Financial Stability
The Macroprudential Policy Framework Needs to Be Global
With Franco Bruni, March 2019. Basell III was a direct answer to the 2008 financial crisis. Now 10 years after the crisis, it is time to assess its timeliness and make the necessary adjustments so it becomes truly global. In this policy brief, we first clarify the goals of macroprudential policy before highlighting the main challenges that home and host countries may run into when global financial institutions lend beyond their home countries. We then suggest to focus on four priorities to address these vulnerabilities: (i) An adaptable and flexible global framework, (ii) The generalization of international standards and best practices, (iii) A stronger global data depository, (iv) Regulatory and monitoring cooperation.
Monetary Policy and Financial System Resilience
With Franco Bruni, March 2019. In a time of global crisis, international policy coordination is quite natural. Yet, in normal times such coordination becomes a challenge. This is an issue especially when it comes to monetary and macroprudential policy of globally influential countries. This is especially relevant now with the trend of monetary normalisation in many of these countries. In this brief, we propose four necessary steps to help addressing these challenges: (i) Monetary policy should take into account its spillovers on financial stability, (ii) Systemic central banks need to account for the global impact of their policy, (iii) Multilateral consultations may provide a useful platform to assess these impacts, (iv) The analysis that helps designing monetary and macroprudential policy should include global aggregates to capture the global economic and financial context.
The Crypto-Assets Experience
T20 Argentina, Task Force: An International Financial Architecture for Stability and Development, July 2018. Crypto-Assets (CA) are digital instruments aimed to serve as mediums of exchange that rely on decentralized control and boast the (yet to prove) promise of a revolution in Finance. Their meteoric rise entails both opportunities and perils. Rewards are uncertain; risks, much more tractable. We propose the design of a cross border framework to put CA on a level regulatory playing field with other competing financial instruments and activities. That involves keeping close scrutiny of CA linkages with the real economy and the existing conventional financial infrastructure, and bringing CA under the normal anti-money laundering (AML) and counter- terrorist financing (CFT) standards. Risks borne by users and investors – and possible systemic risk – deserve thorough examination while giving technology space to develop its genuine potential.
Macroprudential Policy and Financial Stability: Where Do We Stand?
With J. Adams-Kane, E. Saeidinezhad and J. Wilhelmus, MI Report, March 2018. This report comprises a synopsis of the discussions the IFM team at MI had with regulators and market participants thought out the year, as well as five papers illustrating some of the topics. The papers and discussions highlight the impacts of the current regulations, the influence of the asset management industry on financial stability, and how the strengthened role of central counterparty clearinghouses in the derivatives market affects the resilience of the financial system.
Central Counterparties Help, But Do Not Assure Financial Stability
With E. Saeidinezhad, MI Viewpoints, Jul. 2017. Chinese version in Financial Market Research, NAFMII, Sept 2017
Key observations: 1. Central counterparties (CCPs) provide derivative markets with benefits of multilateral netting and better collateralization, assurances of trade finality and settlement, and help bolster the market integrity. 2. Strengthening CCPs is a necessary but hardly sufficient condition to ensure financial system stability. Macroprudential policy should supplement the work of CCPs with attentive monitoring and rapid resolution procedures: § Market liquidity conditions must be monitored vigilantly to ensure effective price discovery and market continuity. Regulators and supervisors must stand ready to support illiquid financial intermediaries if CCPs and markets threaten to seize. § A fast and certain recovery and resolution procedure of a failed CCP is essential. It would facilitate the CCP’s recapitalization and its ability to resume its function within the financial system.
The Asset Management Industry, Systemic Risk, and Macroprudential Policy
Journal of Financial Transformation , 2017, vol: 45 pp. 121-128.
In the aftermath of the 2007-2008 financial crisis, new legislation and regulations have pressured banks and insurance companies to reduce their size, leverage, and riskier lines of business in order to avoid another too-big-to-fail debacle. Nonbank financial intermediaries have naturally taken up some of that slack, and, not surprisingly, regulatory scrutiny has turned toward these intermediaries to evaluate whether they could pose similar risks to financial stability that banks did pre-crisis. This article explores whether there is a demonstrable link between the asset management industry and systemic risk.
Financial Deregulation: Repeal or Adjust?
CLS Blue Sky Blog
With E. Saeidinezhad, MI Viewpoints, Feb. 2017.
