Between 1870 and 1914, 68 countries – both sovereign and British colonies – used the London Stock Exchange to issue bonds. This column argues that bond prices and spreads in this period show that the colonies’ semi-sovereignty lowered credit risk at the price of higher illiquidity risk, and further worsened liquidity by attracting investors that rarely traded. Parallels between Eurozone and colonial bonds suggest that the pricing of liquidity and credit in government bond markets is an institutional phenomenon.
Matthieu Chavaz, Marc Flandreau, 01 December 2016
Jean-Pierre Landau, 24 November 2016
The objectives of maximising growth and reducing external imbalances may not be fully compatible in a financially integrated and asymmetric world. This column argues that countries have two choices: they can contain global imbalances and gross financial flows through permanent capital controls, or they can pursue financial integration, managing growing imbalances and external exposures by creating more global safe assets. This implies debt contracts would be either state-contingent, with easy restructuring, or built to be ‘safe’, with a high level of commitment by the issuer.
Thorsten Beck, Elena Carletti, Itay Goldstein, 22 November 2016
The Global Crisis has led to a new wave of regulation. This column argues that improved capital requirements, liquidity requirements, bank resolution and cross-border regulatory cooperation are welcome, but that unresolved problems remain. Specifically, regulation may become too complex, focus too little on macroprudential risks, be inadequate to deal with crises in global financial institutions, or fail to cope with financial innovation.
Yi Huang, Jianjun Miao, Pengfei Wang, 08 November 2016
The Chinese Shanghai Stock Exchange Composite Index dropped by a third in mid-2015, wiping out billions in share value. One of the responses of the Chinese government was to directly participate in the stock market. This column assesses the costs and benefits of this intervention, finding that the resulting gains amounted to about 5% of Chinese GDP. The value was created not just from increased equity and investor confidence, but also from increased liquidity and reduced probability of default for listed firms.
Federico Cingano, Francesco Manaresi, Enrico Sette, 24 June 2016
Negative shocks to bank balance sheets are problematic not just for financial markets, but for employment and economic growth more widely. This column uses evidence on a bank liquidity shock in Italy in 2007-10 to show the impact on firms’ production, investment, and employment. Firms borrowing from banks with a high exposure to the shock experienced a more intense fall both in credit flows and in investment expenditure. While the credit cut has been homogeneous across borrowers, firms with easier access to external finance were able to contain the negative consequences of the drop in credit for investment.
The objective of this course is to present empirical applications (as well as the research methodologies) of relevant questions for both banking theory and policy, mainly related to Systemic Risk, Crises, Monetary Policy and Risk taking behaviour. An important objective is to understand scientific papers in empirical banking; to accomplish this objective, emphasis is placed on illustrating research methodologies used in empirical banking and learning the application of these methodologies to selected topics, such as:
- Securities and credit registers; large datasets
- Fire sales, runs, market and funding liquidity, systemic risk
- Risk-taking and credit channels of monetary policy
- Moral hazard vs. behavioral based risk-taking
- Secular stagnation, banking and debt crises
- Interbank globalization, contagion, emerging markets, policy
Liangliang Jiang, Ross Levine, Chen Lin, 20 May 2016
By creating liquidity, banks improve the allocation of capital and accelerate economic growth. This column uses evidence from US banks between 1984 and 2006 to evaluate the impact of competition amongst banks on their liquidity creation. It finds that an intensification of competition in the banking industry materially reduces liquidity creation. Furthermore, the evidence suggests that more profitable banks experience a smaller reduction in liquidity creation because of their ability to better absorb risk. Similarly, an intensification of competition reduces liquidity creation more among small banks, who are more engaged in relationship lending.
Luis Marques, Gaston Gelos, 18 January 2016
Concerns about both the level of bond market liquidity and its fragility have risen lately, prompted partly by events such as the October 2014 Treasury bond flash rally in the US, or the April 2015 Bund tantrum in Europe. This column assesses current market liquidity and resilience, discerning several key policy recommendations from the evidence.
