Natalia Tente, Natalja von Westernhagen, Ulf Slopek, 06 December 2017

Regulators are still debating the amount of capital needed to support bank losses in a financial crisis. This column presents a new, pragmatic stress-testing tool that can answer the question under macroeconomic stress scenarios. The method models inter-sector and inter-country dependence structures between banks in a holistic, top-down supervisory framework. A test of 12 major German banks as of 2013 suggests that while there is enough capital in the system as a whole, capital allocation among the banks is not optimal.

Yener Altunbaş, Mahir Binici, Leonardo Gambacorta, Andres Murcia, 05 December 2017

The main objective of macroprudential tools is to reduce systemic risks – in particular, the frequency and depth of financial crises. Most studies look at the impact of macroprudential measures on credit growth, focusing on country-wide data or bank-level information. This column presents new evidence using credit registry data at the bank-firm level to evaluate the impact on bank risk measures. Results show that macroprudential tools help stabilise credit cycles and contain bank risk.

Vincent Bignon, Guillaume Vuillemey, 04 December 2017

To improve financial stability after the Global Crisis, regulators have mandated the use of central clearing counterparties for standardised derivatives. While they are designed to insulate investors against counterparty risk, the central clearing counterparties themselves can fail. This column uses historical data to discuss how this can happen. The results show the risks to financial stability when a central clearing counterparty starts gambling for its resurrection.

Stephen Cecchetti, Kim Schoenholtz, 03 December 2017

The Global Crisis dramatically revealed the severity of ignorance about risk exposure in the global financial system. A major issue is the complexity of legal structures with webs of subsidiaries and a lack of consolidated information systems. This column describes efforts to address these failings through the launching of a global legal entity identifier. The initiative offers great promise for addressing the complex information problems. However, network externalities imply that its success will depend on participation and adoption incentives.

Jon Danielsson, 15 November 2017

Artificial intelligence is increasingly used to tackle all sorts of problems facing people and societies. This column considers the potential benefits and risks of employing AI in financial markets. While it may well revolutionise risk management and financial supervision, it also threatens to destabilise markets and increase systemic risk.

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. 

Thorsten Beck, Olivier De Jonghe, Klaas Mulier, 09 May 2017

There is little empirical evidence that specialised banks are less stable or perform worse, as suggested by standard portfolio diversification theory. This column uses new data to argue that more specialised banks between 2002 and 2012 did not perform as theory would suggest. More specialised banks, and banks with similar sectoral exposures to their peers, suffered less volatility and had lower exposure to systemic risk. The lack of post-crisis regulatory reform in this area may, accidentally, have been a good thing.

Thomas Gehrig, Maria Chiara Iannino, 21 April 2017

The first Basel Accord initiated what has become a three decade-long process of regulatory convergence of the international banking system. This column argues that by trying to regulate minimal capital standards, the Basel process itself contributed to an ever-increasing shortfall in aggregate bank capital. Consequently, European banks have become increasingly exposed to systemic risk, suggesting that expansive monetary policy could adversely affect the resiliency of banks. 

Claudia Buch, Lena Tonzer, Benjamin Weigert, 06 March 2017

In response to the Global Crisis, governments have implemented restructuring and resolution regimes backed by funds financed by bank levies. Bank levies aim to internalise system risk externalities and to provide funding for bank recovery and resolution. This column explores bank levy design by considering the German and European cases. The discussion points to the importance of structured policy evaluations to determine the effects of levies.

Felix Hufeld, Ralph Koijen, Christian Thimann, 30 January 2017

Despite the importance of insurance, discussions about the macroeconomic role and the risks of insurance markets have been surprisingly limited. This column explores some of the key theoretical and conceptual questions still unanswered in this field, and suggests that a two-fold approach combining a focus on individual firms and an activity-based approach across the sector is needed to tackle systemic risk within the insurance industry.

Jon Danielsson, Robert Macrae, 08 December 2016

Political risk is a major cause of systemic financial risk. This column argues that both the integrity and the legitimacy of macroprudential policy, or ‘macropru’, depends on political risk being included with other risk factors. Yet it is usually excluded from macropru, and that could be a fatal flaw.

