As the recent Financial Stability Board decision on loss-absorbing capital shows, repairing the financial system is still a work in progress. This column reviews the author’s new book on the matter, Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risks. It argues that financial institutions should be required to put up capital against the mismatch between each type of risk they hold and their natural capacity to hold that type of risk.
Avinash Persaud, Friday, November 20, 2015 - 00:00
Philip R. Lane, Monday, September 7, 2015 - 00:00
In the lead up to the global financial crisis, there was a substantial credit boom in advanced economies. In the Eurozone, cross-border flows played an especially important role in the boom-bust cycle. This column examines how the common currency and linkages between member states contributed to the Eurozone crisis. A very strong relationship between pre-crisis levels of external imbalances and macroeconomic performance since 2008 is observed. The findings point to the importance of delinking banks and sovereigns, and the need for macro-financial policies that manage the risks associated with excessive international debt flows.
Esa Jokivuolle, Jussi Keppo, Xuchuan Yuan, Thursday, July 23, 2015 - 00:00
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 Karam, Ouarda Merrouche, Moez Souissi, Rima Turk, Monday, February 2, 2015 - 00:00
Tomohiko Inui, Keiko Ito, Daisuke Miyakawa, Tuesday, January 6, 2015 - 00:00
Morris Goldstein, Tuesday, November 18, 2014 - 00:00
Nicola Gennaioli, Alberto Martin, Stefano Rossi, Saturday, July 19, 2014 - 00:00
There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.
Anil K Kashyap , Dimitri Tsomocos, Alexandros Vardoulakis, Friday, July 18, 2014 - 00:00
Do the extant workhorse models used in policy analysis support macroprudential and macrofinancial policies? This column argues that this is not the case and describes a new macroprudential model that stresses the special role played by banks. The model also accounts for two, often neglected, key principles of the financial systems. Some of the findings of the model could carry over to other, more general settings that satisfy these two principles.
Mark Mink, Jakob de Haan, Saturday, May 24, 2014 - 00:00
To date, much uncertainty exists about how large the spillovers would be from the default of a systemically important bank. This column shows evidence that the market values of US and EU banks hardly respond to changes in the default risk of banks that the Financial Stability Board considers globally systemically important (G-SIBs). However, changes in all G-SIBs’ default risk explain a substantial part of changes in bank market values. These findings have implications for financial-crisis management and prevention policies.
Martin Brown, Stefan Trautmann, Razvan Vlahu, Thursday, April 10, 2014 - 00:00
Contagious bank runs are an important source of systemic risk. However, with observational data it is near-impossible to disentangle the contagion of bank runs from other potential causes of correlated deposit withdrawals across banks. This column discusses an experimental investigation of the mechanisms behind contagion. The authors find that panic-based deposit withdrawals can be strongly contagious across banks, but only if depositors know that the banks are economically related.
Joseph Noss, Priscilla Toffano, Sunday, April 6, 2014 - 00:00
The impact of tighter regulatory capital requirements during an economic upswing is a key question in macroprudential policy. This column discusses research suggesting that an increase of 15 basis points in aggregate capital ratios of banks operating in the UK is associated with a median reduction of around 1.4% in the level of lending after 16 quarters. The impact on quarterly GDP growth is statistically insignificant, a result that is consistent with firms substituting away from bank credit and towards that supplied via bond markets.
Charles W Calomiris, Friday, March 21, 2014 - 00:00
Charles Calomiris talks to Romesh Vaitilingam about his recent book, co-authored with Stephen Haber, ‘Fragile by Design: The Political Origins of Banking Crises and Scarce Credit’. They discuss how politics inevitably intrudes into bank regulation and why banking systems are unstable in some countries but not in others. Calomiris also presents his analysis of the political and banking history of the UK and how the well-being of banking systems depends on complex bargains and coalitions between politicians, bankers and other stakeholders. The interview was recorded in London in February 2014.
Viral Acharya, Friday, March 14, 2014 - 00:00
Viral Acharya talks to Viv Davies about his recent work with Sascha Steffen that, using publicly available data and a series of shortfall measures, estimates the capital shortfalls of EZ banks that will be stress-tested under the proposed Asset Quality Review. They also discuss the difference in accounting rules between US and EZ banks and the future potential for banking union in the Eurozone. The interview was recorded by phone on 25 February 2014.
Clemens Bonner, Thursday, February 6, 2014 - 00:00
Liquidity risks can be a primary source of bank failures. As such, there are arguments not to rely on a single metric for providing supervision. This column describes research on detailed cases of failed and near-failed institutions, which helps highlight gaps in current practices of liquidity stress testing. It also gives guidance on how to design liquidity stress tests. Deposit insurance coverage, the heterogeneity of lending commitments, distinction between different types of repos, committed facilities, and derivative transactions should receive increased attention when designing liquidity stress tests.
Viral Acharya, Sascha Steffen, Friday, January 17, 2014 - 00:00
The Single Supervisory Mechanism – a key pillar of the Eurozone banking union – will transfer supervision of Europe’s largest banks to the ECB. Before taking over this role, the ECB will conduct an Asset Quality Review to identify these banks’ capital shortfalls. This column discusses recent estimates of these shortfalls based on publicly available data. Estimates such as these can defend against political efforts to blunt the AQR’s effectiveness. The results suggest that many banks’ capital needs can be met with common equity issuance and bail-ins, but that public backstops might still be necessary in some cases.
Willem Buiter, Friday, January 10, 2014 - 00:00
Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.
Friðrik Már Baldursson, Richard Portes, Monday, January 6, 2014 - 00:00
In 2008, Icelandic banks were too big to fail and too big to save. The government’s rescue attempts had devastating systemic consequences in Iceland since – as it turned out – they were too big for the state to rescue. This column discusses research that shows how this was a classic case of banks gambling for resurrection.
Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay, Monday, November 25, 2013 - 00:00
Higher asset prices increase the value of firms’ collateral, strengthen banks’ balance sheets, and increase households’ wealth. These considerations perhaps motivated the Federal Reserve’s intervention to support the housing market. However, higher housing prices may also lead banks to reallocate their portfolios from commercial and industrial loans to real-estate loans. This column presents the first evidence on this crowding-out effect. When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment.
Deniz Anginer, Asli Demirgüç-Kunt, Harry Huizinga, Kebin Ma, Sunday, November 10, 2013 - 00:00
Bank capitalisation determines the probability of a bank failure. This column discusses how bank’s corporate governance affects its capitalisation. Corporate governance, in which the bank acts in the interest of its shareholders, is defined as a good one. Such governance, however, can lead to lower bank capitalisation. It also has possibly negative implications for financial stability.
Thomas Huertas, María J Nieto, Thursday, September 19, 2013 - 00:00
To end moral hazard, investors, not taxpayers, should bear the loss associated with bank failures. Recently, the EU took a major step in this direction with the Banking Recovery and Resolution Directive. This column argues that this is a game changer. It assures through the introduction of the bail-in tool that investors, not taxpayers, will primarily bear the cost of bank failures, and it opens the door to resolving banks in a manner that will not significantly disrupt financial markets.