Has the Basel Accord improved risk management during the global financial crisis?

The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008–09 global financial crisis. These issues are illustrated using Standard and Poor's 500 Composite Index.     

The 2007–2009 financial crisis,global imbalances and capital flows: Implications for reform

The paper discusses the currents that led to the 2007–2009 financial crisis. We discuss the crisis in a historical context and present evidence regarding the incidence and unit price of risk. Our results show that the unit price of risk prior to the subprime crisis is comparable to the price of risk prior to the great depression and similar to the price of risk at onset of the technology bubble. We then discuss global imbalances, the associated risks with regard to international optimal allocation of capital, and arrangements to minimize problems of global imbalances.     

Regional or global shock? A global VAR analysis of Asian economic and financial integration

This study employs a global vector autoregressive (GVAR) model to empirically investigate the viability of regional monetary arrangements in Asia. In marked contrast to the previous studies, we analyzed whether recent regional economic and financial integration in Asia were driven by global (U.S.) shock or regional (Japanese and Chinese) shock, using the GVAR model that allows global inter-linkages between domestic and foreign variables. By estimating generalized impulse responses of Asian economies’ real outputs and interest rates to global and regional shocks, we found that the Chinese shock exerted more real and financial influences on Asian economies than the U.S. shock. Another regional shock, i.e., the Japanese shock, had a far smaller influence on Asian economies. The relative importance of regional shocks originating from China needs to be considered when establishing regional monetary arrangements in Asia.     

The macro-financial factors behind the crisis: Global liquidity glut or global savings glut?

It has been argued that the global financial crisis 2007–2009 was intrinsically related to two largely unprecedented phenomena in the global economy: (i) exceptionally benign financial market conditions as mirrored in historically low risk premia and buoyant asset price developments as well as (ii) an unprecedented widening of external imbalances. This paper explores to what extent these global trends can be understood as a reaction to three structural shocks to the macro-financial environment of the global economy: (i) monetary shocks (“excess liquidity” hypothesis), (ii) preference shocks (“savings glut” hypothesis), and (iii) investment shocks (“investment drought” hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that (US) monetary policy shocks explain the largest part of the variation in imbalances and financial market prices. We find that savings shocks and investment shocks explain less of the variation. Hence, a “liquidity glut” may have been a more important driver of real and financial imbalances in the US and emerging Asia that ultimately triggered the global financial crisis.     

Should the monetary policy rule be different in a financial crisis?

This article reviews the finding that standard loss functions in output and inflation are higher during discretionary periods than in periods during which monetary policy is described by a rule, such as the Taylor rule. It shows that the finding is consistent with earlier research, but argues that we really do not know if the Taylor rule would have improved performance during the recent financial crisis. The article then considers modifications of policy rules to deal with changes in interest rate spreads, credit aggregates and banks׳ balance sheets.     

Is foreign-bank efficiency in financial centers driven by home or host country characteristics?

This paper investigates whether home or host country factors can explain differences in technical efficiency among foreign banks operating in the Luxembourg financial center. We first address heterogeneity across banks by using the group-wise bootstrap to compare DEA measures of bank efficiency between branches and subsidiaries, focused and diversified banks, and euro area and non-euro area banks. We then control for these factors in a second-stage regression indentifying the impact of country-specific regulatory and macroeconomic variables on individual bank efficiency scores. Our regulatory indicators capture the strictness of capital requirements, private monitoring, official disciplinary power and restrictions on bank activities. Our macroeconomic indicators capture GDP per capita in the home country and its position in the business cycle. Our results carry policy implications for bank regulators in both home and host countries and provide insight into banks’ choice between establishing a branch or a subsidiary to develop cross-border activities through international financial centers.     

On credit and output: Is the supply of credit relevant?

The consensus that changes in the supply of credit were irrelevant to making monetary policy decisions existed among macroeconomists during the second half of the twentieth century. Transmission of shocks to the real economy through changes in the supply of credit, however, played an important role in the recent U.S. financial crisis. This paper explores the extent to which policymakers should consider changes in the supply of credit when making forecasts and monetary policy decisions. More specifically, it considers whether a measure of real credit balances offers consistent and stable information, beyond that of a real interest rate and real money balances, about future output gaps during the U.S. post-war era. Results yield evidence that changes in real credit balances are the only variable, among those considered, to provide consistent and stable information about future output gaps over the entire sample period. Each information variable, however, provides relatively little value added for forecasting future output gaps, beyond a simple autoregressive model. To improve upon forecasts and monetary policy decisions, policymakers therefore should consider a broader range of information variables and occasionally reassess the relative weightings assigned to each.     

