The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inherent weaknesses of the regulator-approved standard risk models used in financial institutions. These models under-forecast risk before the announcement and over-forecast risk after the announcement, getting it wrong in all states of the world.
Jon Danielsson, Sunday, January 18, 2015
Christine L. Exley, Saturday, December 27, 2014
Decisions involving charitable giving often occur under the shadow of risk. A common finding is that potential donors give less when there is greater risk that their donation will have less impact. While this behaviour could be fully rationalised by standard economic models, this column shows that an additional mechanism is relevant – the use of risk as an excuse not to give. In light of this finding, this column also discusses how charities may benefit from structuring their donation requests in particular ways.
Jussi Keppo, Josef Korte, Sunday, September 7, 2014
Four years ago, the Volcker Rule was codified as part of the Dodd–Frank Act in an attempt to separate allegedly risky trading activities from commercial banking. This column presents new evidence finding that those banks most affected by the Volcker Rule have indeed reduced their trading books much more than others. However, there are no corresponding effects on risk-taking – if anything, affected banks take more risks and use their trading accounts less for hedging.
Zoltan Pozsar, Thursday, November 7, 2013
Modern banks operate in a complex global financial ecosystem. This column argues that proper regulation requires an updating of our ideas about how they operate. Modern banks finance bond portfolios with uninsured money market instruments, and thus link cash portfolio managers and risk portfolio managers. Gone are the days when banks linked ultimate borrowers with ultimate savers via loans and deposits. The Flow of Funds should be updated to reflect the new realities.
Jon Danielsson, Wednesday, March 6, 2013
Is the fact that different banks have different risk models problematic? Contrary to the Basel Committee and the European Banking Authority, this column argues that heterogeneity is a good thing. It leads to countercyclicality, and thereby reduces instances of procyclical price movements. Both the Basel Committee and the European Banking Authority have indicated that they are troubled by heterogeneity and are seeking to rectify the problem. Their conclusion is plainly wrong.
Eugenio Cerutti, Stijn Claessens, Patrick McGuire, Monday, December 17, 2012
The current global crisis highlights how interconnected the financial world has become. This interconnectedness is a challenge for global systemic risks analysis. This column argues that much of the data needed for tracking systemic risk are not available and that, in fact, world decision makers are leading in the dark. Recent initiatives that aim to improve aggregate banking statistics and gather better institution-level data are welcome, but the complexity of the system means that we won’t have the data we need for some time yet.
Mathias Hoffmann, Bent E. Sørensen, Friday, November 9, 2012
How do members of existing monetary unions share risk? Drawing on a decade of research, this column argues that fiscal transfers in fact make a limited contribution to economic coherence. In the context of Europe’s current crisis, the evidence suggests that unfinished capital market integration must be completed if we wish to see adequate and effective risk sharing.
Lars Frisell, Wednesday, November 7, 2012
Measuring financial risk is difficult. But what lessons, if any, have we learnt from the current crisis? This column argues against a move to leverage ratios and instead proposes continuing to measure financial risk (despite the difficulties), but with higher capital charges for banks. Focusing on the basics can only bolster central banks’ ability to fulfil their duties – looking for imbalances, and promptly tackling them with informed decisions.
Ian Tonks, Sunday, January 8, 2012
Ever since the fall of Lehman Brothers, it has been a popular view – and one increasingly held by officials – that banker bonuses are at least partly to blame. This column compares executive pay in banks with other companies and finds, contrary to the growing consensus, that the financial sector differs not so much in its reward for taking risks, but in its reward for expansion.
Jeffrey Frankel, Carlos A. Vegh , Guillermo Vuletin, Thursday, June 23, 2011
With the ongoing financial turmoil in Europe, many emerging market countries are now deemed less risky than so-called “advanced” countries. This column examines why this is the case and finds that the cyclicality of a country’s fiscal policy – a sign of its riskiness – is inversely correlated with the quality of the country’s institutions.
Enrico Perotti, Mark Flannery, Wednesday, February 9, 2011
Contingent Convertible (CoCo) bonds have been suggested as a way to ensure that banks keep aside enough capital to help them through financial crises. This column proposes a market-triggered CoCo buffer to maintain risk incentives during periods of high leverage. It argues that this will also activate risk information discovery through the market prices of bank securities and increase activism by outside shareholders.
Dimitri Vayanos, Denis Gromb, Saturday, April 10, 2010
Why do financial market anomalies arise and persist? This column summarises a new thread in financial economics – the "limits of arbitrage" literature – explaining how financial institutions sometimes lack the capital needed to arbitrage away anomolies. This new approach has far-reaching implications for our understanding of how financial markets work and how they should be regulated.
Avinash Persaud, Saturday, June 13, 2009
There is a strong consensus that banks had insufficient reserves set aside for a rainy day and that they should be required to hold more capital. This column says we should differentiate institutions less by what they are called and more by how they are funded. Encouraging individual risks to flow to those who can absorb them would make the system safer and introduce new players with risk capacities.
Jon Danielsson, Con Keating, Monday, May 25, 2009
Bank bonuses have been blamed for contributing to the crisis, and regulators and politicians are now demanding changes in compensation arrangements. Most of these calls are based on a misconception of the nature of financial risk, an inflated view of the efficacy of risk models, and an incorrect view of the incentive issues facing financial institutions. This column proposes reforms that would discipline senior managers by exposing them to the dangers of junior managers’ risk taking.
Jon Danielsson, Wednesday, March 25, 2009
Many are calling for significant new financial regulations. This column says that if the “regulate everything that moves” crowd has its way, we will repeat past mistakes and impose significant costs on the economy, to little or no benefit. The next crisis is years away – we have time to do bank regulation right.
Hyun Song Shin, Wednesday, March 18, 2009
Did securitisation disperse risks? This column argues that it undermined financial stability by concentrating risk. Securitisation allowed banks to leverage up in tranquil times while concentrating risks in the banking system by inducing banks and other financial intermediaries to buy each other’s securities with borrowed money.
Monika Bütler, Friday, February 13, 2009
Pension system reforms have increased individual choice and individual risk. This column says that the current crisis proves that those reforms exposed individuals to too much risk. It argues for greater use of intergenerational transfers and says that it would be better if retirement plans were treated as insurance rather than pure investment decisions.
Jon Danielsson, Monday, January 5, 2009
Much of today’s financial regulation assumes that risk can be accurately measured – that financial engineers, like civil engineers, can design safe products with sophisticated maths informed by historical estimates. But, as the crisis has shown, the laws of finance react to financial engineers’ creations, rendering risk calculations invalid. Regulators should rely on simpler methods.
Roland Spahr, Tuesday, November 18, 2008
Globally integrated countries have suffered heavily from highly volatile stock markets during the current crisis. This column argues that globalised countries enjoy lower stock market risk in good times, but they suffer just as much in crises. Moreover, the transition to openness breeds financial instability. Policymakers need ways to manage these risk concerns.
Thomas Dohmen, Armin Falk , David Huffman , Uwe Sunde, Saturday, July 5, 2008
Departing from the practice of treating attitudes as a black box, economists are beginning to study the process through which attitudes are formed. New evidence shows that parents pass on risk and trust attitudes to their children, with important implications for understanding persistent differences in economic outcomes across and within countries.