nep-ifn New Economics Papers
on International Finance
Issue of 2021‒11‒15
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The simpler, the better: Measuring financial conditions for monetary policy and financial stability By Arrigoni, Simone; Bobasu, Alina; Venditti, Fabrizio
  2. Does regulation only bite the less profitable? Evidence from the too-big-to-fail reforms By Goel, Tirupam; Lewrick, Ulf; Mathur, Aakriti

  1. By: Arrigoni, Simone; Bobasu, Alina; Venditti, Fabrizio
    Abstract: In this paper we assess the merits of financial condition indices constructed using simple averages versus a more sophisticated alternative that uses factor models with time varying parameters. Our analysis is based on data for 18 advanced and emerging economies at a monthly frequency covering about 70% of the world's GDP.We assess the performance of these indicators based on their ability to capture tail risk for economic activity and to predict banking and currency crises. We find that averaging across the indicators of interest, using judgmental but intuitive weights, produces financial condition indices that are not inferior to, and actually perform better than, those constructed with more sophisticated statistical methods. An indicator that gives more weight to measures of financial stress, which we term WA-FSI, emerges as the best indicator for anticipating banking crisis, and is therefore better suited for financial stability.
    Keywords: financial conditions,quantile regressions,banking crises,SVARs,spillovers
    JEL: E32 E44 C11 C55
    Date: 2021
  2. By: Goel, Tirupam (Bank for International Settlements); Lewrick, Ulf (Bank for International Settlements); Mathur, Aakriti (Bank of England)
    Abstract: Profitability underpins the opportunity cost of shrinking assets and the ability to generate capital. It thus shapes banks’ responses to higher capital requirements. We present a stylised model to formalise this insight and test our theoretical predictions on a cornerstone of the too-big-to-fail reforms. Leveraging textual analysis to identify the treatment date, we show that less profitable banks reduced their systemic importance as intended by regulation. Those close to the regulatory thresholds that determine bank-specific capital surcharges – a source of exogenous variation in the regulatory treatment – shrunk by even more. In contrast, more profitable banks continued to expand.
    Keywords: Global systemically important bank (G-SIB); textual analysis; capital regulation; systemic risk; bank profitability; difference-in-differences (DD)
    JEL: G21 G28 L51
    Date: 2021–10–29

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