Nina Karnaukh, Angelo Ranaldo, Paul Söderlind, 10 September 2015
Understanding foreign exchange markets is key to understanding the global financial system. Yet, a clear understanding of why and how foreign exchange illiquidity materialises is still missing. This column suggests that foreign exchange liquidity can be impaired in times of flight to quality and higher global risk, and that commonality increases in distressed markets.
Antonio Acconcia, Giancarlo Corsetti, Saverio Simonelli, 14 August 2015
Fiscal transfers are successful in stimulating aggregate demand to the extent that they reach households with a high marginal propensity to consume. Using micro evidence from Italian earthquakes, this column argues that a well-designed programme of temporary transfers, targeted to relatively wealthy but possibly illiquid households, can be quite helpful in speeding up recovery.
Bastian Von Beschwitz, Donald Keim, Massimo Massa, 02 July 2015
High-frequency news analytics can increase market efficiency by allowing traders to react faster to new information. One concern about such services is that they might provide a competitive advantage to their users with potential distortionary price effects. This column looks at how high frequency news analytics affect the stock market, net of the informational content that they provide. News analytics improve price efficiency, but at the cost of reducing liquidity and with potentially distortionary price effects.
Clemens Jobst, Stefano Ugolini, 23 June 2015
Central banks today provide liquidity exclusively through purchases of (mostly) government bonds and through collateralised open-market operations. This column considers the evolution of liquidity provision by central banks over the past two centuries, and argues that there are alternative approaches to those that are focused on today. One such alternative is a revival of the 19th century practice of uncollateralised lending. This would discourage market participants from relying on informational shortcuts, and reduce the likelihood that informational shocks trigger collateral crises.
Philippe Bacchetta, Kenza Benhima, Céline Poilly, 19 February 2015
The corporate cash ratio – the share of liquid assets in total assets – comoves with employment in the US. This column argues that disentangling liquidity shocks and credit shocks is key to understanding this comovement, and that liquidity shocks appear to be crucial. These shocks make production less attractive or more difficult to finance, while they also generate a need for internal liquidity to pay wages, which can be satisfied by holding more cash.
Philippe Karam, Ouarda Merrouche, Moez Souissi, Rima Turk, 02 February 2015
In the wake of the Crisis, policymakers have introduced liquidity regulation to promote the resilience of banks and lower the social cost of crisis management. This column shows that a funding liquidity shock, manifested as lower access to wholesale sources of funding following a credit rating downgrade, translates into a significant decline in both domestic and foreign lending. Liquidity self-insurance by banks mitigates the impact of a credit rating downgrade on lending.
Yunus Aksoy, Henrique Basso, 29 January 2015
Banking activities have received increasing attention in the aftermath of the Crisis. This column focuses on the effects of bank portfolio choice on asset prices. The term spread is strongly influenced by banks’ expectations of their future profitability. Banks' funding activities, through the securitisation market, create conditions for higher leverage and may lead to a reduction in risk premia. Through its effects on asset prices, bank portfolio choice impacts the real economy, increasing its importance for policymaking.
Dirk Niepelt, 21 January 2015
Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Xavier Vives, 22 December 2014
Banking has recently proven much more fragile than expected. This column argues that the Basel III regulatory response overlooks the interactions between different kinds of prudential policies, and the link between prudential policy and competition policy. Capital and liquidity requirements are partially substitutable, so an increase in one requirement should generally be accompanied by a decrease in the other. Increased competitive pressure calls for tighter solvency requirements, whereas increased disclosure requirements or the introduction of public signals may require tighter liquidity requirements.
Ron Alquist, Rahul Mukherjee, Linda Tesar, 22 December 2014
Foreign direct investment is an essential element in 21st century development strategies. This column discusses new evidence that estimates the importance of financial liquidity as a driver of such flows into emerging-market economies. Financial liquidity considerations are key determinants of the size and ownership structure of these investments.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
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.