While a major overhaul of U.S. financial regulation may be unlikely during the early months of the Trump administration, changes should be expected as his nominees to lead the Treasury Department and financial regulatory agencies are confirmed. This will be the biggest turnover in regulatory leadership since the passage in 2010 of the Dodd-Frank Act, and it may prove to be a test for Basel III, the macroprudential policy framework created by the G20 countries in response to the 2007-2008 financial crisis. This short paper describes what can be expected in the near future due to the changes in leadership in many of the regulatory agency.
UK Financial Reforms: Bank of England 2.0
With E. Saeidinezhad,MI report, Dec. 2016.
A few months ago, we produced a timetable for the implementation of U.S. financial reform under the Dodd-Frank Act.1 One of the main observations was that the legislation did little to consolidate regulation outside of banking. In contrast, the analogous UK reform legislation, the Financial Services Act, made the Bank of England (BoE) the center of UK financial and monetary stability. A 2016 amendment confirmed and strengthened the bank’s role.
The Asset Management Industry and Systemic Risk: Is There a Connection?
Working paper version Chinese version in Financial Market Research, NAFMII, Dec. 2016
With D. Markwardt and K. Savard, MI report, Sept. 2016.
In the aftermath of the financial crisis, new legislation and regulation have pressured banks (and insurances) to reduce their size, leverage, and riskier lines of business in order to avoid another too-big-to-fail debacle. Nonbank financial intermediaries have naturally taken up some of that slack and, not surprisingly, regulatory scrutiny has turned toward these intermediaries to evaluate whether they could pose similar risks to financial stability that banks did pre-crisis.Owing to their stunning growth in the past decade, focus among nonbank intermediaries is now centering on asset managers, which include firms offering mutual funds, exchange-traded funds, hedge funds and private equity funds. This report explores whether there is a demonstrable link between the asset management industry and systemic risk.
Dodd-Frank: Washington we have a problem
With E. Saeidinezhad, MI Viewpoints and Banking & Financial Services Policy Report, 35(8) 1-8, July 2016.
The Dodd-Frank Act was the most far-reaching financial regulatory reform in the U.S. since the nation emerged from the Great Depression in the 1930s. The act aims to limit systemic risk, allow for the safe resolution of the largest intermediaries, submit risky nonbanks to greater scrutiny, and reform derivative trading.The public debate is often highly politicized and opinionated when it comes to Dodd-Frank. With that in mind, this paper seeks to assess Dodd-Frank implementation with respect to its initial goal of building “a safer, more stable financial system,” where proprietary trading and the business of banking are separated, and where taxpayers and small business will not have to bail out failing large financial firms.” To make the assessment, the paper first establishes a timeline summarizing the Dodd-Frank final-rule milestones and then compares their implementation to the initial goals.
Macroprudential Policy: What Does It Really Mean
CLS Blue Sky Blog
With D. Markwardt and K. Savard, Banking & Financial Services Policy Report, 34(10) 1-11, Oct. 2015.
The paper is a shorter version of the report below. It aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward.
Macroprudential Policy: A Silver Bullet or Refighting the Last War
Working paper Chinese version in Financial Market Research, NAFMII, Sept. 2015
With D. Markwardt and K. Savard, MI Report, June 2015.
As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. Our report aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward. The report also advocates the use of more refined indicators for financial cycles as benchmarks for policy discussions on macroprudential policy.
Commodity and equity markets: Some stylized facts from a copula approach
VOXeu blog
With A.L. Delatte, Journal of Banking and Finance
In this paper, we propose to identify the dependence structure that exists between returns on equity and commodity futures and its development over the past 20 years. The key point is that we do not impose any dependence structure, but let the data select it. To do so, we model the dependence between commodity (metal, agriculture and energy) and stock markets using a flexible approach that allows us to investigate whether the co-movement is: (i) symmetrical and frequent, (ii) (a) symmetrical and mostly present during extreme events and (iii) asymmetrical and mostly present during extreme events. We also allow for this dependence to be time-varying from January 1990 to February 2012. Our analysis uncovers three major stylised facts. First, we find that the dependence between commodity and stock markets is time-varying, symmetrical and occurs most of the time (as opposed to mostly during extreme events). Second, not allowing for time-varying parameters in the dependence distribution generates a bias towards an evidence of tail dependence. Similarly, considering only tail dependence may lead to false evidence of asymmetry. Third, a growing co-movement between industrial metals and equity markets is identified as early as 2003; this co-movement spreads to all commodity classes and becomes unambiguously stronger with the global financial crisis after Fall 2008.