Since the Global Crisis, critics have questioned why regulatory agencies failed to prevent it. This column argues that the US Federal Reserve was aware of potential problems brewing in the financial system, but was largely unconcerned by them. Both Greenspan and Bernanke subscribed to the view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the damage ex post. The scripted nature of FOMC meetings, the focus on the Greenbook, and a ‘silo’ mentality reduced the impact of dissenting views.
Stephen Golub, Ayse Kaya, Michael Reay, 08 September 2014
Christopher Findlay, Silvia Sorescu, Camilo Umana Dajud, 29 August 2014
Countries facing rising risk premiums on their debt have recognised the need for structural reform, but some politicians have argued that austerity is necessary in the short run because structural reform takes too long. This column argues that financial markets can bring forward the benefits of structural reform, and therefore that such reforms should be given greater weight in the package of crisis responses.
Anne-Laure Delatte, Julien Fouquau, Richard Portes, 17 April 2014
In retrospect, it is striking that the sovereign bond spreads of peripheral Eurozone countries surged while the economic conditions were gradually deteriorating. This column provides a new explanation for this phenomenon. It suggests that the markets in credit default swap indices have exacerbated shocks to economic fundamentals. The same change in fundamentals had a higher impact on the spread during the crisis period than it had previously.
Joshua Aizenman, Mahir Binici, Michael M Hutchison, 04 April 2014
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
Evangelos Benos, Anne Wetherilt, Filip Zikes, 02 December 2013
Like all other over-the-counter derivatives markets, the UK credit default swap (CDS) market has traditionally been opaque, and important questions have been largely unanswered: How do UK CDS market participants trade? Who are the main players? And how did they behave during the financial crisis? Based on newly available transactions data, this column gives some first answers to these questions.
Anne-Laure Delatte, 23 July 2012
Uncovered sovereign credit default swaps will be permanently prohibited in the EU by November 2012. While empirical evidence on their destabilising role is mounting, this column argues that the EU regulation will have only a limited effect, as a number of inconsistencies create regulatory arbitrage and opportunities to circumvent the ban.
Richard Portes, 30 April 2012
Once upon a time, credit default swaps were a form of insurance held by investors who also owned the underlying asset. But this column argues that the market has now become overwhelmed by ‘naked CDSs’ that allow speculators to make bets on the future of corporates and sovereigns – bets that can be wildly destabilising. This column calls for a ban on naked CDSs.
Yeon-Koo Che, Rajiv Sethi, 04 September 2010
The role of naked credit default swaps in the global crisis is an ongoing source of controversy. This column seeks to add some formal analysis to the debate. Its model finds that speculative side bets can have significant effects on economic fundamentals, including the terms of financing, the likelihood of default, and the scale and composition of investment expenditures.
Mathieu Gex , Virginie Coudert , 13 October 2008
Credit default swaps (CDSs) – bilateral insurance contracts against bond default – are now in the eye of the storm. Worries about counterparty risk are mounting among market players and is multiplied by the lack of global netting. This column discusses lessons from the 2005 crisis in CDSs.