Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

The coronavirus disease (COVID-19) pandemic is causing an unprecedented worldwide economic contraction, leading central banks to reduce interest rates to historically low levels and making unconventional monetary policies— including “low for long” interest rates and asset purchases—increasingly common. Arguably, however, the policies implemented are efficient because they encourage increased risk-taking, and they may have, if unintentionally, increased medium- and long-term macro-financial vulnerabilities. This paper argues that the resulting trade-offs need to be carefully accounted for in monetary policy models and outlines how that can be achieved in practice.

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

We augment a linearized dynamic stochastic general equilibrium (DSGE) model with a tractable endogenous risk mechanism, to support the joint analysis of monetary and macroprudential policy. This state dependent conditional heteroskedasticity mechanism specifies the conditional variances of structural shocks as functions of the business or financial cycle. The resultant heteroskedastic linearized DSGE model preserves the satisfactory simulation and forecasting performance of its nested homoskedastic counterpart for the conditional means of endogenous variables, while substantially improving its goodness of fit to their conditional distributions. In particular, the model matches the key stylized facts of growth at risk. Accounting for state dependent conditional heteroskedasticity makes it optimal for monetary policy to respond more aggressively to the business cycle, and for macroprudential policy to manage the resilience of the banking sector more actively over the financial cycle.

United States --- Banks and Banking --- Macroeconomics --- Industries: Financial Services --- Real Estate --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Macroeconomics: Production --- Financial Markets and the Macroeconomy --- Interest Rates: Determination, Term Structure, and Effects --- Housing Supply and Markets --- Finance --- Banking --- Property & real estate --- Production growth --- Macroprudential policy --- Short term interest rates --- Financial institutions --- Production --- Financial sector policy and analysis --- Financial services --- Housing prices --- Prices --- Economic theory --- Economic policy --- Interest rates --- Banks and banking --- Housing

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

The evolution of risk management has resulted from the interplay of financial crises, risk management practices, and regulatory actions. In the 1970s, research lay the intellectual foundations for the risk management practices that were systematically implemented in the 1980s as bond trading revolutionized Wall Street. Quants developed dynamic hedging, Value-at-Risk, and credit risk models based on the insights of financial economics. In parallel, the Basel I framework created a level playing field among banks across countries. Following the 1987 stock market crash, the near failure of Salomon Brothers, and the failure of Drexel Burnham Lambert, in 1996 the Basel Committee on Banking Supervision published the Market Risk Amendment to the Basel I Capital Accord; the amendment went into effect in 1998. It led to a migration of bank risk management practices toward market risk regulations. The framework was further developed in the Basel II Accord, which, however, from the very beginning, was labeled as being procyclical due to the reliance of capital requirements on contemporaneous volatility estimates. Indeed, the failure to measure and manage risk adequately can be viewed as a key contributor to the 2008 global financial crisis. Subsequent innovations in risk management practices have been dominated by regulatory innovations, including capital and liquidity stress testing, macroprudential surcharges, resolution regimes, and countercyclical capital requirements.

Banks and banking --- Bank capital --- Global Financial Crisis, 2008-2009. --- Risk management. --- State supervision. --- Government policy. --- Global Financial Crisis (2008-2009) --- 2008-2009 --- Global Economic Crisis, 2008-2009 --- Subprime Mortgage Crisis, 2008-2009 --- Financial crises --- Capital --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Finance --- Financial institutions --- Money --- Banks and Banking --- Banks --- Capital and Ownership Structure --- Cdos --- Credit risk --- Depository Institutions --- Derivative securities --- Financial Instruments --- Financial instruments --- Financial regulation and supervision --- Financial Risk and Risk Management --- Financial risk management --- Financial services law & regulation --- Financing Policy --- General Financial Markets: General (includes Measurement and Data) --- Goodwill --- Industries: Financial Services --- Institutional Investors --- Investment & securities --- Investments: Derivatives --- Investments: General --- Loans --- Market risk --- Micro Finance Institutions --- Mortgages --- Non-bank Financial Institutions --- Pension Funds --- Securities --- Value of Firms --- United States

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

The COVID-19 pandemic is causing an unprecedented worldwide economic contraction, leading central banks to reduce interest rates to historically low levels and making unconventional monetary policies—including “low for long” interest rates and asset purchases—increasingly common. Arguably, however, the policies implemented are efficient because they encourage increased risk-taking, and they may have, if unintentionally, increase medium- and long-run macro-financial vulnerabilities. This paper argues that the resulting trade-offs need to be carefully accounted for in monetary policy models and outlines how that can be achieved in practice.

Monetary policy. --- Financial risk management. --- Economic policy --- Economic theory --- Finance --- Finance: General --- Financial Markets and the Macroeconomy --- Financial risk management --- Financial sector policy and analysis --- General Financial Markets: Government Policy and Regulation --- International Economics --- International institutions --- Macroeconomics --- Macroeconomics: Production --- Monetary Policy --- Monetary policy --- Political economy --- Production and Operations Management --- Production --- United States

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

Variants of nonbank credit intermediation differ greatly. We provide a conceptual framework to help distinguish various characteristics—structural features, economic motivations, and risk implications—associated with different forms of nonbank credit intermediation. Anchored by this framework, we take stock of the evolution of shadow banking and the extent of its transformation into market-based finance since the global financial crisis. In light of the substantial regulatory and supervisory responses of recent years, we highlight key areas of progress while drawing attention to elements where work still needs to be done. Case studies of policy challenges arising in different jurisdictions are also discussed. While many of the amplification forces that were at play during the global financial crisis have diminished, the post-crisis reform agenda is not yet complete, and policy makers must remain attentive to new challenges looming on the horizon.

Financial institutions --- Finance --- Credit --- Stock exchanges --- Business & economics --- Law --- Nonbank financial institutions. --- Intermediation (Finance) --- Credit. --- Law and legislation. --- Banking --- Banks and Banking --- Banks and banking --- Banks --- Commercial banks --- Depository Institutions --- Finance: General --- Financial sector policy and analysis --- Financial sector stability --- Financial services industry --- Financial services --- General Financial Markets: Government Policy and Regulation --- Industries: Financial Services --- Law and legislation --- Loans --- Micro Finance Institutions --- Monetary economics --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Money and Monetary Policy --- Money --- Mortgages --- Nonbank financial institutions --- Shadow banking --- United States