Choose an application

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

The global financial crisis (GFC) underscored the need for additional policy tools to safeguard financial stability and ultimately macroeconomic stability. Systemic financial vulnerabilities had developed under a seemingly tranquil macroeconomic surface of low inflation and small output gaps. This challenged the precrisis view that achieving these traditional policy targets was a sufficient condition for macroeconomic stability. Thus, new tools had to be deployed to target specific financial vulnerabilities and to build buffers to cushion adverse aggregate shocks, while allowing traditional policy levers, including monetary and microprudential policies to focus on their traditional roles. Macroprudential policy measures emerged as the solution to this gap. Some of these measures had been used before the GFC (mostly in emerging markets). But it was only after the crisis that they were more widely adopted, and the toolkit expanded. This spurred a growing body of empirical research on the effects and potential shortfalls of these measures, with a further deepening of this knowledge gaining importance as policymakers confront increased financial stability risks in the post-pandemic world. Recognizing that there still is much to learn, this paper takes stock of our expanding understanding about the effects (and side effects) of macroprudential measures by focusing on these questions: What have we learned about the effects of macroprudential policy in containing the buildup of vulnerabilities? What do we know about the effects on economic activity and resilience? How do policy effects vary with conditions and over time? How important are leakages and circumvention? How do the effects on credit depend on other policies?.

Monetary policy. --- Fiscal policy. --- macroprudential policy financial stability --- policy effect --- macroprudential effect --- macroprudential buffer --- macroprudential policy instruments --- countercyclical capital buffers --- bank credit --- Asset requirements --- Bank credit --- Banks and Banking --- Countercyclical capital buffers --- Credit --- Economic policy --- Economics --- Finance --- Finance: General --- Financial Institutions and Services: Government Policy and Regulation --- Financial Markets and the Macroeconomy --- Financial regulation and supervision --- Financial sector policy and analysis --- Financial services industry --- Financial services law & regulation --- General Financial Markets: Government Policy and Regulation --- International agencies --- International Agreements and Observance --- International Economics --- International institutions --- International organization --- International Organizations --- Macroeconomics --- Macroprudential policy instruments --- Macroprudential policy --- Monetary economics --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Money and Monetary Policy --- Money --- Political Economy --- Political economy --- Public Policy --- United States

Choose an application

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

Financial sector reforms are being considered to address the risks posed by large and complex financial institutions (LCFIs). The vast majority of global finance is intermediated by a handful of these institutions with growing interconnections within and across borders. Common trends that contributed to the recent global crisis included sharp increases in leverage, significant reliance on short-term wholesale funding, growth of off-balance-sheet activities, maturity mismatches, and increased share of revenues from complex products and trading activities. The key objective of the financial sector reforms is to promote a less leveraged, less risky (or better cushioned), and thus a more resilient financial system that supports strong and sustainable economic growth. The recent proposals of the Basel Committee on Banking Supervision (BCBS) on capital standards represent a substantial improvement in the quantity and quality of capital in comparison with the pre-crisis situation. The analysis of this paper suggests that, subject to usual caveats associated with limited data disclosures and availability, phase-in arrangements will allow most banks to move to these higher standards through earnings retention, assuming a modest economic and earnings outlook. It also suggests that should banks generate strong earnings in the coming years, and distribute lower dividends, they could rebuild common equity capital ratios faster than required under the current phase-in periods. The analysis of the paper also suggests that the new capital standards will have a significant impact on investment-banking-type activities, including through tighter requirements for trading book exposures. Investment banking activities will also be affected by a host of other regulatory initiatives, including the new accounting rules and higher standards for securitization, derivatives, and trading businesses, as well as measures to restrain certain activities. Yet, LCFIs with an investment banking focus have flexible business models and can adjust their strategies easily to mitigate the effects of the regulatory reforms, notwithstanding a multitude of regulations affecting their activities. The ultimate effect of the reforms on business models remains to be seen until the regulations take their final shape.

