Brexit creates new opportunities and new risks for the British and EU financial markets. If policymakers react optimally, both could benefit. However, a more likely outcome is a fall in the quality of financial regulations, more inefficiency, more protectionism, and less protection. Systemic risk could increase, with a systemic vicious feedback loop a possibility.
Jon Danielsson, Robert Macrae, Jean-Pierre Zigrand, 24 June 2016
The objective of this course is to present empirical applications (as well as the research methodologies) of relevant questions for both banking theory and policy, mainly related to Systemic Risk, Crises, Monetary Policy and Risk taking behaviour. An important objective is to understand scientific papers in empirical banking; to accomplish this objective, emphasis is placed on illustrating research methodologies used in empirical banking and learning the application of these methodologies to selected topics, such as:
- Securities and credit registers; large datasets
- Fire sales, runs, market and funding liquidity, systemic risk
- Risk-taking and credit channels of monetary policy
- Moral hazard vs. behavioral based risk-taking
- Secular stagnation, banking and debt crises
- Interbank globalization, contagion, emerging markets, policy
Jon Danielsson, Morgane Fouché, Robert Macrae, 10 June 2016
The threat to the financial system posed by cyber risk is often claimed to be systemic. This column argues against this, pointing out that almost all cyber risk is microprudential. For a cyber attack to lead to a systemic crisis, it would need to be timed impeccably to coincide with other non-cyber events that undermine confidence in the financial system and the authorities. The only actors with enough resources to affect such an event are large sovereign states, and they could likely create the required uncertainty through simpler, financial means.
Christian Thimann, 31 May 2016
The IMF’s latest Global Financial Stability Report devotes for the first time a chapter to the systemic risks potentially associated with the insurance sector and how regulatory bodies should respond. This column examines the key points and proposes a way forward for the global regulatory framework for insurance. In particular, it argues for the importance of not treating the sector in the same way as the banking sector as the two operate very different business models. Similarly, for an activity-based approach, a regulatory focus on just nine ‘systemically important’ insurers rather than the sector as a whole is flawed.
Angus Armstrong, E Philip Davis, 22 April 2016
Since the Global Crisis, a number of regulatory policies have been discussed, proposed and sometimes implemented to address shortcomings in the regulatory framework. This column presents the views of the speakers at a recent conference on whether we have reached an efficient outcome. For most of the speakers, the answer was a resounding “no”.
Franklin Allen, 22 April 2016
Designing good regulation requires a good knowledge of the systems to be regulated. In this video, Franklin Allen argues that we still have an imperfect understanding of systemic risk leading to difficulties in designing effective regulations. One of the problems stems from the fact that regulators still think in terms of macroeconomics instead of focusing on the financial side. This video was recorded at the 18th March 2016 conference on Financial Regulation organized by NIESR and held at the Bank of England.
Roel Beetsma, Siert Vos, 23 February 2016
There is a broad consensus that banks and insurance companies may contribute to systemic risk in the financial system. For other financial market institutions, it is less clear-cut. This column examines the resilience of pension funds to severe shocks. While the evidence indicates that they are of low systematic importance, policy trends that apply to all financial players may undermine this. Specifically, risk-based solvency requirements carry the risk of homogenising the behaviour of all players, potentially amplifying shocks and destabilising markets.
Daniel Gros, 12 February 2016
The Eurozone’s ‘Banking Union’ created a system of banking supervision and a common institution to restructure troubled banks. There remain two issues, however, that need to be addressed: banks are holding too much debt of their own sovereign, and deposit insurance is only backstopped at the national level. This column argues that these issues need to be addressed simultaneously for economic and political reasons. Specifically, periphery and core countries hold opposing positions on remedies to the respective problems. A combination of the two makes economic sense and could represent an acceptable political compromise.
Nikolaos I. Papanikolaou, Christian C. P. Wolff, 06 December 2015
In the years running up to the global crisis, the banking sector was marked by a high degree of leverage. Using US data, this column shows how, before the onset of the crisis, banks accumulated leverage both on and, especially, off their balance sheets. The latter activities saw an increase in maturity mismatch, raised the probability of bank runs, and increased both individual bank risk and systemic risk. These findings support the imposition of an explicit off-balance sheet leverage ratio in future regulatory frameworks.
Avinash Persaud, 20 November 2015
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.
Jon Danielsson, Jean-Pierre Zigrand, 07 August 2015
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, 05 August 2015
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, 05 August 2015
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, 25 July 2015
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, 08 May 2015
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, 03 April 2015
An important research question is whether the current measures of systemic risk are useful for policymakers. This column presents new evidence on this topic. The relevance of a measure depends on how informative it is regarding how financial distress translates into real macroeconomic outcomes. The findings indicate that few systemic risk measures predict macroeconomic shocks. Interestingly, the relationship between systematic risk and future macroeconomic shocks is not symmetric.
Xavier Vives, 17 March 2015
The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Jon Danielsson, Eva Micheler, Katja Neugebauer, Andreas Uthemann, Jean-Pierre Zigrand, 23 February 2015
The proposed EU capital markets union aims to revitalise Europe’s economy by creating efficient funding channels between providers of loanable funds and firms best placed to use them. This column argues that a successful union would deliver investment, innovation, and growth, but it depends on overcoming difficult regulatory challenges. A successful union would also change the nature of systemic risk in Europe.
Georg Ringe, Jeffrey N. Gordon, 28 January 2015
Bank resolution is a key pillar of the European Banking Union. This column argues that the current structure of large EU banks is not conducive to an effective and unbiased resolution procedure. The authors would require systemically important banks to reorganise into a ‘holding company’ structure, where the parent company holds unsecured term debt sufficient to cover losses at its operating financial subsidiaries. This would facilitate a ‘single point of entry’ resolution procedure, minimising the risk of creditor runs and destructive ring-fencing by national regulators.
Viral Acharya, Sascha Steffen, 21 November 2014
The ECB estimated that Eurozone banks would face a capital shortfall of €25 billion in a severe crisis. Earlier work by the authors estimated the shortfall to be 30 times higher. This column argues that this striking divergence can be explained by the ECB’s reliance on static risk-weights.