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
Jon Danielsson, Jean-Pierre Zigrand, Friday, August 7, 2015 - 00:00
The long-running Greek crisis and China’s recent stock market crash are the latest threats to the stability of the global financial system. But as this column explains, systemic risk is an inevitable part of any market-based economy. While we won’t eliminate systemic risk entirely, the agenda for researchers and policymakers should be to create a more resilient financial system that is less prone to disastrous crises and that still delivers benefits for the economy and for society.
Xavier Freixas, Luc Laeven, José-Luis Peydró, Wednesday, August 5, 2015 - 00:00
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.
Jon Danielsson, Jean-Pierre Zigrand, Wednesday, August 5, 2015 - 00:00
Some financial authorities have proposed designating asset managers as systemically important financial institutions (SIFIs). This column argues that this would be premature and probably ill conceived. The motivation for such a step comes from an inappropriate application of macroprudential thought from banking, rather than the underlying externalities that might cause asset managers to contribute to systemic risk. Further, policy authorities are silent on the question of what SIFI designation should mean in practice, despite the inherent link between identification and remedy.
Gaston Gelos, Hiroko Oura, Saturday, July 25, 2015 - 00:00
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.
Taylor Begley, Amiyatosh Purnanandam, Kuncheng Zheng, Friday, May 8, 2015 - 00:00
A key regulatory response to the Global Crisis has involved higher risk-weighted capital requirements. This column documents systematic under-reporting of risk by banks that gets worse when the system is under stress. Thus banks’ self-reported levels of risk are least informative in states of the world when accurate risk measurement matters the most.
Stefano Giglio, Bryan T. Kelly, Seth Pruitt, Friday, April 3, 2015 - 00:00
Xavier Vives, Tuesday, March 17, 2015 - 00:00
Jon Danielsson, Eva Micheler, Katja Neugebauer, Andreas Uthemann, Jean-Pierre Zigrand, Monday, February 23, 2015 - 00:00
Georg Ringe, Jeffrey N. Gordon, Wednesday, January 28, 2015 - 00:00
Viral Acharya, Sascha Steffen, Friday, November 21, 2014 - 00:00
Ian Goldin, Friday, November 21, 2014 - 00:00
Viral Acharya, Sascha Steffen, Wednesday, October 29, 2014 - 00:00
The ECB conducted a comprehensive assessment of banks and identified capital shortfalls for 25 banks, totalling €25 billion. In this column, the authors provide a number of benchmark stress tests to estimate capital shortfalls. The analyses suggest possible capital shortfalls between €80 billion and more than €700 billion depending on the model. They find a negative correlation between their benchmark estimates and the regulatory capital shortfall, and a positive one between the benchmarks and the regulatory estimates of losses. This suggests that regulatory stress test outcomes are potentially affected by the discretion of national regulators.
Christian Thimann, Friday, October 17, 2014 - 00:00
Christian Thimann, Friday, October 10, 2014 - 00:00
Robert Engle, Eric Jondeau, Michael Rockinger, Saturday, September 20, 2014 - 00:00
Luc Laeven, Lev Ratnovski, Monday, July 21, 2014 - 00:00
Bank distress during the recent crisis caused significant damage to the real economy. Appropriately, the policy response focused on stronger bank supervision and regulation. This column asks if there is a role for improvements in bank corporate governance. Based on the literature the authors suggest that better risk management, regulation of pay, and enhanced market discipline can help make banks safer. However, corporate governance cannot substitute for strong supervision: it can at best provide a helping hand.
Lev Ratnovski, Luc Laeven, Hui Tong, Saturday, May 31, 2014 - 00:00
Large banks have grown and become more involved in market-based activities since the late 1990s. This column presents evidence that large banks receive too-big-to-fail subsidies and create systemic risk, whereas economies of scale in banking are modest. Hence, some large banks may be ‘too large’ from a social perspective. Since the optimal bank size is unknown, the best policies are capital surcharges and better bank resolution and governance.
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.