Temporary open market operation on MBS repos: any foreshadowing of the financial crisis of 2008?

The financial crisis of 2008 was significantly influenced by housing, mortgage markets and mortgage-backed securities (MBS). The Federal Reserve (Fed) conducts temporary open market operations on a daily basis and frequently uses repos on MBS. With this daily interaction with MBS, we examine whether any signal about the impending financial crisis could have been seen in the Fed’s temporary open market operations. We identify four anomalous events in MBS temporary open market operations and examine those events for signals of the financial crisis. We find nothing in the four events that would have provided signals of the financial crisis. Instead, the common feature of the four events is an unusually large supply of MBS made available to the Fed for those day’s temporary open market operations.     

Who speaks louder,financial instruments or credit rating agencies? Analyzing the effects of different sovereign risk measures on interest rates in Brazil

Analyzing sovereign risk measures for Brazil, we observe that credit rating agencies are more cautious and conservative than the market to report risk rating improvements, and more rigorous in assigning better risk ratings. In turn, evidence suggest interest rates reflect sovereign risk conditions. However, to date, no study has assessed which measure of sovereign risk has the greatest impact on the yield curve. Using data from March 2004 to August 2019, we investigate whether interest rates respond differently to different sovereign risk measures in Brazil. As a novelty, the results indicate that credit rating agencies “speak louder” in affecting interest rates, i.e., they proved to have greater capacity to affect the yield curve. Therefore, the importance of these agencies is not limited only for financial markets, but also for policymakers, as the slope of the yield curve acts as a leading indicator of the business cycle.     

Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market?

This paper examines the impact of gross foreign equity inflows on aggregate liquidity of the Malaysian stock market using newly assembled foreign trading data and the best performing bid-ask spread proxy. Employing vector autoregression, we discover a one-way causality from gross inflows to aggregate liquidity, and foreign investors erode liquidity of the Malaysian stock market. Additional analyses reveal that uncertainties in the U.S. markets negatively affect aggregate liquidity through the flows of foreign institutions, whose positive feedback trading destabilizes the local bourse. Despite the shocks, there is sufficient liquidity provision from local state-backed institutional funds and local proprietary day traders.     

Non-structural and structural models in productivity analysis: study of the British Isles during the 2007–2009 financial crisis

Journal of Productivity Analysis - The paper compares unrestricted and restricted reduced-form estimates of productivity and efficiency performance constructed from non-structural stochastic...     

Public intervention in UK small firm credit markets: Value-for-money or waste of scarce resources?

Loan guarantee schemes are used in many countries to provide financial support to small firms by guaranteeing loans from commercial banks, but questions remain about whether public intervention in private credit markets to support entrepreneurial firms is justified. This paper examines whether the UK Small Firms Loan Guarantee Scheme (SFLG) provides value-for-money to the UK tax payer, presenting a regression based performance approach which then feeds into a formal cost–benefit analysis. Specifically, we consider whether firm performance post-investment is such that it justifies the governments’ presence in the lending market and the costs associated with it. Our findings suggest that entrepreneurial firms that are able to access new finance through SFLG achieve superior performance in the form of improved sales, job creation and exports and that this justifies public intervention in private credit markets.     

Transmission of US financial and trade shocks to Asian economies: Implications for spillover of the 2007–2009 US financial crisis

This paper describes an investigation of the transmission of US shocks to Asian economies with consideration of financial linkages and trade linkages. Using the sign restriction vector autoregression (VAR) approach during 2000–2012, our empirical results can be summarized as follows. First, both US financial and trade linkages exert a significant impact on production in Asian economies. Second, through both financial and trade linkages, US spillover shocks account for around 50% of the production fluctuation in Asian economies. Third, during the episodes of 2007–2009 US financial crisis, the impact of financial shocks is greater than that of trade shocks. Results suggest that (i) Asian economies are not decoupled with US; and (ii) different from conventional findings, financial linkages between US and Asian economies are strong, especially for highly developed Asian economies. Therefore, investors and policymakers of Asian economies should take account of US financial conditions.     

New unions in the UK: the vanguard or the rearguard of the union movement?

