The future for CoCos

Martijn Boermans, Sinziana Petrescu, Razvan Vlahu 17 November 2014

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CoCo issuances have risen strongly year-on-year since the first CoCos were issued in November 2009 (Figure 1). More than 20 European banks have so far issued almost 100 CoCos, mainly in the past two years. The majority of CoCos have been issued by British and Swiss banks (Figure 2). In the past year, banks from Denmark, Germany, France, Italy, and Spain issued CoCos to raise capital. Recently, CoCos with a temporary write-down mechanism (contingent on the bank having regained its financial health) have become more popular.

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Topics:  Financial markets

Tags:  CoCos, financial regulation, financial crises

Where danger lurks

Olivier Blanchard 03 October 2014

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Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.

The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.

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Topics:  Macroeconomic policy Monetary policy

Tags:  macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models

Shadow banking and the economy

Alan Moreira, Alexi Savov 16 September 2014

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Shadow banking, what is it good for? At the epicentre of the global financial crisis, shadow banking has become the focus of intense regulatory scrutiny. All reform proposals implicitly take a stance on its economic value.

According to the prevailing regulatory arbitrage and neglected risks views, it doesn’t have any – shadow banking is about evading capital requirements, exploiting ‘too big to fail’, and marketing risky securities as safe to unwitting investors. The right response is to bring shadow banking into the regulatory and supervisory regime that covers insured banks.

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Topics:  Financial markets Global crisis Macroeconomic policy

Tags:  shadow banking, banking, financial crisis, global crisis, regulatory arbitrage, liquidity transformation, financial stability, externalities, collateral, business cycle, financial regulation, financial fragility, liquidity, liquidity crunch

Model risk and the implications for risk management, macroprudential policy, and financial regulations

Jon Danielsson, Kevin James, Marcela Valenzuela, Ilknur Zer 08 June 2014

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Risk forecasting is central to macroprudential policy, financial regulations, and the operations of financial institutions. Therefore, the accuracy of risk forecast models – model risk analysis – should be a key concern for the users of such models. Surprisingly, this does not appear to be the case. Both industry practice and regulatory guidance currently neglect the risk that the models themselves can pose, even though this problem has long been noted in the literature (see for example Hendricks 1996 and Berkowitz and O’Brien 2002).

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Topics:  Financial markets

Tags:  financial crises, financial regulation, forecasting, risk management, Macroprudential policy

The roots of shadow banking

Enrico Perotti,

Date Published

Thu, 01/16/2014

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financial regulation, shadow banking

Overcoming the obstacles to international macro policy coordination is hard

Olivier Blanchard, Jonathan D Ostry, Atish R Ghosh 20 December 2013

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International policy coordination is like the Loch Ness monster – much discussed but rarely seen. Going back over the decades, and even further in history to the period between the two world wars, coordination efforts have been episodic.

Coordination seems to occur spontaneously in turbulent periods, when the world faces the prospect of some calamitous outcome and the key players are seeking to avoid cascading negative spillovers. In quieter times coordination is rarer, though not unheard of – the Louvre and Plaza accords are examples. 

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Topics:  Macroeconomic policy

Tags:  spillovers, fiscal consolidation, financial regulation, policy coordination, unconventional monetary policy, currency war

Regulation, supervision and the role of central banks

The Editors 20 December 2013

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The 2008 Global Crisis consisted of a financial crisis in the North Atlantic economies and a trade and expectations crisis in the rest of the world. Five years on, US and European policymakers as still struggling to put in place regulation and supervision regimes aimed at avoiding future crises.

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Topics:  Macroeconomic policy

Tags:  Central Banks, financial regulation, financial supervision

The LIBOR scandal: What’s next ? A possible way forward

Vincent Brousseau, Alexandre Chailloux, Alain Durré 09 December 2013

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After the first allegations of LIBOR manipulation in May 2012 – which eventually resulted in investigations into banks and individuals in various countries as of June 2012 – the reliability and credibility of unsecured reference rates in various currencies (the LIBOR in pounds, dollars, euros, and yen, and also the EURIBOR) have been severely questioned. With a view to restoring the credibility of these important reference interest rates, financial regulators have launched a broad consultation to study possible options to avoid similar manipulation in the future.

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Topics:  Financial markets

Tags:  interest rates, LIBOR, financial regulation

Assessing leverage in the financial sector through flow data

Javier Villar Burke 14 November 2013

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The build-up of leverage in the banking sector played a prominent role in the Global Crisis.1 A standard description the role of leverage corresponds with the typical profile of a financial bubble as reflected in the evolution of the banks of the Eurostoxx 50 (Figure 1). Surprisingly, the traditional measure of leverage in the banking sector does not show this profile at all (Figure 2).

Figure 1: Eurostoxx 50 Index

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Topics:  International finance

Tags:  deleveraging, financial regulation, global crisis, bank leverage

The impact of liquidity regulation on monetary-policy implementation

Clemens Bonner, Sylvester Eijffinger 14 October 2013

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In response to the recent financial crisis, the Basel Committee on Banking Supervision has drafted a new regulatory framework (henceforth Basel III) with the aim to achieve a more robust banking system. While it also tightens the existing requirements for capital, the proposal stands out as it is the first to attempt harmonised liquidity regulation across the globe. Specifically, the framework includes the short-term Liquidity Coverage Ratio (Liquidity Coverage Ratio) and the long-term Net Stable Funding Ratio.

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Topics:  Financial markets Monetary policy

Tags:  monetary policy, liquidity, financial regulation, BASEL III, liquidity coverage ratio

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