Financial regulation and banking

S. M. Ali Abbas, Daniel Hardy, Jun Kim, Alex Pienkowski, 06 June 2017

The theoretical benefits of state-contingent debt instruments for sovereigns – such as GDP-linked and extendible bonds – have been advocated by academics for several decades, but only recently have the practical constraints and considerations been explored in detail. This column summarises this more recent work, highlighting key findings on instrument design and on broader market development prospects. 

Myrvin L. Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, Eriko Togo, 06 June 2017

The case for state-contingent debt instruments, linking contractual debt to a pre-defined variable, has been theorised but not developed. This column gives a historical perspective of the issuance of these instruments to alleviate liquidity and/or solvency pressures on the sovereign in ‘normal times’ and during restructurings. It also discusses the valuable lessons that inflation-linked bonds provide for development of the state-contingent debt instrument market.

Tom Best, Christopher Dielmann, Meghan Greene, Tania Mohd Nor, 06 June 2017

State-contingent debt instruments could provide sovereigns with additional policy space in bad states of the world. This column presents an Excel-based tool that allows debt managers and investors to explore the impact of different designs of such instruments on public debt and gross financing needs under user-specified macroeconomic scenarios (both baseline and shocks). Illustrative results show the potential benefits of different bond designs on both debt and gross financing needs.

Jon Danielsson, Robert Macrae, Eva Micheler, 31 May 2017

Brexit is likely to cause considerable disruption for financial markets. Some worry that it may also increase systemic risk. This column revisits the debate and argues that an increase in systemic risk is unlikely. While legal ‘plumbing’ and institutional and regulatory equivalence are of concern, systemic risk is more likely to fall due to increased financial fragmentation and caution by market participants in the face of uncertainty. 

Stephen Cecchetti, Kim Schoenholtz, 29 May 2017

In April 2017, the US House of Representatives passed a bipartisan revision of the bankruptcy code, which would expedite the resolution of adequately structured intermediaries. This column considers the new Financial Institutions Bankruptcy Act of 2017 and how it fits in with the existing Dodd-Frank mechanism. By raising the odds of an effective resolution, the Act (as a complement to Dodd-Frank) boosts the credibility of the US regime. However, in the absence of an Orderly Liquidation Fund-like provision for temporary government funding, investors and foreign regulators will expect a future US government to re-introduce an ad hoc bailout mechanism when it is inevitably needed.

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