Failed bank takeovers and financial stability

Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies.     

Economic growth and the stability and efficiency of the financial sector

It has been claimed that the ability of emerging markets to adopt optimal stabilization policies is hampered by a number of factors. Among them, it has been recently emphasized the role of financial instability, inefficiencies, and financial market imperfections. It is claimed here that the current financial regulatory paradigm, embodied in Basel II, may improve financial stability but reinforces cyclicality. Therefore, countries should emphasize financial efficiency since it would lead to enhanced financial stability, without increasing cyclicality.     

Financial liberalization and the stability of currency pegs

This paper analyzes how the strategies of domestic firms borrowing abroad complicate the interaction between central banks and foreign exchange short sellers. If we define financial liberalization as the degree of freedom given to domestic firms to borrow abroad, we find that, in the early stages of financial liberalization, foreign borrowing does not affect the stability of the currency peg, but, in the advanced stages of financial liberalization, foreign borrowing destabilizes currency pegs. When this happens, we show that policies to curb currency short sellers have no effect. The paper thus formalizes the critical juncture where financial liberalization and currency pegs become incompatible policy goals.     

Distribution forecast targeting in an open-economy,macroeconomic volatility and financial implications

In an open-economy faced with parameter uncertainty, this paper uses distribution forecasts to investigate the impact of alternative inflation targeting policies on macroeconomic volatility and their potential implications on financial stability. Theoretically, Domestic Inflation Targeting (DIT) leads to less volatility than Consumer Price Index Inflation Targeting (CPIIT) for several macroeconomic variables and, in particular, for the interest rate. Empirically, a positive relationship between interest rate volatility and financial instability emerges for the US, UK and Sweden since the early 1990s. Bridging theory and empirical evidence, we conclude that the choice of the inflation targeting regime has an important impact on macroeconomic volatility and potential implications for financial stability.     

Loss Sharing Rules for Bank Holding Companies: An Assessment of the Federal Reserve's Source‐of‐Strength Policy and the FDIC's Cross Guarantee Authority

In this article, we critically examine two policies designed to protect the deposit insurance funds—the Federal Reserve Board's source‐of‐strength policy and the FDIC's cross‐guarantee authority. We discuss why each of the policies was adopted and how effective each has been in practice since its implementation. We then evaluate the future application and usefulness of the two policies in light of the structural changes that have resulted from industry consolidation and the financial modernization of the 1990s.     

A leverage-based measure of financial stability

The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system’s potential for financial crises can be measured by the stability ratio, the ratio of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.     

Monetary policy and financial stability in a banking economy: Transmission mechanism and policy tradeoffs

The 2008 global financial crisis demonstrated that monetary policy and financial stability policy are more highly interrelated than previously thought. This paper analyzes the interactions between these policies using a non-linear overlapping-generations model with financial frictions in the form of banking financial intermediation. The paper embeds negative externalities due to contagion effects in physical investments which creates the need for financial stability policy. We show how the monetary policy transmission mechanism depends on financial stability policy tools as well as on regulatory and institutional constraints.We find policy tradeoffs in trying to accomplish both monetary and financial stability targets. The central bank must take these tradeoffs into account when selecting the tools in its policy toolbox. Another important finding is the interchangeability of price stability and financial stability policy tools.     

Corporate Governance and Financial Peer Effects

Growing evidence suggests that managers select financial policies partially by mimicking policies of peer firms. We find that these peer effects in capital structure choice are unique to firms operating under weak external corporate governance. Cross-sectional tests suggest that this finding is best explained by a quiet life hypothesis in which managers may be able to avoid the effort required to optimize financial policies and the scrutiny of market participants. Leverage ratios of mimicking firms display less sensitivity to a profitability shock. Finally, mimicking correlates to higher financing costs and lower future profitability, especially if it results in high leverage.     

宏观审慎政策协调能否抑制国际性银行危机传染？——基于跨境金融关联视角的实证研究

本文基于跨境金融关联视角对宏观审慎政策能否抑制国际性银行危机传染这一重要的理论与实践问题进行了实证研究。选取亚洲金融危机和全球金融危机时期遭受冲击的10个代表性国家作为样本,构建Logit模型和多元回归模型探讨本国及具有金融关联的国家协调实施宏观审慎政策对本国系统性银行危机传染的影响。研究表明,具有金融关联的国家出现金融危机会显著增加本国系统性银行危机的发生概率,具有金融关联的国家实施宏观审慎政策对本国信贷的影响比对房价的影响更明显,本国及具有金融关联的国家协调实施宏观审慎政策会显著降低本国系统性银行危机的发生概率。在调整银行危机指标及考虑贸易关联和流动性风险的影响后,研究结果依然保持稳健。本文的研究结论揭示了加强宏观审慎政策协调有助于维护全球金融稳定,对于中国政策当局强化宏观审慎管理具有极其重要的政策含义。     

