New-breed global investors and emerging-market financial stability

Gaston Gelos, Hiroko Oura 23 August 2014

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The investor base matters since different investors behave differently. During the emerging-market sell-off episodes in 2013 and early 2014:

  • Retail-oriented mutual funds withdrew aggressively, but investors from different regions also tended to behave differently;
  • Institutional investors such as pension funds and insurance companies with long-term strategies broadly maintained their emerging-market investments.

Figure 1 shows the facts.

Figure 1. Bond flows to emerging-market economies 

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Topics:  Financial markets International finance

Tags:  Pension Funds, financial stability, capital flows, investment, emerging markets, financial deepening, herding, original sin, mutual funds, institutional investors

Why is financial stability essential for key currencies in the international monetary system?

Linda Goldberg, Signe Krogstrup, John Lipsky, Hélène Rey 26 July 2014

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Could the dollar lose its status as the key international currency for international trade and international financial transactions, and if so, what would be the principal contributing factors? Speculation about this issue has long been abundant, and views diverse. After the introduction of the euro, there was much public debate about the euro displacing the dollar (Frankel 2008). The monitoring and analysis included in the ECB’s reports on “The International Role of the Euro” (e.g.

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Topics:  Financial markets International finance

Tags:  reserve currency, financial stability, dollar, capital flows, spillovers, Currency, SIFIs

Financial stability and monetary policy

Gabriel Chodorow-Reich 27 July 2014

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In the winter of 2008, the Federal Reserve began an unprecedented campaign to combat the economic downturn. The mix of policy instruments included a near zero federal funds rate, explicit communication regarding the forward path of the funds rate, and a balance sheet that ballooned to more than $4 trillion as of this writing. With memories of the 2008-09 financial crisis still fresh, the policies have prompted concern for their effect on financial stability (Bernanke 2013, Stein 2013, Fisher 2014, Yellen 2014).

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Topics:  Financial markets Monetary policy

Tags:  financial stability, mutual funds, life insurance

Repairing the transmission of monetary policy through asset-backed securitisation

Markus K Brunnermeier, Yuliy Sannikov 03 June 2014

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Recent data show a decline in credit to small and medium-sized enterprise (SME) and private loans. Lack of credit growth to productive firms is one of the main obstacles to reignite the European growth engine.

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Topics:  Monetary policy

Tags:  monetary policy, price stability, financial stability, securitisation, risk premia, asset backed securities

Spillovers from systemic bank defaults

Mark Mink, Jakob de Haan 24 May 2014

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Financial-crisis management and prevention policies often focus on mitigating spillovers from the default of systemically important banks. During the recent crisis, governments avoided large bank failures by insuring and purchasing intermediaries’ troubled assets, by providing them with capital injections, and even by outright nationalisations. After the crisis, financial regulators designed additional requirements for those institutions that the Financial Stability Board designated as globally systemically important banks (G-SIBs).

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Topics:  Financial markets

Tags:  financial stability, spillovers, regulation, banking, banks, systemic risk

The two faces of cross-border banking flows: An investigation into the links between global risk, arms-length funding, and internal capital markets

Dennis Reinhardt, Steven Riddiough 07 May 2014

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Following the collapse of Lehman Brothers in September 2008, global risk spiked and the world witnessed a collapse in cross-border funding between banks. On closer inspection, however, not all countries’ banking systems experienced a withdrawal of cross-border finance. In fact, a number actually enjoyed an inflow of funding from banks overseas (Figure 1).

Figure 1 Cross-border bank-to-bank flows following the collapse of Lehman Brothers

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Topics:  Financial markets International finance

Tags:  financial stability, banking, Wholesale funding, interbank lending, Cross-border lending, cross-border banking

Exploring the transmission channels of contagious bank runs

Martin Brown, Stefan Trautmann, Razvan Vlahu 10 April 2014

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Financial contagion – the situation in which liquidity or insolvency risk is transmitted from one financial institution to another – is viewed by policymakers and academics as a key source of systemic risk in the banking sector. In particular, the events in the 2007–2009 Global Crisis have turned the attention of policymakers towards the potential contagion of liquidity withdrawals across banks and the resulting implications for financial stability.

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Topics:  Financial markets

Tags:  experimental economics, financial stability, financial crisis, global crisis, banking, contagion, banks, systemic risk, bank runs

Banks’ disclosure and financial stability

Rhiannon Sowerbutts, Ilknur Zer, Peter Zimmerman 05 April 2014

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Investors in banks need information about the risks that they are exposed to in order to be able to assess and price those risks properly. However, during the recent crisis, investors found that they did not have enough information to assess these risks, which led to a dramatic increase in funding costs, intensifying the crisis (Gorton 2008). Increased disclosure can help to alleviate the problem of asymmetric information between banks – who have more information about their own financial resilience – and investors, who may have less information.

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Topics:  Global governance International finance

Tags:  financial stability, bank disclosure, risk information

The role of central banks in financial stability: How has it changed?

Willem Buiter,

Date Published

Mon, 01/16/2012

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Coordinating bank-failure costs and financial stability

Iman van Lelyveld, Marco Spaltro 27 October 2011

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During the financial crisis, failure or distress of cross-border firms has been met by ad hoc coordinated solutions (eg Fortis and Dexia) or national solutions (eg UK and US banks). However, economic theory (such as Freixas 2003) shows that ‘improvised coordination’ is inefficient as it leads to a general under-provision of the public good (ie financial stability). The European Financial Stability Facility (EFSF) for the Eurozone (EZ) constitutes the first example instead of an ex ante burden-sharing agreement.

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Topics:  Europe's nations and regions Global crisis International finance

Tags:  financial stability, Eurozone crisis, cross-border banking, burden-sharing, bank resolution

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