Financial institutions --- Banks and banking --- Bank capital --- Bank liquidity --- Liquidity (Economics) --- Capital --- State supervision --- E-books --- Banks and Banking --- Financial Crises --- Financial Institutions and Services: Government Policy and Regulation --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Investment Banking --- Venture Capital --- Brokerage --- Ratings and Ratings Agencies --- Banking --- Financial services law & regulation --- Liquidity requirements --- Investment banking --- Commercial banks --- Capital adequacy requirements --- Financial regulation and supervision --- Financial services --- Countercyclical capital buffers --- Asset requirements --- United States

Choose an application

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

We present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing. SE losses are measured using a reduced-form model to value financial entity assets, conditional on macroeconomic stress and the distress of other entities in the system. This valuation is made possible by a multivariate density which characterizes the asset values of the financial entities making up the system. In this paper this density is estimated using CIMDO, a statistical approach, which infers densities that are consistent with entities’ probabilities of default, which in this case are estimated using market-based data. Hence, SE losses capture the effects of interconnectedness structures that are consistent with markets’ perceptions of risk. We then show how SE losses can be decomposed into the likelihood of distress and the magnitude of losses, thereby quantifying the contribution of specific entities to systemic contagion. To illustrate the approach, we quantify SE losses due to Lehman Brothers’ default.

Banks and Banking --- Finance: General --- Financial Risk Management --- Financial Institutions and Services: Government Policy and Regulation --- Financial Crises --- Financial Markets and the Macroeconomy --- General Financial Markets: Government Policy and Regulation --- International Financial Markets --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Finance --- Banking --- Financial services law & regulation --- Systemic risk --- Stress testing --- Asset valuation --- Financial contagion --- Financial sector policy and analysis --- Asset and liability management --- Countercyclical capital buffers --- Financial regulation and supervision --- Financial risk management --- Asset-liability management --- Banks and banking --- Asset requirements --- United States

Choose an application

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

Past experience with financial crises places systemic risk oversight at the core of Korea’s approach to the financial system. The Korean authorities have amassed over a decade of experience with macroprudential policies. They have put in place rigorous and sophisticated processes for risk monitoring. They publish first-rate analysis. And they have actively developed measures to mitigate risks to the financial system—notably from FX exposures, and from household indebtedness—as circumstances have changed. But their system has evolved to be highly complex, which poses challenges for coordination, communication, and transparency; moreover, their toolkit needs to be extended. These areas should be the focus of efforts to strengthen the policy framework.

Monetary policy. --- Foreign exchange. --- Asset requirements --- Banking --- Banks and Banking --- Banks and banking --- Banks --- Countercyclical capital buffers --- Depository Institutions --- Economic policy --- Finance --- Finance: General --- Financial Institutions and Services: Government Policy and Regulation --- Financial Markets and the Macroeconomy --- Financial regulation and supervision --- Financial risk management --- Financial sector policy and analysis --- Financial sector stability --- Financial services industry --- Financial services law & regulation --- General Financial Markets: Government Policy and Regulation --- Macroeconomics --- Macroprudential policy instruments --- Macroprudential policy --- Micro Finance Institutions --- Mortgages --- Systemic risk --- Korea, Republic of

Choose an application

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

Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.

Banks and Banking --- Macroeconomics --- Money and Monetary Policy --- Industries: Financial Services --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- General Financial Markets: General (includes Measurement and Data) --- Financial Institutions and Services: General --- Financial Institutions and Services: Government Policy and Regulation --- Business Fluctuations --- Cycles --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Finance --- Monetary economics --- Financial services law & regulation --- Credit cycles --- Nonperforming loans --- Credit gaps --- Credit --- Countercyclical capital buffers --- Financial sector policy and analysis --- Financial institutions --- Money --- Financial regulation and supervision --- Business cycles --- Loans --- Asset requirements --- El Salvador