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on International Finance |
| By: | Faia, Ester; Weder di Mauro, Beatrice |
| Abstract: | Most recent regulations establish that resolution of global banking groups shall be done according to bail-in procedures and following a Single Point of Entry (SPE) as opposed to a Multiple Point of Entry (MPE) approach. The latter requires parent holding of global groups to put up front the equity capital needed to absorb losses possibly emerging in foreign subsidiaries-branches. No model rationalized so far such resolution regime. We build a model of optimal design of resolution regimes and compare three regimes: SPE with cooperative authorities, SPE with non-cooperative authorities and MPE (ring-fencing). We find that the costs for bondholders of bail-inable instruments is generally higher under noncooperative regimes and ring-fencing. We also find that in those cases banks have ex ante incentives to reduce their exposure in foreign assets. We also examine recent case studies that help us rationalize the model results. |
| Keywords: | single point of entry,multiple point of entry,strategic interaction of regulators,financial spillover,financial retrenchment |
| JEL: | G18 F3 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:88&r=ifn |
| By: | Ahmet Sensoy; Kevser Ozturk; Erk Hacihasanoglu; Benjamin M. Tabak |
| Abstract: | Using dynamic conditional correlations and networks, we bring a novel framework to define the integration and segmentation of emerging countries. The individual EMBI+ spreads of 13 emerging countries from 01/2003 to 12/2013 are used to compare their interaction structure before (phase 1) and after (phase 2) the global financial crisis. Accordingly, the average of dynamic correlations between cross country spreads significantly increases in phase 2. At first, the increased co-movement degree suggests an integration of the sample countries after the crisis. However, correlation based stable networks show that the increase is more likely to be caused by clusters of countries that exhibit high within-cluster co-movement but not between-cluster co-movement. Important implications for international investors and policymakers are discussed. Using dynamic conditional correlations and networks, we bring a novel framework to define the integration and segmentation of emerging countries. The individual EMBI+ spreads of 13 emerging countries from 01/2003 to 12/2013 are used to compare their interaction structure before (phase 1) and after (phase 2) the global financial crisis. Accordingly, the average of dynamic correlations between cross country spreads significantly increases in phase 2. At first, the increased co-movement degree suggests an integration of the sample countries after the crisis. However, correlation based stable networks show that the increase is more likely to be caused by clusters of countries that exhibit high within-cluster co-movement but not between-cluster co-movement. Important implications for international investors and policymakers are discussed. |
| Keywords: | emerging markets, financial crisis, integration, segmentation, dynamic conditional correlation, financial networks |
| JEL: | C58 D85 E44 F30 G01 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bor:wpaper:1526&r=ifn |
| By: | Abbassi, Puriya; Iyer, Rajkamal; Peydró, José Luis; Tous, Francesc R. |
| Abstract: | We analyze securities trading by banks and the associated spillovers to the supply of credit. Empirical analysis has been elusive due to the lack of securities register for banks. We use a unique, proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. Analyzing data at the security level for each bank in each period, we find that during the crisis, banks with higher trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading-expertise banks with higher capital and in securities with lower rating and long-term maturity. In fact, there are no differential effects for triple-A rated securities. Moreover, banks with higher trading expertise reduce their overall supply of credit in crisis times – i.e., for the same borrower at the same time, trading-expertise banks reduce lending relative to other banks. This effect is more pronounced for trading-expertise banks with higher capital, and the credit reduction is binding at the firm level. Finally, these differential effects for trading-expertise banks are not present outside the crisis period |
| Keywords: | bank capital; banking; credit supply; investments; risk-taking |
| JEL: | G01 G21 G28 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10480&r=ifn |
| By: | Fornaro, Luca |
| Abstract: | This paper provides a framework to understand debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging, world consumption demand is depressed and the world interest rate is low, reflecting a high propensity to save. If exchange rates are allowed to float, deleveraging countries can rely on depreciations to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut off, because deleveraging countries cannot depreciate against the other countries in the monetary union, and therefore the fall in the demand for consumption and the downward pressure on the interest rate are amplified. Hence, deleveraging can easily push a monetary union against the zero lower bound and into a recession. |
| Keywords: | Debt Deflation; Global Debt Deleveraging; Liquidity Trap; Monetary Union; Precautionary Savings; Sudden Stops |
| JEL: | E31 E44 E52 F32 F34 F41 G01 G15 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10469&r=ifn |
| By: | Juan Andrés Espinosa-Torres; Jose E. Gomez-Gonzalez; Luis Fernando Melo-Velandia; José Fernando Moreno-Gutiérrez |
| Abstract: | We study the effect of shocks to the United States government bonds term premium on Latin American government bonds term premia. For doing so, we compute dynamic multipliers. Our main findings indicate that Latin American countries’ term premia respond permanently to changes in United States term premium. However, impulse-response functions vary depending on the country and particular time-length for which premia are computed. Responses are larger for Brazil and Colombia. Mexico exhibits the lowest responses for the four economies in our study. Classification JEL: E43, F36, C22. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:869&r=ifn |
| By: | Garratt, Rod (Federal Reserve Bank of New York); Zimmerman, Peter |
| Abstract: | Novating a single asset class to a central counterparty (CCP) in an over-the-counter derivatives trading network impacts both the mean and variance of total net exposures between counterparties. When a small number of dealers trade in a relatively large number of asset classes, central clearing increases the mean and variance of net exposures, which may lead to increased counterparty risk and higher margin needs. There are intermediate cases where there is a trade-off: The introduction of a CCP leads to an increase in expected net exposures but this increase is accompanied by a reduction in variance. We extend the work of Duffie and Zhu (2011) by considering general classes of network structures and focus on scale-free and core-periphery structures, which have been shown to be accurate models of real-world financial networks. We find that a CCP is unlikely to be beneficial when the link structure of the network relies on just a few key nodes. In particular, in large scale-free networks a CCP will always worsen expected netting efficiency. In such cases, CCPs can improve netting efficiency only if agents have some degree of risk aversion that allows them to trade off the reduced variance against the higher expected netted exposures. This may explain why, in the absence of regulation, traders in a derivatives network may not develop a CCP themselves. |
| Keywords: | central clearing; core-periphery network; scale-free network |
| JEL: | D85 G14 |
| Date: | 2015–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:717&r=ifn |