358), pages 612-652, April.
    21. Sorge, Marco & Virolainen, Kimmo, 2006. "A comparative analysis of macro stress-testing methodologies with application to Finland," Journal of Financial Stability, Elsevier, vol. 2(2), pages 113-151, June.
    22. Morni, Fareiny & Masih, Mansur, 2017. "Predicting stress in the banking sector: Malaysian evidence," MPRA Paper 108445, University Library of Munich, Germany.
    23. Eric Tymoigne, 2010. "Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility," Economics Working Paper Archive wp_605, Levy Economics Institute.
    24. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
    25. Mr. C. A. E. Goodhart & Miguel A. Segoviano & Boris Hofmann, 2006. "Default, Credit Growth, and Asset Prices," IMF Working Papers 2006/223, International Monetary Fund.

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    2. Gunnar Bårdsen & Kjersti-Gro Lindquist & Dimitrios P. Tsomocos, 2012. "Evaluation of Macroeconomic Models for Financial Stability Analysis," Chapters, in: The Challenge of Financial Stability, chapter 3, pages 32-58, Edward Elgar Publishing.
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    More about this item

    Keywords

    Financial fragility; Systemic risk; UK banking system; Default;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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