Diego Caballero Orduna, Bernd Schwaab, 30 September 2019

A bank’s balance sheet lists its assets, liabilities and shareholder equity, each of which is subject to risk. This column uses the examples of the announcement of the ECB’s Outright Monetary Transactions programme and the first very-long-term refinancing operation allotment to show that, in exceptional circumstances, a central bank can remove illiquidity-related credit risk from parts of its balance sheet by extending the scale of its operations.

Jon Danielsson, Robert Macrae, 12 August 2019

The type of risk we most care about is long-term, what happens over years or decades, but we tend to manage that risk over short periods. This column argues that the dissonance of risk is that we measure and manage what we don't care about and ignore what we do.

Stan Olijslagers, Annelie Petersen, Nander de Vette, Sweder Van Wijnbergen, 17 June 2019

The decade since the Global Crisis has seen central banks employ a range of monetary policy tools. This column draws two lessons from the unconventional monetary policy measures employed during the European sovereign debt crisis. First, central banks should communicate clearly – and with sufficient detail – in times of heightened market stress to lower tail risk perceptions in financial markets. Second, policies aimed at changing the relative supply within different asset classes have an impact on perceived crash risk, while measures aimed at easing financing costs of commercial banks do not.

Jeffrey Chwieroth, Andrew Walter, 03 June 2019

The accumulation of mass financialised wealth has transformed the politics of banking crises. This column shows that the rising wealth of the middle classes has generated great expectations that their wealth will be protected by the government. As a result, democracies perform more financial sector bailouts and are also more financially fragile and politically unstable. 

Esa Jokivuolle, George G. Pennacch, 31 May 2019

Much of financial regulation has been focusing on adequately pricing risk taking by lenders. This column argues that a multinational deposit insurance system such as the proposed European Deposit Insurance Scheme has important advantages, but can also create conflicts among its member nations due to potential deposit insurance subsidies that differ across nations. The authors suggest alternative design features that could minimise these subsidies and make a multinational deposit insurance system more mutually agreeable.

Mathias Hoffmann, Egor Maslov, Bent Sørensen, Iryna Stewen, 10 January 2019

Bank-to-bank lending in the euro area has increased, direct cross-border lending has not. The column shows that dependence on domestic banks reduces risk-sharing in a crisis, reducing GDP growth in affected country-sectors. Benefits from banking integration are only robust to global shocks if banking integration takes the form of cross-border lending to firms and households.

João Granja, Christian Leuz, Raghuram Rajan, 04 December 2018

Risk taking was pervasive during the Global Crisis even in the most unlikely areas, such as stretching to lend at a distance. Using US data, this column examines the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple and policy-relevant measure, the average physical distance of borrowers from banks’ branches. It finds that distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. A sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. 

Carlos Vegh, Guillermo Vuletin, Daniel Riera-Crichton, Juan Pablo Medina, Diego Friedheim, Luis Morano, Lucila Venturi Grosso, 14 November 2018

Emerging markets are especially vulnerable to a myriad of domestic and external risks. This column develops a framework to classify these risks based on their predictability and, hence, their insurability. As the probability of relatively large events increases, it becomes more difficult to insure against such risks. In the extreme case in which countries face truly unpredictable and impactful events (or ‘black swans’), they must rely on building broad-based resilience or resorting to ex-post aid. 

Morten Ravn, 08 November 2018

Morten Ravn of University College London discusses ADEMU work on how differences across households and players in the economy matter for macroeconomic policy.

Christian Bayer, Chi Hyun Kim, Alexander Kriwoluzky, 06 September 2018

Investors fret that Italy may exit the euro. One reason to worry is redenomination risk, driven by the prospect of a country allowing a new currency to depreciate against the euro. This column compares two types of Italian bond yield curves to estimate such risk, and finds that the yield premium due to it peaked at 7% during the sovereign debt crisis. Redenomination risk also affects interest rates in strong economies, which implies a redistribution between savers and borrowers throughout the euro area.

Hélène Rey, 13 August 2018

Hélène Rey, Professor of Economics at London Business School and CEPR Fellow, explains how credit booms develop, what their mechanics are and how the financial intermediaries involved take on different amounts of risk.

David Miles, 23 March 2018

The housing market faces major challenges in both the short and long run in terms of affordability, price variability, ownership structures, financing, and their impacts upon wider macroeconomic stability. This column summarises a conference on lessons for the future of housing, jointly organised by the Brevan Howard Centre for Financial Analysis at Imperial College Business School and CEPR.

Stefan Avdjiev, Leonardo Gambacorta, Linda Goldberg, Stefano Schiaffi, 20 March 2018

The post-crisis period has seen a considerable shift in drivers of international bank lending and international bond issuance, the two main components of global liquidity. This column describes how the sensitivity of cross-border lending to global risk conditions declined substantially post-crisis, becoming similar to that of international bond issuance. This fall largely reflects a change in the composition of international lenders.

Nathan Converse, Eduardo Levy Yeyati, Tomás Williams, 20 March 2018

The share of fund assets held in exchange-traded funds has risen from 3.5% in 2005 to 14% in 2017, and to 20% for funds in emerging market assets. This column uses reported investor flows to argue that this is related to increased exposure of aggregate portfolio equity capital inflows to global risk. On this evidence, exchange-traded fund flows amplify the global financial cycle.

Zsofia Doeme, Stefan Kerbl, 24 January 2018

Risk weights define each bank's minimum capital requirements, but many doubt the comparability of the risk weights that banks report. This column quantifies the variability of these weights across banks, and finds that the country where a bank is headquartered creates statistically significant and economically important differences. Model output floors, as recently agreed upon by the Basel Committee, would reduce this unintended risk weight heterogeneity.

Marlene Amstad, Eli Remolona, Jimmy Shek, 28 October 2017

Global investors are assumed to differentiate between economies using economic fundamentals. This column uses returns on sovereign CDS contracts for 18 emerging markets and ten advanced countries to argue that fundamentals do not drive these decisions. Instead, most of the variation across sovereigns reflects whether or not the country is designated as an 'emerging market'. Investment strategies tend simply to replicate benchmark portfolios.

Max Bruche, Frédéric Malherbe, Ralf R Meisenzahl, 11 September 2017

Syndicated loan issuance has grown dramatically over the last 25 years. Over the period, the syndicated loan business model has evolved, affecting the nature of the associated risks that arranging banks are exposed to. This column introduces the concept of ‘pipeline’ risk –the risk associated with marketing the loans during the syndication process. Pipeline risk forces arranging banks to hold much larger shares of very risky syndicated term loans, which results in reduced lending by the arran­­ging bank not only in the syndicated term loan market, but in others as well.

Ricardo Caballero, Alp Simsek, 30 August 2017

Interest rates continue to decline across the globe, while returns to capital remain constant or increasing. The reasons for this widening risky-safe gap are wide-ranging. This column illustrates the secular rise of risk intolerance in the global economy, and summarises a new macroeconomic framework suitable for this environment. It uses this framework to discuss the current global macroeconomic context, its underlying fragility, and the coexistence of low equilibrium interest rates and high speculation.

Vittoria Cerasi, Sebastian M. Deininger, Leonardo Gambacorta, Tommaso Oliviero, 07 August 2017

Since 2011, the Financial Stability Board (FSB) has implemented compensation principles and standards for executives and material risk-takers in many financial institutions. This column presents evidence that banks in jurisdictions that adopted them changed their compensation policies more than other banks. Compensation in these banks is less linked to short-term profits and more linked to risk, and the CEOs of risky banks now receive less in bonuses and other variable compensation than their peers at less risky banks.

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