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.
Anil K Kashyap , Dimitri Tsomocos, Alexandros Vardoulakis, 18 July 2014
Mark Mink, 24 May 2014
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, 10 April 2014
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, 06 April 2014
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, 21 March 2014
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, 14 March 2014
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, 06 February 2014
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, 17 January 2014
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, 10 January 2014
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, 06 January 2014
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, 25 November 2013
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, 10 November 2013
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, 19 September 2013
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.
Lev Ratnovski, 28 July 2013
After much negotiation, Basel III regulations set capital requirements to be between 8% and 12%. This column suggests this may not be enough. It looks at how much capital banks would need to fully absorb asset shocks of the size seen in OECD countries over the last 50 years. The answer is 18% risk-weighted capital, corresponding to 9% leverage. This benchmark is highly conservative, so the true 'optimal' bank capital may be lower.
Thorsten Beck, Wolf Wagner, 20 July 2013
The proper level for bank supervision is mired in detail. This column argues that the higher the cross-border externalities and the lower the country heterogeneity, the more likely supranational regulation is desirable. This framework informs the various initiatives for improving cross-border supervision, including a better understanding of the sources of political-economy constraints that so frequently are an obstacle to integration.
Sheila Bair, 09 June 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.
Lev Ratnovski, 02 June 2013
Bank competition policy seeks to balance efficiency with incentives to take risk. This calls for an intermediate degree of competition. This column argues that although the traditional policy tools are rules on entry/exit and the consolidation of banks, the Crisis showed that a focus on market structure alone is misplaced. There are other, newer ways in which competition policy can support financial stability: dealing with too-big-to fail and other structural issues in banking, as well as facilitating crisis management.
Edward J Kane, 30 January 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.
Biagio Bossone, 22 January 2013
Has unconsidered use of technology and exasperated market competition carried finance way afar from its original purpose, i.e. to serve the economy? This column offers a set of simple suggestions for complex interventions on the financial regulatory world. It suggests incentives be designed to lead financial institutions to place people’s real economic needs at the core of their mission, thus humanising finance.
Takeo Hoshi, 23 December 2012
Rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up? This column argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation.