Systemic risk in Europe: Too big to save

Robert Engle, Eric Jondeau, Michael Rockinger 20 September 2014

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The Global Financial Stability Report of the IMF (2009) defines systemic risk as “a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and that has the potential to cause serious negative consequences for the real economy”. With the recent financial crisis, interest in the concept of systemic risk has grown. The rising globalisation of financial services has strengthened the interconnection between financial institutions.

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Topics:  Global economy International finance

Tags:  systemic risk

Corporate governance of banks and financial stability

Luc Laeven, Lev Ratnovski 21 July 2014

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Corporate governance is the practice of shareholders exercising control over managers so that they act in shareholders’ interests. In non-financial firms, this maximises firm efficiency. Such efficiency effects also exist in banks. For example, banks that face more active takeover markets are more cost-efficient (Brook et al. 1998).

Unlike non-financial firms, bank operations have another relevant dimension besides efficiency: risk. Banks are prone to risk-taking, due to:

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Topics:  Financial markets

Tags:  corporate governance, bank regulation, systemic risk

Are banks too large?

Lev Ratnovski, Luc Laeven, Hui Tong 31 May 2014

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Large banks have grown significantly in size and become more involved in market-based activities since the late 1990s. Figure 1 shows how the balance-sheet size of the world’s largest banks increased two- to four-fold in the ten years prior to the crisis. Figure 2 illustrates how banks shifted from traditional lending towards market-oriented activities.

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Topics:  Financial markets

Tags:  regulation, economies of scale, bank regulation, banking, Too big to fail, systemic risk, BASEL III, bank resolution, bank capital

Spillovers from systemic bank defaults

Mark Mink, Jakob de Haan 24 May 2014

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Financial-crisis management and prevention policies often focus on mitigating spillovers from the default of systemically important banks. During the recent crisis, governments avoided large bank failures by insuring and purchasing intermediaries’ troubled assets, by providing them with capital injections, and even by outright nationalisations. After the crisis, financial regulators designed additional requirements for those institutions that the Financial Stability Board designated as globally systemically important banks (G-SIBs).

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Topics:  Financial markets

Tags:  financial stability, spillovers, regulation, banking, banks, systemic risk

Exploring the transmission channels of contagious bank runs

Martin Brown, Stefan Trautmann, Razvan Vlahu 10 April 2014

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Financial contagion – the situation in which liquidity or insolvency risk is transmitted from one financial institution to another – is viewed by policymakers and academics as a key source of systemic risk in the banking sector. In particular, the events in the 2007–2009 Global Crisis have turned the attention of policymakers towards the potential contagion of liquidity withdrawals across banks and the resulting implications for financial stability.

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Topics:  Financial markets

Tags:  experimental economics, financial stability, financial crisis, global crisis, banking, contagion, banks, systemic risk, bank runs

The puzzling pervasiveness of dysfunctional banking

Charles W Calomiris interviewed by Romesh Vaitilingam,

Date Published

Fri, 03/21/2014

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See Also

Calomiris, C W and S H Haber (2014), Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton University Press.

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Topics

Financial markets
Tags
credit booms, banking, banks, systemic risk, recapitalisation, Eurozone crisis, Bank credit, bank capital

Related Article(s)

The limits to partial banking unions The AQR and stress testing the European banking system Banking union for Europe – where do we stand? Eastern European credit crunch and foreign bank funding Bank credit during the global crisis: A cross-country comparison
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How much is enough? The case of the Resolution Fund in Europe

Thomas Huertas, María J Nieto 18 March 2014

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During the crisis, individual institutions such as Hypo Real Estate required public assistance of €100 billion or more.1 So how can a European Resolution Fund of only €55 billion possibly suffice for all banks in the Eurozone?

It could, provided the Fund is part of a well-designed architecture for regulation, supervision, and resolution, that makes banks not only less likely to fail but also safe to fail – meaning that they can be resolved without cost to the taxpayer and without significant disruption to financial markets or the economy at large.

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Topics:  EU institutions Financial markets International finance

Tags:  eurozone, regulation, banking, systemic risk, microprudential regulation, bank resolution, Macroprudential policy, bail-in, European Resolution Fund

The AQR and stress testing the European banking system

Viral Acharya interviewed by Viv Davies,

Date Published

Fri, 03/14/2014

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See Also

Acharya, V and S Steffen (2014) "Falling short of expectations? Stress-testing the European banking system", VoxEU.org, 17 January.

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Topics

Financial markets
Tags
banking, banks, systemic risk, recapitalisation, Eurozone crisis, banking union, bank capital, Asset Quality Review, stress testing

Related Article(s)

Banking union for Europe – where do we stand? Stress tests: a success for cooperation and transparency – and also very good for Spain A call for liquidity stress testing Bank resolution: from Cinderella to centre stage The urgent need to recapitalise Europe’s banks How much capital do European banks need?
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Falling short of expectations? Stress-testing the European banking system

Viral Acharya, Sascha Steffen 17 January 2014

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The Eurozone is mired in a recession. In 2013, the GDP of the 17 Eurozone countries fell by an average of 0.5%, and the outlook for 2014 shows considerable risks across the region. To stabilise the common currency area and its (partly insolvent) financial system, a Eurozone banking union is being established. An important part of the banking union is the Single Supervisory Mechanism, which will transfer the oversight of Europe’s largest banks to the ECB (Beck 2013).

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Topics:  Financial markets

Tags:  banking, banks, systemic risk, recapitalisation, Eurozone crisis, banking union, bank capital, Asset Quality Review, stress testing

Foreign-currency loans and systemic risk in Europe

Pınar Yeşin 26 November 2013

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Before the onset of the financial crisis, foreign currency loans to the non-banking sector in Europe became remarkably prevalent. In particular, households and non-financial firms were taking bank loans denominated in lower-yielding foreign currencies and investing in high-yielding domestic currencies (e.g., in the form of home mortgages or business investments), even though these agents did not necessarily have a steady income in the foreign currency concerned. Therefore these retail foreign currency loans were usually dubbed 'small men’s carry trade'.

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Topics:  International finance

Tags:  international finance, systemic risk, foreign currency loans

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