Globalisation is in retreat, but while the slowdown in trade is widely recognised, what is more striking is the collapse of global trade flows. This column shows how banking deglobalisation is a substantial contributor to the sharp slowdown in global capital flows. It finds that certain types of unconventional monetary policy, and their interactions with regulatory policy, can have important global spillovers. Policies designed to support domestic lending may have had the unintended consequence of amplifying the impact of microprudential capital requirements on external lending.
Kristin Forbes, Dennis Reinhardt, Tomasz Wieladek, 23 December 2016
Lionel Fontagné, Gianluca Orefice, 18 December 2016
Regulation is a barrier to trade. This column uses French firm-level panel data to assess how technical barriers to trade impact firms’ exports. In the presence of stringent barriers, exporters balance the cost of complying with this regulation against the fixed cost of entering a new market. Barriers reduce the number of exporting firms in each sector-destination, especially in sectors with many multi-destination firms.
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.
Ross Levine, Chen Lin, Wensi Xie, 07 October 2016
Many policies have been put in place to constrain the expansion of banks across economic borders, in part to avoid them becoming too big and interconnected to fail. However, some argue that such expansion can reduce risk. This column evaluates the impact of geographic expansion on the cost of a bank’s interest-bearing liabilities. Geographic diversification materially lowers bank holding companies’ funding costs, suggesting there is a real cost of restricting banks from using geographic expansion to diversify their risks.
Peter Gal, Alexander Hijzen, 27 September 2016
Product market reforms are seen as a way to boost output in advanced economies, but we know little about their short-term impact. This column presents data from 18 advanced economies that reveal large differences in the potential upside of reform depending on the sector in which a firm operates, its size, and its financial health.
Alex Edmans, 23 September 2016
During political campaigns, candidates often set their sights on CEO compensation as a target for potential regulation. This column considers the various arguments for regulating CEO pay and questions whether it is a legitimate target for political intervention. Some arguments for regulation are shown to be erroneous, and some previous interventions are shown to have failed. While regulation can address the symptoms, only independent boards and large shareholders can solve the underlying problems.
Marco Buti, José Leandro, Plamen Nikolov, 25 August 2016
The fragmentation of financial systems along national borders was one of the main handicaps of the Eurozone both prior to and in the initial phase of the crisis, hindering the shock absorption capacity of individual member states. The EU has taken important steps towards the deeper integration of Eurozone financial markets, but this remains incomplete. This column argues that a fully-fledged financial union can be an efficient economic shock absorber. Compared to the US, there is significant potential in terms of private cross-border risk sharing through the financial channel, more so than through fiscal (i.e. public) means.
Tobias Adrian, Nellie Liang, 14 August 2016
Recent research into how monetary policy frameworks incorporate risks to financial stability has shown that policy affects both financial conditions and financial vulnerabilities that amplify negative shocks. This column argues that looser monetary policy improves financial conditions, but can in some situations worsen vulnerabilities through incentives for financial sector risk-taking and non-financial sector borrowing. Policymakers face an intertemporal trade-off between financial conditions and vulnerabilities which may impact a cost-benefit analysis of monetary policy.
Norges Bank Investment Management, 18 July 2016
Growth in the number of publicly quoted companies is a key driver of economic development, so the apparent decline in the number of company listings, at least in developed markets, is naturally worrying for investors, exchanges, and regulators alike. This column provides a framework to address this decline, and proposes possible remedies that could be taken to encourage more listings. The listings ecosystem must establish a new equilibrium to address the evolving conflicts of interest between founders, early investors, underwriters, and future shareholders.
Stijn Claessens, Nicholas Coleman, Michael Donnelly, 18 May 2016
Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.
Avinash Persaud, 14 April 2016
Since the breakup of Bretton Woods in the early 1970s, the housing market has been at the centre of the biggest banking crises across the world. This column considers the nexus between housing, banking, and the economy, and how these ties can be broken. It argues for two modest regulatory changes in banking and insurance. These would result in life insurers and pension funds providing mortgage finance, better insulating the economy and homeowners from the housing cycle.
