Labour Markets During Crises Conference

The Labour Economics Group at NUI Maynooth is hosting a one-day conference on Labour Markets During Crises on Wednesday, July 2 in Maynooth.

Olive Sweetman will be presenting our ongoing work on how the crisis has affected the Irish labour market, and we’ve got a great line-up of external speakers too: Torben Andersen from the University of Aarhus, Pedro Martins from Queen Mary College, University of London, Mike Elsby from the University of Edinburgh and Ignacio Garcia Perez from Seville’s Universidade Pablo de Olavide. Full details are available here.

As it says on the flyer, registration is free, but you should email me if you plan to attend.

IMF: Ireland—Concluding Statement of the First Post-Program Monitoring Discussion

Available here.

Jason Furman at IIEA

The chair of the CEA will speak at the IIEA next Wednesday: details here.

Scots should recall the poverty of the Irish Free State

“A nationalist state has carved itself out of the UK before. It was a disaster” writes Kevin Toolis in the FT: article here.

Problematic Calibration of the EU Banking Sector Stress Test for Ireland

The details for the calibration of the EU-wide bank stress test are now available. Looking only at Ireland, and only at one of the key variables in the stress test, the calibration looks problematic. It may be coincidental that the Irish adverse scenario has been badly chosen; it might be that all the other member countries have reasonable calibrations.  If the others are as problematic as in the Irish case, this is not a reliable EU banking sector stress test.

Under the adverse scenario, Irish property prices are assumed to suffer a cumulative three-year drop of 3.03%; equivalent to a decline of 1.02% each year for three years in a row. Over the period covered by CSO data, 2005-2013, Irish residential property prices had an annual sample volatility of 11.7%. This in turn implies (under reasonable assumptions) a three-year volatility of 20.27%. In risk analysis it is conventional analytical shorthand to measure adverse outcomes in “x-sigma” units defined as the outcome as a multiple of the standard deviation. For an adverse scenario calibration, the assumed outcome is usually roughly a two-sigma or three-sigma event. Using a four-sigma shock would not be unusual (due to fat tails in some probability distributions). The EBA has calibrated the adverse price shock as a 0.1492-sigma event. That is not credible as an adverse scenario in a stress test.

Keep in mind that the stress test is meant to reassure market participants that even in an adverse scenario the Irish banks are sound. This test reassures us that if property prices fall by as much as one percent a year over the next three years, the banks have enough capital. In the case of a two-percent fall, there are no promises.

As a caveat, this does not mean that the Irish banks need equity capital. They have already had a credible stress test (in 2011) and a big capital injection. Also, the Irish property market although very volatile has a maximum likelihood price change which is positive over the next three years. However the asset class also has considerable “downside” potential and continued high volatility. Conventionally, at least in the case of portfolio risk analysis, the unconditional mean of a stressed variable is set equal to zero for risk analysis purposes. The EBA has chosen to build in a big positive benchmark price rise for Irish property assets, and this is part of the reason that the adverse scenario is unacceptably mild. In any case, this calibration is extremely mild as an adverse scenario and not reassuring for the EU-wide test.