‘Too big to fail’ is an enduring problem for financial authorities and regulators. While forbidding government bailouts may be a popular move, the strategy lacks credibility. This column examines the proposals of the Minneapolis Plan to End Too Big to Fail. The plan has many virtues that tackle systemic problems and that build on the Dodd-Frank Act’s crisis prevention and management tools. However, further analysis of the plan is still needed to ensure that its measures aren’t circumvented.
Stephen Cecchetti, Kim Schoenholtz, 18 January 2017
Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo, 12 December 2016
In the years since the Global Crisis, there has been substantial public opposition to taxpayer-funded bailouts of financial institutions. Reflecting this sentiment, a cornerstone of the EU’s post-crisis resolution framework is that losses be borne by private investors and creditors. This column surveys some of the details that need to be worked out before such bail-in measures can work. Effective implementation requires clear identification of the limits to bail-in. In particular, for such measures to be successful, bailout cannot be ruled out by assumption.
Selim Elekdag, Gaston Gelos, 24 November 2016
The relationship between corporate governance and financial stability has received little attention in the context of emerging markets. Using new firm-level indices of governance in emerging markets, this column shows that both firm-level governance and governance frameworks have generally improved at the country level over recent years. These stronger frameworks have enhanced the resilience of firms to global shocks, and bolstered balance sheets.
Paul Tucker, 28 September 2016
The objective of financial stability policy is unclear. Is it the resilience of the financial system, avoiding the costs of systemic collapse, or managing the credit cycle, containing the costs of resource misallocation and over-indebtedness? This column argues that the answers have serious implications for what can decently be delegated to independent ‘macroprudential authorities’, but have barely been debated in those terms.
Carlos Arteta, M Ayhan Kose, Marc Stocker, Temel Taskin, 26 September 2016
Against a background of persistently weak growth and low inflation expectations, a number of central banks have implemented negative interest rate policies over the past few years. This column argues that such policies could help provide additional monetary policy stimulus, as long as policy interest rates are only modestly negative and do not stay negative for too long to avoid adverse effects on the financial sector. While these policies do have a place in the policymaker’s toolkit, they need to be handled with care to secure their benefits while mitigating risks.
The Money Macro and Finance Research Group Annual Conference. Speakers include Claudio Borio (Bank for International Settlements), Jagjit Chadha (National Institute of Economic and Social Research), Kristin Forbes (Bank of England), Rain Newton Smith (CBI) and John Vickers (Oxford University) - journalists welcome - see website for full programme.
Banking is one of the most complex areas of modern economies. Flawed understanding, mismanagement, and bad regulation of banks have caused the Great Financial Crisis of 2007-2010 and the worst economic crisis in Europe in decades. This course will shed some light on the theory of banking and recent empirical insights into the functioning of banks. Starting from a thorough discussion of basic conceptual frameworks it will discuss elements of shadow banking, financial stability, and bank regulation.
The course provides an introduction to the conceptual foundations of banking and explores the workings of banks in modern economies, by looking at problems of credit intermediation, liquidity provision, maturity transformation, relationship lending, and bank competition.
Philip Lane, 23 August 2015
This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability.
Charles Goodhart, Enrico Perotti, 10 September 2015
In the last century, real estate funding by banks grew steadily. This column argues that the unprecedented expansion of banking in mortgage lending resulted in a high degree of maturity mismatch. The solution to this problem should focus on greater maturity matching, and not using insured deposits. One avenue to do so is by securitising mortgages with little maturity transformation. Another is to create intermediaries providing mortgage loans where the lender shares in the appreciation, while assuming some risk against the occasional bust.
Gaston Gelos, Hiroko Oura, 25 July 2015
The growth of the asset management industry has raised concerns about its potential impacts on financial stability. This column assesses the systemic risk created by fund managers’ incentive problems and a first-mover advantage for end investors. Fund flows and fund ownership affect asset prices, and fund managers’ behaviour can amplify risks. This lends support to the expansion and strengthening of industry oversight, both at the individual fund and market levels.
Gaston Gelos, Frederic Lambert, 17 May 2015
Since the Global Crisis, international banks have reduced cross-border lending but continued to lend through their branches and affiliates overseas. This column argues that the observed shift was to a significant extent driven by regulatory changes. It should improve financial stability in host countries of foreign banks.
Rabah Arezki, Olivier Blanchard, 13 January 2015
Plunging oil prices affect everyone, albeit no two countries will experience it in the same way. In this column, the IMF’s Chief Economist Olivier Blanchard and Senior Economist Rabah Arezki examine the causes as well as the consequences for various groups of countries and for financial stability more broadly. The analysis has important implications for how policymakers should address the impact on their economies.
Alan Moreira, Alexi Savov, 16 September 2014
The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.
James Boughton, 15 September 2014
The international financial system is not working fine and reforms of regional and global institutions are much needed. This column discusses some of the transformations that the IMF could implement in order to keep pace with the changes in the world economy. One problem for the credibility of the IMF is the G20 in its current design and organisation. Institutional reforms, however, should be combined with advances in economic policy in order to promote economic growth and financial stability.
Jussi Keppo, Josef Korte, 07 September 2014
Four years ago, the Volcker Rule was codified as part of the Dodd–Frank Act in an attempt to separate allegedly risky trading activities from commercial banking. This column presents new evidence finding that those banks most affected by the Volcker Rule have indeed reduced their trading books much more than others. However, there are no corresponding effects on risk-taking – if anything, affected banks take more risks and use their trading accounts less for hedging.
Gaston Gelos, Hiroko Oura, 23 August 2014
The landscape of portfolio investment in emerging markets has evolved considerably over the past 15 years. Financial markets have deepened and become more internationally integrated. The mix of global investors has also changed, with more money intermediated by mutual funds. This column explains that these changes have made capital flows and asset prices in these economies more sensitive to global financial shocks. However, broad-based financial deepening and improved institutions can enhance the resilience of emerging-market economies.
Linda Goldberg, Signe Krogstrup, John Lipsky, Hélène Rey, 26 July 2014
The dollar’s dominant role in international trade and finance has proved remarkably resilient. This column argues that financial stability – and the policy and institutional frameworks that underpin it – are important new determinants of currencies’ international roles. While old drivers still matter, progress achieved on financial-stability reforms in major currency areas will greatly influence the future roles of their currencies.
Gabriel Chodorow-Reich, 27 July 2014
The monetary policies implemented by the Federal Reserve since late 2008 have raised concerns about the risk taking of financial institutions. This column discusses the effect of some of these policies on life insurance companies and market mutual funds. While the effect on life insurance companies has been stabilising, money market funds did not actively reach for yield.
Markus K Brunnermeier, Yuliy Sannikov, 03 June 2014
Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. This column uses the ‘I theory of money’ to diagnosis the problem and propose ‘prudently designed’ asset-backed securitisation as the cure. This would transform illiquid SME and consumer loans into a liquid asset class that would broaden the transmission mechanism while providing a lasting intermediation market for this segment in the Eurozone.
Mark Mink, Jakob de Haan, 24 May 2014
To date, much uncertainty exists about how large the spillovers would be from the default of a systemically important bank. This column shows evidence that the market values of US and EU banks hardly respond to changes in the default risk of banks that the Financial Stability Board considers globally systemically important (G-SIBs). However, changes in all G-SIBs’ default risk explain a substantial part of changes in bank market values. These findings have implications for financial-crisis management and prevention policies.