Ravi Kanbur, Lucas Ronconi, 30 March 2016
Current de jure measures of labour regulation stringency point to negative consequences of labour laws. This column presents new evidence on cross-country measurements of enforcement of labour laws from almost every country in the world. The authors argue that the consequences of labour enforcement cannot be credibly assessed using de jure measures which ignore the chance that enforcement is lower in places with stricter laws. On average, there is a negative correlation between the stringency of labour regulation and the intensity of its enforcement.
John Armour, Colin Mayer, Andrea Polo, 24 March 2016
Following the Global Crisis, regulators around the world have shown a greater commitment to investigating and sanctioning corporate wrongdoers. This column argues that fines are only one (surprisingly small) component of the overall sanctions available to regulators. Reputational sanctions are, for some categories of misconduct, far more potent than direct penalties.
Stefano Micossi, 26 February 2016
A combination of shocks has led to the spectre of a renewed systemic bank crisis within the EU. This column argues that what is needed is a regulatory policy response in the form of joint action by European governments to convince financial investors that bank liabilities are secure.
Di Gong, Harry Huizinga, Luc Laeven, 18 February 2016
Prior to the Global Crisis, banks could easily use off-balance sheet structures to lower their effective capitalisation rates. This column examines another way that US banks circumvented capital regulations – by maintaining minority-owned, non-consolidated subsidiaries. Had these subsidiaries been consolidated, average reported equity-to-assets ratios would have been 3.5% lower. These findings suggest that some US banks were actively misrepresenting the riskiness of their assets prior to the crisis.
Jakob de Haan, Wijnand Nuijts, Mirea Raaijmakers, 06 November 2015
The Global Crisis revealed serious deficiencies in the supervision of financial institutions. In particular, regulators neglected organisational culture at the institutional level. This column reviews efforts since 2011 by De Nederlandsche Bank to oversee executive behaviour and cultures at financial institutions. These measures aimed at identifying risky behaviour and decision-making processes at a sufficiently early stage for appropriate countermeasures to be implemented. The findings show that regulators can play a larger part in securing the stability of the financial system by taking an active role in shaping institutional cultural processes.
Jon Danielsson, Morgane Fouché, Robert Macrae, 20 October 2015
There has always been conflict between macro- and microprudential regulation. Microprudential policy reigns supreme during good times, and macro during bad. This column explains that while the macro and micro objectives have always been present in regulatory design, their relative importance has varied according to the changing requirements of economic, financial and political cycles. The conflict between the two seems set to deepen and so, regardless of which ‘wins’, policymakers must not undermine the central bank's execution of monetary policy.
Jon Danielsson, Jean-Pierre Zigrand, 07 August 2015
The long-running Greek crisis and China’s recent stock market crash are the latest threats to the stability of the global financial system. But as this column explains, systemic risk is an inevitable part of any market-based economy. While we won’t eliminate systemic risk entirely, the agenda for researchers and policymakers should be to create a more resilient financial system that is less prone to disastrous crises and that still delivers benefits for the economy and for society.
Liangliang Jiang, Ross Levine, Chen Lin, 25 July 2015
The Global Crisis has brought the ins and outs of bank stability to the attention of increasing numbers of academics and policymakers. But what is the impact of bank regulation and competition on bank opacity? This column presents one of the first evaluations of the impact of bank regulatory reforms on the quality of information disclosed by banks, which in turn helps us assess bank stability.
Dirk Schoenmaker, 31 May 2015
Debt financing amplifies the effects of asset prices fluctuations across the financial system and this can produce bubbles. Regulation therefore increasingly focusses on restricting debt financing. Although there is no silver bullet for making the financial system failure-proof, this column argues that policymakers should adopt an integrated and consistent macroprudential approach across the financial system in order to help prevent businesses moving to less-regulated pastures.