Financial crisis
Book notes: Debtonator, by Andrew McNally
A lucid book questioning society’s bias towards debt and against equity
BIS paper models self-generating financial crises
Authors set out DSGE model where financial crises can be triggered either by an external shock or the endogenous generation of credit booms and busts
Financial variables improve output gap estimates, BoE paper finds
Adding financial variables to estimates of the output gap can allow policy-makers to spot trouble on the horizon more easily, authors say
Lender of last resort function must be flexible to cope with crises, BoE’s Hauser says
Central banks should prepare in advance to open up lender of last resort frameworks to new counterparties and instruments, Bank of England executive director says
Bank recapitalisation is a ‘powerful’ policy instrument, paper suggests
Economy likely to remain in an ‘anaemic state’ until certain conditions met, research says; bank recapitalisation more effective than fiscal expansion in encouraging aggregate demand
Paper models complications to systemic financial shock responses
Different classes of illiquid asset and different types of banking network produce complicated responses to systemic financial shocks, Bank of Italy working paper argues
BIS deputy: animal spirits need stability
Investors need certainty over long-term prospects for sustainable growth, so more short-term stimulus by central banks is likely to make the problem worse, Pereira da Silva says
Haircuts on sovereign debt ‘open the door for more leverage’, research finds
Prolonged low interest rates also contribute to an overleveraged economy in case of crisis; though in times of ‘low crisis’ they can help decelerate fiscal adjustment
ECB’s Cœuré calls for new attitude to liquidity
Liquidity in the European banking system should not return to its pre-crisis levels, Benoît Cœuré tells a Davos audience; CMU offers chance to fix problems which caused crisis, he adds
Central banks struggling to exit ‘confused period’, economists say
The financial crisis forced a regime change on central banks, raising challenges to independence, analysis and policy tools, which have yet to be fully resolved, say panellists in Brussels
BoE paper seeks to improve forecasts with adaptive model
Using an adaptive model in conjunction with heavy-tailed t-distributions allows authors to deliver ‘substantial improvements’ in forecasting inflation
Basel Committee completes trading book review
Much-anticipated redesign of market risk framework seeks to capture risks the Basel accord failed to guard against in 2008; impact study implies median 27% increase in capital charges
Central Bank of the Year: Central Bank of Ireland
Well-capitalised banks, new supervision measures and timely macro-prudential policy action to cool an overheated property sector have gone far to restoring the Central Bank of Ireland's credibility
Lifetime achievement award: Zeti Akhtar Aziz
Zeti has played a crucial role in efforts to modernise Malaysia’s financial system, and has worked tirelessly to promote Islamic finance, financial inclusion and South-east Asian integration.
Real impact of credit booms demands policy rethink, say BIS economists
Financial booms and busts feed through to the real economy via labour reallocations, harming productivity growth; results call for wide-ranging rethink of models and policy, authors say
Markov switching model enables diagnosis of ‘systemic financial stress episodes’, ECB paper argues
A Markov switching model can be used to diagnose episodes when both the real and the financial economies are subject to simultaneous severe stress, paper finds
‘Step-in risk’ could become part of Basel framework
Basel Committee consults on the risks created by a bank intervening to support third parties, but reserves judgement on how to incorporate such risks into the Basel framework
BIS deputy warns all economies must manage ‘sudden floods’ of capital
Advanced economies face the same floods of capital as emerging markets, and may be hit by other spillovers that are not yet well understood, Luis Awazu Pereira da Silva says
HBOS investigation reveals possible ‘loose rivet’ in UK regulation
Accounting standards and auditing may be a weak point that is only just starting to be addressed, according to MPs at a parliamentary committee hearing on the failure of HBOS
Leverage ratio as high as 5% could yield net benefits, BIS economists say
Authors say there is ‘considerable room for manoeuvre’ when it comes to setting a leverage ratio above the current Basel III minimum of 3%
BIS paper looks for nuanced story of 2008 bank failures
Failed commercial banks in the US suffered most from their exposure to non-household real-estate borrowers, rather than traditional mortgages or agency MBS, a BIS economist finds
Changing commodity prices can ‘cushion’ other shocks, Colombian paper says
Colombian working paper suggests commodity price fluctuations do not always amplify business cycles in emerging markets
UK regulators to reopen flawed HBOS investigation
Report critical of financial supervisors who failed to see problems developing or take proper enforcement action, and of bank managers who created a fatally flawed business model
Risk of banking crisis increases with ‘network centrality’, ECB paper argues
Modelling the interconnectedness of 14 European countries' banking sectors gives valuable information on the likelihood of a crisis, a paper published by the ECB argues