Why supervisors should continue measuring financial risks – the fallacy of simple rules
Lars Frisell 07 November 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.
Measuring financial risk is notoriously difficult. But no more difficult than measuring any other risk. Take, for example, the risk of flooding. In order to calculate the optimal height of a seawall one must take into account the regular variation of the sea level caused by the moon’s gravity, the shape of the shoreline, the probability of extreme events such as hurricanes and tsunamis, alongside myriad other factors. Such deliberations – and experience - have resulted in very different structures of seawalls, from high-rising concrete walls to porous mounds.
Financial markets Global crisis Institutions and economics International finance
risk, global crisis, global crisis debate, leverage ratios, capital charges
Real time solutions for US financial reform: A new ebook
Viral Acharya, Matthew Richardson, Ingo Walter, Thomas F Cooley 15 December 2009
The NYU Stern group – authors of the influential book Restoring Financial Stability: How to Repair a Failed System – have completed a new ebook that assesses the strengths and weaknesses of the US financial reform legislation. This column introduces the new ebook.
November 2008 saw the global financial system on the brink of collapse; the crisis – which began in 2007 – had entered a new and dangerous phase. That time we responded by gathering a group of world-renown financial market experts to evaluate:
global crisis debate, financial market reform, Banking reform
Green shoots: Grounds for cautious pessimism
Willem Buiter 29 April 2009
Is the global economy turning around? Analysing the situation across the globe, this column concludes that the only reasonably convincing evidence of ‘green shoots’ comes from China – but even that recovery is unlikely to be sustainable due to China's dependency on exports. A global flu pandemic, if it were to occur, would act as a negative supply and demand shock.
I am not going to use this opportunity to deepen the gloom by exploring at length the possible consequences of a worldwide pandemic of a virulent form of swine flu. Just a few depressing words will have to suffice. From an economic perspective, a flu pandemic amounts to at least a temporary reduction in the effective supply of labour. If flu-related mortality is high, there will be a permanent reduction in labour supply. The dependency ratio rises (temporarily or permanently, depending on whether mortality increases). Trade and travel are interrupted.
global recession, global crisis debate, green shoots
China’s Syndrome: The “dollar trap” in historical perspective
Olivier Accominotti 23 April 2009
China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously. Sterling suffered a major currency crisis, French authorities lost a lot of money, and subsequent policy reactions deepened the Great Depression.
China’s huge volume of dollar reserves is now at the centre of serious concerns about the future of the US currency. The origin of this situation dates back to the early 2000s, after the East Asian and Russian crises. At that time, accumulating foreign reserves was considered benign policy. Developing and emerging countries were encouraged in this way in order to insure against sudden reversals of capital inflows. China was pegging its currency against the dollar and, due to the US trade deficits, started acquiring US assets.
Economic history International finance
trade liberalisation, Great Depression, global crisis debate, dollar trap, trading with africa
The Report of the Manuel Committee on IMF Governance Reform: What’s good, what’s less good, and what’s missing?
Biagio Bossone 21 April 2009
The IMF appointed a committee, chaired by Trevor Manuel, to look into IMF decision making. This column reviews the report, arguing that it misses critical question on Executive Board reform. Without an independent board, the Fund’s skewed voting power tends to produce uneven treatment of members. Decision-making power must ultimately rest with shareholders but they should be advised by an independent board that acts as the voice of the institution and its membership as a whole.
In recent years, especially since the start of the first global crisis of the new millennium, reforming the governance of global finance, particularly the Bretton Woods institutions, has attracted increasing attention from analysts and policymakers involved in international financial issues. The related debate hosted by Vox is a reflection of the broad range of views spanning the issue.
Institutional reform, IMF reform, global crisis debate, institution reform
Stress tests and the decoupling of Main and Wall Street
Ricardo Caballero 20 April 2009
The approaching release of stress-test results is accompanied by widespread fears that the tests are not rigorous enough. This column argues that a modification to the Capital Assistance Programme would neutralise these concerns. Banks should hold the capital implied by the central scenario, and buy government insurance to cover more extreme outcomes, thus taking the aggregate risk off the leveraged institutions and breaking the link between bad economic news and the financial sector’s health.
As the date for the release of the stress tests on the largest 19 US banks approaches, anxiety levels and strategic positioning are on the rise. One of the main concerns (from a macroeconomic point of view) is whether the stress tests’ parameters are extreme enough given the current scenario. Opponents of the US Administration’s CAP/PPIP program (i.e. the Capital Assistance Programme and the Public-Private Investment Program) have seized on this concern over the level of severity of the tests – which has some validity – to torpedo the credibility of the entire program.
CAP, global crisis debate, stress tests, PPIP
What do the new data tell us?
Barry Eichengreen, Kevin Hjortshøj O’Rourke 08 March 2010
This column updates the original Vox columns by Barry Eichengreen and Kevin O’Rourke comparing today’s global crisis to the Great Depression. The three previous columns have shattered all Vox readership records with over 450,000 views. This latest edition covers up to February 2010 showing that, while there is cause for optimism, there is no room for complacency.
Editor's Note: This column updates the original Vox columns by Barry Eichengreen and Kevin O’Rourke comparing today’s global financial crisis to the Great Depression. The previous columns have shattered all Vox readership records with over 450,000 views (O’Rourke and Eichengreen 2009). The latest data cover up to February 2010, the original April 2009 column and the subsequent updates appear below. Click here to read the original column.
Great Depression, global crisis, global crisis debate, tale of two depressions, Depression, global output, world trade
The G20 communiqué: Work in progress but good news for emerging markets
Guillermo Calvo 06 April 2009
The G20 communiqué revealed a clear attitude towards chain-reaction crises. Here one of the world’s most experienced and insightful crisis-watchers argues the G20 communiqué reflects a major improvement in the way leaders view financial crises – moving away from the view that blames the victims and towards a view that recognizes systemic crises and chain-reaction accidents involving many innocent bystanders.
From the perspective of Financial Architecture, the G20 communiqué represents a major and positive change in the way world leaders view financial crises. They have definitely moved from a view according to which crises are largely homegrown, to a view that allows for the existence of systemic crises, chain-reaction accidents involving many innocent bystanders.
emerging markets, global crisis debate, sudden stops
Trade and the London Summit outcome
Richard Baldwin 04 April 2009
G20 leaders made a number of commitments on trade in their London Communiqué. This column argues that the anti-protection pledge is more credible than the one agreed in the Washington Declaration. The commitment on the Doha Round, by contrast, was pitiful.
The London Communiqué confirms that issues surrounding international trade have moved up the G20 agenda. The commitments made could have been much stronger, but I believe that what was agreed on protectionism can be graded as “not bad”. On the Doha Round, the Summit’s pledge was pitiful – it should be graded “very sad”. Yet, given the current disarray in the US’s trade policymaking machinery, it was perhaps the best that could have been accomplished.
What did they agree in London?
The commitments on trade fall into three basic categories:
trade, G20 Summit, global crisis debate, murky protectionism