Past financial crises,the current financial turmoil,and the need for a new macrofinancial stability framework

While it is tempting to focus on new financial innovations in helping explain recent financial turmoil, more traditional causes should not be overlooked. As on many previous occasions, very rapid credit growth led to major increases in asset prices, which in turn encouraged consumption and investment decisions which could yet prove unsustainable. The natural “procyclicality” of the financial system could perhaps be contained through the introduction of a “new macrofinancial stability framework”. There are many practical impediments to realising such a suggestion, but there are also grounds for belief that these impediments could be removed.     

Financial globalization, financial crises and contagion

Two observations suggest that financial globalization played an important role in the recent financial crisis. First, more than half of the rise in net borrowing of the U.S. non-financial sectors since the mid-1980s has been financed by foreign lending. Second, the collapse of the U.S. housing and mortgage-backed-securities markets had worldwide effects on financial institutions and asset markets. Using an open-economy model where financial intermediaries play a central role, we show that financial integration leads to a sharp rise in net credit in the most financially developed country and to large asset price spillovers of country-specific shocks to bank capital. The impacts of these shocks on asset prices are amplified by bank capital requirements based on mark-to-market.     

Banking crises,financial dependence,and growth

This paper contributes to the literature that analyzes the mechanisms linking financial shocks and real activity. In particular, we investigate the growth impact of banking crises on industries with different levels of dependence on external finance. If banks are the key institutions allowing credit constraints to be relaxed, then a sudden loss of these intermediaries in a system in which such intermediaries are important should have a disproportionately contractionary impact on the sectors that flourished due to their reliance on banks. Using data from 38 developed and developing countries that experienced financial crises during the last quarter century, we find that those sectors that are highly dependent on external finance tend to experience a substantially greater contraction of value added during a banking crisis in countries with deeper financial systems than in countries with shallower financial systems. Our results do not suggest, however, that on net the externally dependent firms fare worse in deep financial systems.     

Financial crises and labor market turbulence

Financial crises in emerging markets trigger a significant reallocation of labor as exchange rate depreciations and interest rate increases cause relative prices to change drastically. Household survey data for Mexico reveal that individuals who switched industry or occupation during the 1994–1995 crisis lost about 10% of their hourly earnings on average compared to similar workers who did not move. This suggests that many workers became less productive in the process of migrating to different economic activities. These productivity losses, in turn, can explain about 40% of the observed fall in TFP in Mexico in 1995.     

Incentives and financial crises: Microfounded macroprudential regulation

We provide a micro-based rationale for macroprudential capital regulation of financial intermediaries (banks) by developing a model in which bankers can privately undertake a costly effort and reduce the probability of adverse shocks to their asset holdings that force liquidation (deterioration risk). A decline in the fundamental risk of assets ameliorates funding conditions, boosting the banks’ ability to expand their balance sheets. In principle, a higher continuation value would improve incentives to put effort. However, the rise in asset demand and prices also increases the payoff in liquidation, eventually reducing the equilibrium optimal effort. Poor incentives impose socially inefficient liquidation and can be corrected through a regulatory capital requirement. We show that the requirement should be high when fundamental risk is low. Therefore, the model suggests a theoretical foundation for macroprudential regulation and the countercyclical capital buffer of Basel III.     

Foreign currency debt,financial crises and economic growth: A long-run view

Foreign currency debt is widely believed to increase risks of financial crisis, especially after being implicated as a cause of the East Asian crisis in the late 1990s. In this paper, we study the effects of foreign currency debt on currency and debt crises and its indirect effects on short-term growth and long-run output effects in both 1880–1913 and 1973–2003 for 45 countries. Greater ratios of foreign currency debt to total debt are associated with increased risks of currency and debt crises, although the strength of the association depends crucially on the size of a country's reserve base and its policy credibility. We found that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We estimate some implications of our findings for the risks posed by currently high levels of foreign currency liabilities in eastern Europe.     

Diversification at financial institutions and systemic crises

It is widely believed that diversification at financial institutions benefits the stability of the financial system. This paper shows that it also entails a cost: even though diversification reduces each institution’s individual probability of failure, it makes systemic crises more likely. When systemic crises induce additional costs (over and above individual failures), full diversification is no longer desirable as a result and the optimal degree of diversification may be arbitrarily low. We show that the analysis can be extended beyond diversification, such as to interbank insurance and financial integration.     

Credit conditions and recoveries from financial crises

Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.     

Optimal financial crises: A note on Allen and Gale

This note provides an example of an optimal banking panic. We construct a model in which a banking panic is triggered by the banker, not the depositors. When the banker receives a pessimistic information on the return on the bank’s assets, he liquidates them prematurely in order to protect his capital. In the face of this liquidation, all depositors withdraw their funds prematurely. The premature liquidation of the bank’s assets strengthens the bank’s balance sheet. As a result, the banking panic does not cause bank failure and the government should not try to prevent the panic. Such a panic occured in 1857 in the United States. JEL Classification G21     

Market concentration and the likelihood of financial crises

According to theory, market concentration affects the likelihood of a financial crisis in different ways. The “concentration-stability” and the “concentration-fragility” hypotheses suggest opposing effects operating through specific channels. Using data of 160 countries for the period 1970–2009, this paper empirically tests these indirect effects of financial market structure. We set up a simultaneous system in order to jointly estimate financial stability and the relevant channel variables as endogenous variables. Our findings provide support for the assumption of channel effects in general and both the concentration-stability and the concentration-fragility hypothesis in particular. The effects are found to vary between high and low income countries.     

