Model risk and the implications for risk management, macroprudential policy, and financial regulations

Jon Danielsson, Kevin James, Marcela Valenzuela, Ilknur Zer 08 June 2014

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Risk forecasting is central to macroprudential policy, financial regulations, and the operations of financial institutions. Therefore, the accuracy of risk forecast models – model risk analysis – should be a key concern for the users of such models. Surprisingly, this does not appear to be the case. Both industry practice and regulatory guidance currently neglect the risk that the models themselves can pose, even though this problem has long been noted in the literature (see for example Hendricks 1996 and Berkowitz and O’Brien 2002).

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Topics:  Financial markets

Tags:  financial crises, financial regulation, forecasting, risk management, Macroprudential policy

The roots of shadow banking

Enrico Perotti,

Date Published

Thu, 01/16/2014

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CEPR Policy Insight No.69 is available to download free of charge here.

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financial regulation, shadow banking

Overcoming the obstacles to international macro policy coordination is hard

Olivier Blanchard, Jonathan D Ostry, Atish R Ghosh 20 December 2013

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International policy coordination is like the Loch Ness monster – much discussed but rarely seen. Going back over the decades, and even further in history to the period between the two world wars, coordination efforts have been episodic.

Coordination seems to occur spontaneously in turbulent periods, when the world faces the prospect of some calamitous outcome and the key players are seeking to avoid cascading negative spillovers. In quieter times coordination is rarer, though not unheard of – the Louvre and Plaza accords are examples. 

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Topics:  Macroeconomic policy

Tags:  spillovers, fiscal consolidation, financial regulation, policy coordination, unconventional monetary policy, currency war

Regulation, supervision and the role of central banks

The Editors 20 December 2013

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The 2008 Global Crisis consisted of a financial crisis in the North Atlantic economies and a trade and expectations crisis in the rest of the world. Five years on, US and European policymakers as still struggling to put in place regulation and supervision regimes aimed at avoiding future crises.

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Topics:  Macroeconomic policy

Tags:  Central Banks, financial regulation, financial supervision

The LIBOR scandal: What’s next ? A possible way forward

Vincent Brousseau, Alexandre Chailloux, Alain Durré 09 December 2013

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After the first allegations of LIBOR manipulation in May 2012 – which eventually resulted in investigations into banks and individuals in various countries as of June 2012 – the reliability and credibility of unsecured reference rates in various currencies (the LIBOR in pounds, dollars, euros, and yen, and also the EURIBOR) have been severely questioned. With a view to restoring the credibility of these important reference interest rates, financial regulators have launched a broad consultation to study possible options to avoid similar manipulation in the future.

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Topics:  Financial markets

Tags:  interest rates, LIBOR, financial regulation

Assessing leverage in the financial sector through flow data

Javier Villar Burke 14 November 2013

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The build-up of leverage in the banking sector played a prominent role in the Global Crisis.1 A standard description the role of leverage corresponds with the typical profile of a financial bubble as reflected in the evolution of the banks of the Eurostoxx 50 (Figure 1). Surprisingly, the traditional measure of leverage in the banking sector does not show this profile at all (Figure 2).

Figure 1: Eurostoxx 50 Index

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Topics:  International finance

Tags:  deleveraging, financial regulation, global crisis, bank leverage

The impact of liquidity regulation on monetary-policy implementation

Clemens Bonner, Sylvester Eijffinger 14 October 2013

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In response to the recent financial crisis, the Basel Committee on Banking Supervision has drafted a new regulatory framework (henceforth Basel III) with the aim to achieve a more robust banking system. While it also tightens the existing requirements for capital, the proposal stands out as it is the first to attempt harmonised liquidity regulation across the globe. Specifically, the framework includes the short-term Liquidity Coverage Ratio (Liquidity Coverage Ratio) and the long-term Net Stable Funding Ratio.

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Topics:  Financial markets Monetary policy

Tags:  monetary policy, liquidity, financial regulation, BASEL III, liquidity coverage ratio

Everything the IMF wanted to know about financial regulation and wasn’t afraid to ask

Sheila Bair 09 June 2013

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I was honoured when the IMF asked me to moderate the Financial Regulation panel at this year’s Rethinking Macro II conference. And while naturally, I delivered one of the more enlightening and thought-provoking policy discussions of the conference, I did fail in my duties as moderator to make sure my panellists covered all the excellent questions our sponsors submitted to us.

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Topics:  Financial markets

Tags:  financial regulation, banks, capital ratios

Basel III: Europe’s interest is to comply

Nicolas Véron 05 March 2013

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On 14 February, European Commissioner Michel Barnier and Federal Reserve Governor Daniel Tarullo both indicated their agreement to quickly give the Basel III accord binding force over European and US banks respectively (Jones 2013). This is welcome. But even more important than the speed of adoption is that implementation should stay true to what the accord stipulates. At this point, and contrary to many perceptions in Europe, this goal is more likely to be reached by the US than by the EU.

Basel III’s bite

Basel III changes financial regulation:

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Topics:  EU policies International finance

Tags:  EU, financial regulation, BASEL III

Hair of the dog that bit us: New and improved capital requirements threaten to perpetuate megabank access to a taxpayer put

Edward J Kane 30 January 2013

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This column is a lead commentary in the VoxEU Debate "Banking reform: Do we know what has to be done?"

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Topics:  International finance

Tags:  financial regulation, global crisis, Too big to fail, banks, Finance, taxpayers

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