Giudici Paolo, Laura Paris, 30 June 2016

In April 2016, Italian banks set up an equity fund intended to recapitalise troubled financial institutions in a ‘private bail-out intervention’ scenario, with a view to avoiding a bail-in under the European Bank and Recovery Resolution directive. This column analyses the main differences between a bail-in and a bail-out scenario. In particular, it compares contagion effects, and thus the total default probabilities of financial institutions in these two circumstances, in order to establish which banks would benefit more from a bail-out rather than a bail-in.


The Asian Development Bank Institute (ADBI), in cooperation with S. Rajaratnam School of International Studies, invites submissions of original, unpublished papers on any aspect of global and regional financial architecture and global shocks relating to, although not limited to, the following:

Analysis of regional vulnerabilities in Asia to global monetary and real shocks
Capital flow management in response to global shocks
Developments in national financial regulation and supervision
Global and regional financial regulation and supervision
Regional and national support for financial stability, development, and integration
Financial safety nets, crisis prevention, and crisis management

Mariassunta Giannetti , Bige Kahraman, 09 June 2016

Theoretical corrections of price deviations in trade are not reflected in empirical evidence. This is surprising because institutional investors should be able be able to identify mispricing. This column explores how the organisation of the asset management industry may hamper trading against mispricing. Asset managers that are less subject to redemption risk exhibit a higher propensity to trade against mispricing. Organisational structures lowering the sensitivity of investor flows to performance strengthen asset managers’ incentives to trade against mispricing.

Charles Calomiris , Matthew Jaremski, 01 June 2016

Liability insurance is a fundamental part of banking regulation of today, but despite being accepted as best practice now, it did not expand out of the US until the second half of the 20th century. This column discusses economic and political explanations for the spread of liability insurance availability, and finds that a political explanation reflects the empirical evidence well. Liability insurance was preferable to other policies despite being inefficient, due to its use as political leverage. 

Danthine Jean-Pierre, 04 May 2016

Since the Eurozone Crisis a host of monetary and fiscal instruments have been used to try to reinvigorate growth and achieve financial stability, with mixed results. Basel III’s counter-cyclical capital buffer (CCB) is one such instrument which was met with scepticism. This column uses evidence from the Swiss economy to show that given the right circumstances and political will, the CCB can achieve financial stability.

Angus Armstrong, 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”.

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.

Clemens Bonner, 03 January 2016

Economists continue to debate whether preferential treatment in financial regulation increases banks’ demand for government bonds. This column looks at bank purchases of government bonds and other types of bonds when constrained by a capital or liquidity requirement. Financial regulation seems to be a main driver of banks’ demand. If regulators wish to break the vicious circle from weak banks to weak governments, revising financial regulation seems to be a good starting point.

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. 

Robert Kosowski, Juha Joenväärä, 14 September 2015

In the aftermath of the Global Crisis, there have been many regulatory initiatives targeting financial institutions, especially investment funds. This column sheds light on the costs and benefits of increased financial regulation. The findings show that the indirect cost of regulation of alternative funds such as UCITS is around 2% per annum in terms of risk-adjusted returns. Policymakers should therefore carefully consider the effect of higher liquidity requirements on the returns that alternative investment funds can generate.

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.

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.

Esa Jokivuolle, Jussi Keppo, Xuchuan Yuan, 23 July 2015

Bankers’ compensation has been indicted as a contributing factor to the Global Crisis. The EU and the US have responded in different ways – the former legislated bonus caps, while the latter implemented bonus deferrals. This column examines the effectiveness of these measures, using US data from just before the Crisis. Caps are found to be more effective in reducing the risk-taking by bank CEOs.

Philippe Aghion, 19 January 2015

Jean Tirole’s Nobel was for his transformative work on industrial organisation. In this Vox Talk Philippe Aghion talks about Tirole’s contribution. The interview was recorded in November 2014.

Jon Danielsson, 18 January 2015

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.

Wouter den Haan, 23 December 2014

Macroecomics has changed in a number of ways since the global crisis. For example, there is now more emphasis on modeling the financial sector, self-fulfilling panics, herd behaviour and the new role of demand. This Vox Talk discusses these changes as well as those areas in macroeconomics that are currently perhaps not researched enough. Wouter den Haan explains the inadequacy of the conventional 'rational expectations' approach, quantitative easing, endogenous risk and deleveraging and refers to current CEPR research that reflects the changes. He concludes by reminding us that the 'baby boomers' issue could be the basis of the next crisis.

Martijn Boermans, Sinziana Petrescu, Razvan Vlahu, 17 November 2014

Contingent convertible capital instruments – also known as CoCos – have grown in popularity since the financial crisis. This column suggests that the search for yield and the tightening of capital requirements have resulted in a new wave of CoCo issuances. While many of their features and risks remain unclear, CoCos may act as a buffer that makes banks more resilient in times of crisis.  

Olivier Blanchard, 03 October 2014

Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.

Alan Moreira, Alexi Savov, 16 September 2014

The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.

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

Risk forecasting is central to financial regulations, risk management, and macroprudential policy. This column raises concerns about the reliance on risk forecasting, since risk forecast models have high levels of model risk – especially when the models are needed the most, during crises. Policymakers should be wary of relying solely on such models. Formal model-risk analysis should be a part of the regulatory design process.