Financial markets

Paul Hiebert, 13 July 2021

Climate change will impact those parts of the financial system most exposed to its disruptive effects. This column analyses a new financial stability risk mapping for the EU financial system, linking financial exposures of thousands of banks, insurance companies, and investment funds to millions of firms subject to climate risk. It highlights a high level of risk concentration, both in European regions subject to climate hazards as well as economic sectors with diverse carbon emission intensities. Long-term scenario analyses suggest that the risks will be best addressed through proactive policies that directly contain global temperature rises. 

Timo Löyttyniemi, 08 July 2021

Financial stability is at the core of central banking. This column assesses the various risks to financial stability stemming from climate change, which arise from physical risks, transition risks, and the chosen transition path towards a net zero economy. Additional risks arise from the changes in government policies, risks in green investments, mispricing of assets, and potential changes in metrics. The channels for financial instability are, as usual, the sustainability of government debt, the vulnerability of banking, and the volatility and liquidity of securities markets. Awareness of these additional financial stability risks could increase financial stability.

Rustam Jamilov, Hélène Rey, Ahmed Tahoun, 05 July 2021

Cyber risk poses serious threats for businesses around the world. This column develops a new text-based measure of cyber risk exposure by leveraging computational linguistics and quarterly earnings transcripts for 12,000+ firms from 85 countries over the past 20+ years. Cyber threats have tripled since 2013 and affected a lot more countries and industries. Cyber risks are priced into the stock market and are contagious. The authors conclude that cyber risk is a source of systemic risk for firms and markets.

Giovanni Cespa, Xavier Vives, 01 July 2021

Over the past two decades, governments and regulators have worked to foster competition among trading venues, leading to market fragmentation and contributing to a drastic reduction in the cost of trading. But this also led exchanges to heighten their reliance on revenue generating activities such as the sale of market data, co-location space, and fast connections to matching engines. This column argues that a connectivity fee or entry regulations could work well from a regulatory perspective, and highlights the important role of exchanges’ technological capacity decisions as a driver of liquidity.

Michael Ehrmann, Robin Tietz, Bauke Visser, 29 June 2021

Most of the Reserve Bank presidents of the Federal Open Market Committee of the US Federal Reserve System have rotating voting rights. This column discusses new evidence that having the right to vote makes them more involved, which affects their meeting interventions and their inter-meeting speeches. This matters for financial markets – asset prices react less to speeches delivered by presidents when they have the right to vote. The authors argue that this is consistent with changes in the speeches’ information content.

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