Fund Management and Systemic Risk – Lessons from the Global Financial Crisis

Fund managers play an important role in increasing efficiency and stability in financial markets. But research also indicates that fund management in certain circumstances may contribute to the buildup of systemic risk and severity of financial crises. The global financial crisis provided a number of new experiences on the contribution of fund managers to systemic risk. In this article, we focus on these lessons from the crisis. We distinguish between three sources of systemic risk in the financial system that may arise from fund management: insufficient credit risk transfer to fund managers; runs on funds that cause sudden reductions in funding to banks and other financial entities; and contagion through business ties between fund managers and their sponsors. Our discussion relates to the current intense debate on the role the so‐called shadow banking system played in the global financial crisis. Several regulatory initiatives have been launched or suggested to reduce the systemic risk arising from non‐bank financial entities, and we briefly discuss the likely impact of these on the sources of systemic risk outlined in the article.     

Financial intermediation and the funding of biomedical innovation: A review

We review the literature on financial intermediation in the process by which new medical therapeutics are financed, developed, and delivered. We discuss the contributing factors that lead to a key finding in the literature—underinvestment in biomedical R&D—and focus on the role that banks and other intermediaries can play in financing biomedical R&D and potentially closing this funding gap. We conclude with a discussion of the role of financial intermediation in the delivery of healthcare to patients.     

How to improve IFRS for intangible assets? A milestone approach

This study focuses on the decreasing relevance of financial information associated with current financial reporting standards for intangible assets. We summarize and compare three approaches to improving financial reporting standards for internally generated intangibles—the recognition approach, the fair value approach and the disclosure approach, among which we focus on the recognition approach. We investigate the impact of current International Accounting Standard 38 on the R&D capitalization policies of the high-tech industry, particularly among medical device firms in China. We conclude that the current recognition criteria are so stringent that they disincentivize firms from capitalizing their R&D investments. A large variation exists in capitalization timing within the medical device industry. Accordingly, we propose the milestone approach to revising financial reporting standards for intangible assets. We suggest that determining the capitalization criteria for intangibles based on the R&D cycle and capitalization timing should be moved forward.     

Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality*

We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual‐based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. We conclude that the assessment of a firm's institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.     

货币政策与宏观审慎政策共同支持宏观经济稳定

货币政策是维持宏观经济稳定运行的重要政策工具,但2007—2009年国际金融危机表明,仅仅保持物价水平稳定,忽视金融风险,并不足以维持宏观经济稳定。近年来中国提出双支柱宏观政策框架以支持宏观经济稳定,这一创新具有重要的理论与现实意义。我们首先提出了双支柱宏观调控的框架,强调应该注重两类政策目标的协同与矛盾、政策传导渠道的相互交叉与影响、冲击类型与开放条件的差异等,从而保证双支柱宏观调控对宏观经济的稳定效应。接下来,我们建立了一个DSGE两国模型,作为分析双支柱宏观调控稳定宏观经济的案例研究。研究表明,第一,金融冲击下,货币政策有助于稳定宏观经济,且随着汇率制度从固定转向浮动,货币政策稳定宏观经济的效果会明显加强。第二,在货币政策的基础上,增加以跨境资本流入税为代表的宏观审慎政策工具,可以有效遏制金融市场的顺周期机制,进一步提高宏观经济的稳定性,从而验证了双支柱宏观调控的有效性。第三,双支柱宏观调控的有效性与汇率制度有关,当汇率灵活性水平较低时,双支柱宏观调控对宏观经济的稳定效果更好。     

Visible Reserves in Banks – Determinants of Initial Creation,Usage and Contribution to Bank Stability

The opportunity of building up visible “Reserves for General Banking Risks” by the bank management represents a peculiarity in the German financial accounting framework for banks. We investigate German banks' motives for the creation and usage of these reserves and assess their role in financial stability. We find that banks primarily create and use GBR reserves to build up Tier 1 capital for regulatory capital management and earnings management purposes. Most importantly, however, we also reveal that banks using these reserves are less likely to experience a future distress or a bank default event. We therefore conclude that the existence of GBR reserves within the financial accounting framework represents both a convenient capital and earnings management tool for bank managers and a beneficial regulatory instrument to enhance bank stability.     

