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on Financial Markets |
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Issue of 2015‒08‒25
three papers chosen by |
| By: | Aikman, David (Bank of England); Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.)); Lee, Seung Jung (Board of Governors of the Federal Reserve System (U.S.)); Palumbo, Michael G. (Board of Governors of the Federal Reserve System (U.S.)); Warusawitharana, Missaka (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer. |
| Keywords: | Early warning system; financial crisis; financial stability; financial vulnerabilities; heat maps; macroprudential policy; systemic risk; data visualization; countercyclical capital buffers |
| JEL: | G01 G12 G21 G23 G28 |
| Date: | 2015–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-59&r=fmk |
| By: | Altunbas, Yener (Bangor Business School); Manganelli, Simone (European Central Bank); Marques-Ibanez, David (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | In the years preceding the 2007-2009 financial crisis, forward-looking indicators of bank risk concentrated and suggested unusually low expectations of bank default. We assess whether the ex-ante (i.e. prior to the crisis) cross-sectional variability in bank characteristics is related to the ex-post (i.e. during the crisis) materialization of bank risk. Our tailor-made dataset crucially accounts for the different dimensions of realized bank risk including access to central bank liquidity during the crisis. We consistently find that less reliance on deposit funding, more aggressive credit growth, larger size and leverage were associated with larger levels of realized risk. The impact of these characteristics is particularly relevant for capturing the systemic dimensions of bank risk and tends to become stronger for the tail of the riskier banks. The majority of these characteristics also predicted bank risk as materialized before the financial crisis. |
| Keywords: | Bank risk; business models; Great Recession |
| JEL: | E58 G15 G21 G32 |
| Date: | 2015–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1140&r=fmk |
| By: | Ratna Sahay; Martin Cihak; Papa N'Diaye; Adolfo Barajas; Diana Ayala Pena; Ran Bi; Yuan Gao; Annette Kyobe; Lam Nguyen; Christian Saborowski; Katsiaryna Svirydzenka; Reza Yousefi |
| Abstract: | The global financial crisis experience shone a spotlight on the dangers of financial systems that have grown too big too fast. This note reexamines financial deepening, focusing on what emerging markets can learn from the advanced economy experience. It finds that gains for growth and stability from financial deepening remain large for most emerging markets, but there are limits on size and speed. When financial deepening outpaces the strength of the supervisory framework, it leads to excessive risk taking and instability. Encouragingly, the set of regulatory reforms that promote financial depth is essentially the same as those that contribute to greater stability. Better regulation—not necessarily more regulation—thus leads to greater possibilities both for development and stability. |
| Keywords: | Economic growth;Emerging markets;Financial stability;financial development, financial deepening, financial inclusion, finance, markets, General, Government Policy and Regulation, |
| Date: | 2015–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfsdn:15/8&r=fmk |