The response of the external finance premium in Asian corporate bond markets to financial characteristics,financial constraints and two financial crises

Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds, especially for the emerging Asian market. In this paper, we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995–2009 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity, we show that financial variables appear to be both statistically and quantitatively more important for financially constrained firms. Finally, when we examine the effects of the 1997–1998 Asian crisis and the 2007–2009 global financial crisis, we find that the sensitivity of the premium is greater for constrained firms during the Asian crisis compared to other times.     

Sustainability of macroeconomic policies in selected MENA countries: Post financial and debt crises

In the wake of the recent financial and debt crises, the conduct of macroeconomic policies in the emerging MENA economies has recently become critical in determining those countries future economic situation, due to the accumulation since the early 1990s of a sizable level of external debt, and the pursuit by some countries of a fixed exchange rate regime. Using time series econometric models, this study assesses the sustainability of macroeconomic policies in a selected sample of 4 MENA countries. The empirical results point to sustainable fiscal and exchange rate policies in Tunisia and Morocco, and unsustainable external debt and exchange rate policies in Egypt and Jordan. While Egypt has recently moved to a flexible exchange rate regime, if Jordan still opts for maintaining a fixed exchange rate arrangement, it will have to implement crisis-prevention measures, namely by exercising fiscal discipline, and managing properly its external debt and foreign reserves.     

Forecasting financial crises and contagion in Asia using dynamic factor analysis

In this paper we use principal components analysis to obtain vulnerability indicators able to predict financial turmoil. Probit modelling through principal components and also stochastic simulation of a Dynamic Factor model are used to produce the corresponding probability forecasts regarding the currency crisis events affecting a number of East Asian countries during the 1997–1998 period. The principal components model improves upon a number of competing models, in terms of out-of-sample forecasting performance.     

Transmission of the financial and sovereign debt crises to the EMU: Stock prices,CDS spreads and exchange rates

This paper tests for the transmission of the 2007–2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes to analyze the stock market returns for three country groups within EMU: North, South and Small. The following results hold for both the North and South European countries, while the smallest countries seem to be relatively isolated from international events. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, but not for financials. Second, in order to test how the sovereign debt crisis affects stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in the difference between the Greek and German CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is much smaller for non-financials. Third, before the crisis euro appreciations coincide with European stock market decreases, whereas this relationship reverses during the crisis. Finally, this reversal seems to be triggered by Lehman’s collapse.     

The dynamic of financial crises and its non-monotonic effects on earnings quality

Despite the wealth of research examining earnings quality and earnings management, we still have much to learn about the effects of macroeconomic factors on accounting discretion’s decisions; the recent financial crises may be one of such factors. Nevertheless, the extant literature is inconclusive about the direction of the relationship between earnings quality and economic downturn. In this study, we focus on the extent to which organizational survival may be an objective of earnings management. In this manner, we add to research considering earnings target as an objective of earnings manipulation. Furthermore, our results suggest that these objectives likely change as crisis becomes worse. Consequently, we argue that the relationship between financial crises and earnings management is non-monotonic. Earnings management decreases when the intensity of the crisis is low, while it increases when the crisis is acute.     

The flight home effect: Evidence from the syndicated loan market during financial crises

This paper shows that the collapse of the global market for syndicated loans during financial crises can in part be explained by a flight home effect whereby lenders rebalance their loan portfolios in favor of domestic borrowers. The home bias of lenders' loan origination increases by approximately 20% if the bank's home country experiences a banking crisis. This flight home effect is distinct from flight to quality because borrowers of different quality are equally affected. The results indicate that the home bias in capital allocation tends to increase when adverse economic shocks reduce the wealth of international investors.     

建立和完善金融市场监测分析体系

本课题以研究金融市场风险、金融市场政策传导和金融产品创新发展与金融市场监测分析体系框架的关系为出发点,在深入研究分析我国金融市场监测分析体系现状和国际经验的基础上,提出了构建和完善我国金融市场监测分析体系框架的初步设想。     

The theoretical underpinnings of government policy,turbulence and performance in the service sector: a conceptual framework

The objective of this paper is to provide a theoretical framework to study the relationship between host country government policy, market and technological turbulence, competitive intensity and export marketing performance in the financial services sector using Dunning’s (J Int Bus Stud 11(1): 9–31, 1980) eclectic paradigm. A literature review is used to define and set out the main conceptual framework and propositions for further research. A better understanding of the factors that contribute to export marketing performance success in the financial services sector is provided. The managerial implications of such a study would be to provide important knowledge or understanding for international business practitioners in the financial services sector. Such a study could also confirm the role that host country governments play in the performance of export ventures in the financial services sector and could make financial services exporters aware of the significance of environmental turbulence and its impact in the global market place.