There has been much talk about using macroprudential policy to manage systemic risk and reduce negative spillovers, but there is little agreement on how it could be operationalised. This column highlights the findings of a new book on the topic and offers a framework for operationalising macroprudential policy. Macroprudential measures, together with higher capital requirements, could be used to tame the build-up of leverage and credit booms in order to prevent financial crises.
Xavier Freixas, Luc Laeven, José-Luis Peydró, Wednesday, August 5, 2015
Gaston Gelos, Hiroko Oura, Saturday, July 25, 2015
The growth of the asset management industry has raised concerns about its potential impacts on financial stability. This column assesses the systemic risk created by fund managers’ incentive problems and a first-mover advantage for end investors. Fund flows and fund ownership affect asset prices, and fund managers’ behaviour can amplify risks. This lends support to the expansion and strengthening of industry oversight, both at the individual fund and market levels.
Esa Jokivuolle, Jussi Keppo, Xuchuan Yuan, Thursday, July 23, 2015
Bankers’ compensation has been indicted as a contributing factor to the Global Crisis. The EU and the US have responded in different ways – the former legislated bonus caps, while the latter implemented bonus deferrals. This column examines the effectiveness of these measures, using US data from just before the Crisis. Caps are found to be more effective in reducing the risk-taking by bank CEOs.
Philippe Aghion, Monday, January 19, 2015
Jean Tirole’s Nobel was for his transformative work on industrial organisation. In this Vox Talk Philippe Aghion talks about Tirole’s contribution. The interview was recorded in November 2014.
Jon Danielsson, Sunday, January 18, 2015
The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inherent weaknesses of the regulator-approved standard risk models used in financial institutions. These models under-forecast risk before the announcement and over-forecast risk after the announcement, getting it wrong in all states of the world.
Wouter den Haan, Tuesday, December 23, 2014
Macroecomics has changed in a number of ways since the global crisis. For example, there is now more emphasis on modeling the financial sector, self-fulfilling panics, herd behaviour and the new role of demand. This Vox Talk discusses these changes as well as those areas in macroeconomics that are currently perhaps not researched enough. Wouter den Haan explains the inadequacy of the conventional 'rational expectations' approach, quantitative easing, endogenous risk and deleveraging and refers to current CEPR research that reflects the changes. He concludes by reminding us that the 'baby boomers' issue could be the basis of the next crisis.
Martijn Boermans, Sinziana Petrescu, Razvan Vlahu, Monday, November 17, 2014
Contingent convertible capital instruments – also known as CoCos – have grown in popularity since the financial crisis. This column suggests that the search for yield and the tightening of capital requirements have resulted in a new wave of CoCo issuances. While many of their features and risks remain unclear, CoCos may act as a buffer that makes banks more resilient in times of crisis.
Olivier Blanchard, Friday, October 3, 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Alan Moreira, Alexi Savov, Tuesday, September 16, 2014
The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.
Jon Danielsson, Kevin James, Marcela Valenzuela, Ilknur Zer, Sunday, June 8, 2014
Risk forecasting is central to financial regulations, risk management, and macroprudential policy. This column raises concerns about the reliance on risk forecasting, since risk forecast models have high levels of model risk – especially when the models are needed the most, during crises. Policymakers should be wary of relying solely on such models. Formal model-risk analysis should be a part of the regulatory design process.
Enrico Perotti, Thursday, January 16, 2014
The ‘shadow banking’ sector is a loose title given to the financial sector that exists outside the regulatory perimeter but mimics some structures and functions of banks. CEPR Policy Insight 69 looks into what we have learned about shadow banking since the Global Crisis.
Olivier Blanchard, Jonathan D Ostry, Atish R Ghosh, Friday, December 20, 2013
The world has just been through a period of unprecedented macro policy activism. More is set to come as central banks exit unconventional policies, governments fix their fiscal positions, and financial regulations are reformed. These national policies have undeniable international spillovers. This column argues that the setting is ripe for more cooperation and suggests some ways forward, even if international macro policy coordination may continue to be heard about more often than it is seen.
The Editors, Friday, December 20, 2013
Maintaining financial stability is a major concern and central banks have been increasingly involved in assuring it. This column introduces a CEPR Policy Insight written by Italy’s central bank governor on the post-Crisis role of central banks in financial regulation and supervision.
Vincent Brousseau, Alexandre Chailloux, Alain Durré, Monday, December 9, 2013
In the aftermath of the LIBOR scandal, it is important to re-establish a credible reference rate for the pricing of financial instruments and of wholesale and retail loans. The new candidate must meet the five criteria suggested by the Bank for International Settlements – reliability, robustness, frequency, availability, and representativeness – in all circumstances. This column argues that strengthening governance and/or adopting a trade-weighted reference rate is probably the fastest approach, but not necessarily sufficient for a resilient reference rate in the long run.
Javier Villar Burke, Thursday, November 14, 2013
This column discusses the concept of leverage, its components and how to measure and monitor it. It proposes the marginal leverage ratio – a valuable supplement to the traditional absolute leverage ratio – as an early warning tool to signal episodes of excessive leverage and to determine if and how banks deleverage. By capturing the dynamics of leveraging-deleveraging cycles better than the absolute leverage ratio, the marginal leverage ratio provides an indication of risk that a stable absolute leverage ratio can conceal.
Clemens Bonner, Sylvester Eijffinger, Monday, October 14, 2013
Liquidity requirements like the Basel III Liquidity Coverage Ratio are aimed at reducing banks’ reliance on short-term funding. This may have implications for the implementation of monetary policy, which usually operates through short-term interbank interest rates. This column looks at how banks reacted to the Dutch quantitative liquidity requirement. The authors conclude that liquidity requirements will only reduce overnight interest rates if they cause an aggregate liquidity shortage.
Sheila Bair, Sunday, June 9, 2013
Does anybody have a clear vision of the desirable financial system of the future? This column has one. It gives simple answers to 12 simple questions panellists at a recent IMF conference failed to answer.
Nicolas Véron, Tuesday, March 5, 2013
The EU was once a champion of global financial regulatory convergence. What happened? This column argues that the EU should drop its lacklustre inertia and pursue Basel III because, in the end, it’s in its interests to comply. EU policymakers ought to aim at enabling the adoption of a Capital Requirements Regulation that would be fully compliant with Basel III.
Edward J Kane, Wednesday, January 30, 2013
Do financial institution managers only owe enforceable duties of loyalty, competence and care to their stockholders and explicit creditors, but not to taxpayers or government supervisors? This column argues that in the current information and ethical environments, regulating accounting leverage cannot adequately protect taxpayers from regulation-induced innovation. We ought to aim for establishing enforceable duties of loyalty and care to taxpayers for managers of financial firms. Authorities need to put aside their unreliable, capital proxy: they should measure, control, and price the ebb and flow of safety-net benefits directly.
Viral Acharya, T Sabri Öncü, Monday, January 14, 2013
Internationally prominent economists and politicians have been pushing for effective implementation and better coordination of the new financial regulations currently under construction across the globe. This columns argues that at a time of crisis, financial regulators were forced to act on systemically important assets and liabilities, rather than just on the individual financial institutions holding them. A key turning point towards better regulation will be when we recognise the need for such action ahead of time, building the essential infrastructure that ensures excessive risk-taking is discouraged.