Between January 1999 and March 2010, 34 trade unions entered the Certification Officer list or schedule in the UK. This article reports on a survey of those unions, discussing the extent to which they represent new forms of unionism and the possible implications for union revitalisation.     

Influence of economic crisis on new SME survival: reality or fiction?

The aim of this research was to analyse the survival of new ventures during periods of economic crisis. The article compares survival probability during growth and crisis periods. An empirical study was used to analyse new venture survival probability. Results show that new firms have a greater likelihood of surviving during crisis periods than they do during growth periods. An additional aim of the study was to analyse the survival probability of opportunity and necessity entrepreneurs during crisis periods. Results show that gaps in survival likelihood between opportunity and necessity entrepreneurship are bigger during times of crisis than they are during growth periods.     

From indirect to direct rule? Transnational policy planning bodies and global governance in the COVID crisis

The origins of contemporary supra-national power go back to the second British Empire, which, unlike the first, faced organized labor as a potential revolutionary force. The formation of the Rhodes–Milner Group was meant to better manage the formation of the public mood, and the Boer War in South Africa demanded close integration of imperial affairs. A central figure in the Rhodes–Milner Group, Lord Esher, was also the architect of the Committee of Imperial Defense, created to take up the latter task. Esher's idea of a secretariat confidentially preparing solutions to issues of the day before they emerged in the public domain was introduced into the structure of international organizations after World War I and the Russian Revolution. Escher also laid the foundations of today's model of transnational politics in which groups such as Bilderberg or the Trilateral Commission and many others, shape certain areas of consensus before the public is allowed to make its voice heard. In this process, the circumvention of democracy has assumed the nature of an outright assault on it. In the process the World Economic Forum, formally joining forces with the United Nations, has become the most visible supranational body applying direct rule.     

Trading income and bank charter value during the financial crisis: Does derivatives dealer designation matter?

Derivative markets have exploded over the last decade, remained active in the midst of the 2007–2009 financial crisis and continue to be dominated by a small group of bank holding companies (BHC). BHC motives for derivative usage are usually tied to hedging purposes (balance sheet risk management), trading purposes (profit motives) or some combination thereof. This paper examines the relationship between derivative trading income and bank charter value for 27 BHC between 2001Q1 and 2011Q3. We find that the impact of derivative trading income on bank charter value, using Tobin's Q, is very small and seems to be tied to BHCs derivatives dealer trading designation. We also find that trading incomes are a modest fraction of net operating revenue, highly volatile, and did not contribute to overall BHC income during the crisis.     

‘Gatekeepers’ of Islamic financial circuits: Analysing urban geographies of the global Shari’a elite

This paper analyses the importance of ‘Shari’a scholars’ in the Islamic Financial Services (IFS) sector, which has been a growing global practice since the 1970s. Based on Shari’a Law, IFS firms provide banking, finance and insurance respecting faith-based prohibitions on interest, speculation and risk taking. Although IFS firms operate across a variety of scales and involve a range of actors, this paper focuses on the transnational capacities of Shari’a experts employed by IFS firms. These scholars use their extensive knowledge of Shari’a Law to assess the ‘Islamic’ character of a firm's operations, and assist the development of Shari’a-compliant products. As they embody necessary entry-points into Islamic circuits of knowledge and authority, members of what we dub the ‘global Shari’a elite’ can be regarded as ‘gatekeepers’ of Islamic financial circuits. Drawing on a comprehensive data source we present a geographical analysis of Shari’a board membership, nationality and educational background of 253 Shari’a scholars. The results show that the global Shari’a elite connects a limited number of IFS hubs (e.g. Dubai, Kuala Lumpur, Kuwait City, Manama, and London) to knowledge and authority networks falling outside ‘mainstream’ business and service spheres.     

Peddling in the Antebellum Economy: Precursor of Mass-Marketing or a Start in Life?

Abstract . This article examines the effect of peddling upon industrialization and economic development and the evolution of institutional arrangements in marketing in the Antebellum period. After 1840 peddling in America was undertaken, to an increasing extent, by newly arrived immigrants from Germany who displaced the traditional “Yankees” from the trade. The relationship between peddling and the development of entrepreneurship is explored, along with the special opportunities that peddling provided for economic and occupational mobility in the American milieu. The frequency with which individuals who started careers as peddlers rose to prominence in the fields of merchandising and finance points to the importance of the “schooling” function of this institution for newly arrived immigrants in American folkways, business practices, and commercial possibilities.