Xavier Vives, 06 December 2016

As with previous systemic crises, the 2007-2009 crisis has created regulatory reform, but is it adequate? This column argues that prudential regulation should consider interactions between conduct – capital, liquidity, disclosure requirements, macroprudential ratios – and structural instruments, and also coordinate with competition policy. Though recent reforms are a welcome response to the latest crisis, we do not know how effective they will be in future.

Stephen Cecchetti, Kim Schoenholtz, 15 November 2016

A growing class of mutual funds – those that hold mostly illiquid assets – appear to be a potential source of systemic risk. This column discusses why, and argues that converting open-end mutual funds into exchange-traded funds could mitigate the problem. When markets are liquid, exchange-traded funds operate like open-end mutual funds; but should markets become illiquid, exchange-traded funds then operate like closed-end funds and face no run risk.

Domenico Lombardi, Pierre Siklos, 07 November 2016

After the 2008 Global Crisis, there has been progress towards a system-wide regulatory architecture that includes a national macroprudential authority. This column describes a ‘capacity indicator’ that measures the state of macroprudential policies worldwide, including the features policymakers believe constitute a successful macroprudential policy regime. Eventually this index may be used to establish whether these macroprudential policy innovations have been successful.

Markus K Brunnermeier, Sam Langfield, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh, Dimitri Vayanos, 20 September 2016

The Eurozone lacks a safe asset that is provided by the region as a whole. This column highlights why and how European Safe Bonds, a union-wide safe asset without joint liability, would resolve this problem, and outlines steps to put them into practice. For given sovereign default probabilities, these bonds would be as safe as German bunds and would approximately double the supply of euro safe assets. Moreover, owing to general equilibrium effects, they would weaken the diabolic loop between sovereign risk and bank risk.

Priyank Gandhi, Hanno Lustig, Alberto Plazzi, 21 August 2016

Governments and regulators are commonly assumed to offer special protection to the stakeholders of large financial institutions during financial crises. This column measures the ex ante cost of implicit shareholder guarantees to financial institutions in crises, and suggests that such protection affects small and large financial institutions differently. The evidence suggests that in the event of a financial crisis, stock investors price in the implicit government guarantees extended to large financial institutions, but not to small ones. 

Thomas Huertas, 09 August 2016

Financial market infrastructures (FMIs) are the backbone of the financial system. Although steps have been taken to make it less likely, if an FMI were to fail it could have catastrophic consequences for financial markets and the economy at large. This column introduces four recommendations from the CEPS Resolution Taskforce for policymakers in case of such an event, based on coordination, timeliness, and remedying the impediments to FMI resolvability.

Gaston Gelos, Nico Valckx, 27 July 2016

In recent years, the life insurance sector has become more systemically important across advanced economies. This increase is largely due to growing common exposures and to insurers’ rising interest rate sensitivity. This column analyses the evolution of the insurance sector’s contribution to systemic risk. Overall, life insurers do not seem to have markedly changed their asset portfolios toward riskier assets, although smaller and weaker insurers in some countries have taken on more risk. The findings suggest that supervisors and regulators should take a more macroprudential approach to the sector.

Giudici Paolo, Laura Parisi, 28 August 2017

In the European single resolution framework, there are three potential paths for failing banks: bail-in, private intervention, or liquidation. This column proposes combining a new market-based early warning measure of credit risk based on CDS spreads to investigate potential losses and systemic contagion for each path. Applying this to Italy's banking system suggests that private intervention and a bail-in minimise losses compared to liquidation, and, bail-in slightly reduces contagion effects compared to private intervention.

Balazs Csullag, Jon Danielsson, Robert Macrae, 27 June 2016

Investor demand for bonds is very high. This column argues that this is surprising because under almost any likely inflation scenario, including central banks merely hitting their target inflation rates, bondholders suffer large losses. The beneficiaries are sovereign and corporate borrowers; the losers are pension funds, insurance companies and some foreign exchange reserve funds. Meanwhile, the systemic risk from a bond crisis is increasing.

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