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.

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This advanced course focuses on financial and prudential aspects of the shadow banking sector, with some attention to its legal underpinnings.

This course will focus on:
- Shadow banking as a financial segment that expands and contracts credit outside the regulatory perimeter.
- Key elements of shadow banking regulation, emerging issues related to macro-prudential policy.
- European (as well as some US) legislation on insurance companies, money mutual funds and central clearing platforms for derivatives.
- Review of typical shadow banking funding and lending strategies.

Course Instructors: Enrico Perotti, Bart Joosen and Roger Laeven (University of Amsterdam); Iman van Lelyveld (Free University of Amsterdam and DNB)
Area: Financial Stability and Regulation
Level: Intermediate

Further information and registration: http://fbf.eui.eu/training/regulation-shadow-banks/
Registration deadline: 9 October 2017

Enrique Sentana, 16 September 2016

Determining which risks are worth taking is one of the key problems facing financial market participants. Central to this is the time-varying nature of volatility. This column examines the Chicago Board Options Exchange volatility index, VIX, which has become the standard measure of volatility risk. Complementary approaches to pricing VIX derivatives are considered, and the tumultuous economy since the Great Recession is used to assess the empirical performance of the different models.

Guillaume Vuillemey, 12 February 2015

The interest rate derivatives market has grown tenfold over the past 15 years. These contracts are mostly held by commercial banks, raising financial stability concerns. This column discusses how hedging using derivatives affects bank lending and the occurrence of bank defaults. 

Márcio Garcia, 25 September 2013

The recent reversal of capital flows to emerging markets raises the question of whether and how to intervene in currency markets. Brazil’s central bank has intervened heavily, spending more than $50 billion and promising to double that by the end of the year. However, almost all of that intervention has taken place in onshore derivative markets that settle in real. This column argues that such interventions can be effective, but that central banks must stand ready to use their foreign-exchange reserves if necessary.

Venkatachalam Shunmugam, 19 March 2011

The exchange-traded derivatives market has been growing rapidly, particularly in the decade preceding the global crisis. This column discusses the various policies available for mitigating the downside risks and argues that the dynamic nature of the market calls for the continuous evolution of regulation and regulatory tools.

Carlos Tavares, 09 January 2011

With the economic crisis mutating, now is the hour of the regulator. This column argues that policymakers should take heed; the opacity of over-the-counter trading should come to an end and regulation and transparency should be extended to all corners of the financial sector.

Venkatachalam Shunmugam, 18 May 2010

Over-the-counter markets for derivatives have been a subject of blame for the global crisis. This column argues that the rising opacity and barriers to entry in these markets have been sorely overlooked leading to dark pools, flash trading, and front-running. These unfair practises can – at any time – cripple markets. They undermine the premise of free markets and should be stopped.

Dayanand Arora, Francis Rathinam, 11 May 2010

Over-the-counter derivatives were heavily involved in the spread of the global crisis. This column analyses the regulatory framework for such derivatives in India. It argues that moves to tighten the regulatory rope are unnecessary and that a shift to exchange-traded markets may not bring the desired results. Instead, policymakers should strive towards increased disclosure, more transparency, and more standardisation.

Harald Hau, 17 April 2010

What good can come from the global crisis? This column argues that a major cause of the crisis was the lack of exchange trading for derivatives, which prevented market prices from signalling their inherent risk – more "missing market" than "market failure". The use of exchange trading for Greek sovereign debt, for example, marks a new and improved era in modern finance.

Viral Acharya, 04 September 2009

Financial institutions enjoy a large number of government guarantees. This column says that we ought to be charging banks for such subsidies and doing so in a way that promotes financial stability. It uses the example of demand deposit insurance in the US to explore the poor design of funding for such guarantees.

Viral Acharya, Robert Engle, 29 August 2009

Over-the-counter (OTC) markets produced most of the toxic assets that played a prominent role in the ongoing crisis. This column advocates further transparency in OTC markets regulation, arguing that it would make participants apply appropriate risk controls, lower systemic risk, and better situate regulators to address failures of large institutions.

Events