Banks’ Financial Reporting and Financial System Stability

The use of accounting measures and disclosures in banks’ contracts and regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and nonmarket mechanisms in limiting banks’ development of debt and risk overhangs in economic good times and in mitigating the adverse consequences of those overhangs for the stability of the financial system in downturns. This essay examines how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system. We begin with a foundational discussion of how aspects of banks’ accounting and disclosures may affect stability. We then evaluate representative papers in the empirical literature on banks’ financial reporting and stability, pointing out the research design issues that empirical accounting researchers need to confront to develop well‐specified tests able to generate reliably interpretable findings. To this end, we provide examples of settings amenable to addressing these issues. We conclude with considerations for accounting standard setters and financial system policy makers.     

Regulatory technology (Reg-Tech) in financial stability supervision: Taxonomy,key methods,applications and future directions

Financial regulation is the basic requirement for financial stability. Recently, regulatory technology (Reg-Tech) has become one of the main research topics in financial stability regulation. Reg-Tech aims to use artificial intelligence technologies to realize intelligent identification and early risk warning. It is a powerful tool for assisting financial regulation informatization and high efficiency. This study aims to comprehensively review the application of smart technology in financial stability regulation, and analyze the objects and results of the technology's applications. We build a framework for the application of complex networks, knowledge graphs, machine learning, and dynamic systems in Reg-Tech. The aim is to form a clear context for its development, and serve as the support and development foundation for financial stability research. Finally, we summarize the limitations and shortcomings of current Reg-Tech developments, and discuss future research and development directions.     

货币、财政和宏观审慎政策的协调搭配研究

本文通过构建包含多部门和多元宏观政策的DSGE模型,对货币政策、财政政策和宏观审慎政策的最优反应规则及其协调组合问题进行了分析。分析结果显示:(1)从社会福利最大化的角度,货币政策可继续盯住通胀和产出的稳定,政府支出和税收政策可分别重点盯住产出稳定和债务稳定,而宏观审慎政策则可重点关注以信贷利差和信贷波动为代表的关键金融变量;(2)货币政策、财政政策和宏观审慎政策,通过合理的搭配和组合使用,能比任何单一政策工具都具有更好的经济金融稳定效应;反之,政策之间的不协调将显著削弱彼此的调控效应,加大经济和金融波动,从而导致显著的社会福利损失;(3)从多种政策协调搭配产生“合力”的内在机制来看,财政政策主要通过增加对产出、通胀、就业和债务等变量的稳定效应,对货币政策产生额外助力,而宏观审慎政策则主要通过稳定金融体系和降低金融风险对货币政策产生助力。上述结论表明,在多种经济金融政策并存的情况下,基于良好设定的政策规则,同时加强政策各部门之间的协调合作,是确保多元政策产生积极合力的重要基础。     

Financial regulation and financial inclusion in Sub-Saharan Africa: Does financial stability play a moderating role?

This study examines the impact of financial regulation on financial inclusion in Sub-Saharan Africa, considering the moderating role of financial stability. By analysing the relationship between financial inclusion and the most prominent macro-prudential regulation (capital adequacy), we find that tightening prudential regulations could negatively impact access to finance, thereby conflicting with Sub-Saharan African economies’ financial inclusion goals. More specifically, the capital adequacy requirement tremendously reduces banks’ capacity to provide financial services and this could lead to credit rationing thereby reducing financial inclusion. The results also indicate that, the interaction of financial regulation with financial stability positively impacts financial inclusion. Thus, financial stability augments financial regulation to have an affirmative impact on financial inclusion. The practical implications of this paper are that, one of the ways central governments and policy makers in Sub-Saharan African countries can increase and get the most out of financial inclusion is to formulate policies targeted at reducing capital adequacy requirements of financial institutions and other constraints that limit the operations and efficiency of financial institutions. Such policies should also aim at creating an enabling environment to promote financial stability.     

IMF programs, financial and real sector performance, and the Asian crisis

This paper has three objectives. First, using a richer and more comprehensive set of IMF-related news than previous studies, we examine the impact of IMF-related news on both financial and real stock sector returns in Indonesia during the Asian crisis. Second, we draw lessons about financial and real sectoral patterns of adjustment in crisis countries, including whether and how IMF programs facilitate this adjustment. Third, we explore the interplay between IMF actions in crisis countries and the actions and responses of local authorities. To do so, not only do we account for the impact of news regarding IMF policy actions but also the government’s reaction to them and willingness to implement such policies, and the public sentiment about the implemented IMF programs and government policies. We discuss the policy implications of the findings.