Default of Systemically Important Financial Intermediaries: Short-term Stability versus Incentive Compatibility?

2013 ◽  
Vol 14 (1) ◽  
pp. 15-30 ◽  
Author(s):  
Andreas Dombret ◽  
André Ebner
Keyword(s):  
Financial Institutions ◽  
Financial Stability ◽  
Financial Integration ◽  
Incentive Compatibility ◽  
Financial Intermediaries ◽  
Entry And Exit ◽  
Short Term ◽  
Market Participants ◽  
Cross Border ◽  
Crucial Feature

Abstract Financial integration and globalization have acted as a major stimulus in the development of large, internationally operating banks, which not only provide cross-border services but also have a local presence. While these banks are themselves drivers of economic integration, they can pose serious threats to financial stability. Their size, interconnectedness and importance as providers of specific services mean that financial institutions can be too-systemic-to-fail (TSTF). Since the entry and exit of market participants is a crucial feature of well-functioning markets, the absence of any credible possibility of failure leads to serious distortions. This analysis gives an overview of the TSTF problem and discusses the challenges to be faced in establishing credible resolution regimes.

scholarly journals BANKING CONSOLIDATION PROCESS AND IMPACT TO FINANCIAL STABILITY

2010 ◽  
Vol 2 (2) ◽  
pp. 62-68
Author(s):  
Lina Novickytė
Keyword(s):  
Financial Stability ◽  
Economies Of Scale ◽  
Negative Impact ◽  
Financial Sector ◽  
Financial Intermediaries ◽  
Stability Studies ◽  
Consolidation Process ◽  
Market Participants ◽  
Efficient Management ◽  
Market Consolidation

Globalization promotes financial market participants to seek opportunities for efficient management of available resources and maximize benefits. In recent years, took place in the con­solidation process is mainly due to both macroeconomic and microeconomic factors. Most often leads to consolidation pro­cesses in order to gain economies of scale, market power and X-efficiency. Market consolidation and financial sector stability studies have shown that concentrated financial intermediaries market have a negative impact on the region/country/sector financial stability. In the future countries and regions (EU) must find ways and means to smoothly manage the inevitable process of globalization under the supervision of future merger transac­tions in order to guarantee the efficiency and sustainability of the financial sector.

scholarly journals Capital Markets Union: A Vision for the Long Term

2016 ◽  
Vol 2 (1) ◽  
pp. 130-153 ◽  
Author(s):  
Nicolas Véron ◽  
Guntram B. Wolff
Keyword(s):  
Financial Markets ◽  
Capital Markets ◽  
Financial Stability ◽  
Financial Integration ◽  
Bank Lending ◽  
The European Union ◽  
Short Term ◽  
Capital Markets Union ◽  
Improve Access

Abstract Capital Markets Union (CMU) is a welcome economic policy initiative. If well designed and implemented, it can improve access to funding, the allocation of capital, prospects for savers, and financial stability in the European Union. But since financial ecosystems only change slowly, CMU cannot be a short-term cyclical instrument to substitute for subdued bank lending. Shifting financial intermediation towards capital markets will require persistent action on multiple fronts. The policy agenda should aim to enhance both capital markets development and cross-border financial integration, two distinct but mutually reinforcing aims; to increase the transparency, reliability, and comparability of information, a key enabler of trust in financial markets which always involve information asymmetries; and to adequately address financial stability concerns. We propose a staged process to sustain the momentum and make Europe’s CMU fully worthy of its 'union' label.

scholarly journals Macroprudential ring-fencing

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tomáš Konečný ◽  
Lukáš Pfeifer
Keyword(s):  
Financial Stability ◽  
Capital Mobility ◽  
Financial Integration ◽  
Banking Union ◽  
Policy Action ◽  
Content Type ◽  
Cross Border ◽  
Macroprudential Policies ◽  
Structural Capital ◽  
The Eu

Purpose This paper aims to focus on capital-related macroprudential policies in the context of recent policy discussions on the removal of barriers to the mobility of capital and liquidity of cross-border banks in the European Union (EU). Design/methodology/approach This study first discusses the link between financial stability and internal resource mobility of cross-border banks. Then, it examines past heterogeneity in structural capital buffers as key macroprudential capital instruments applied in the EU and relate them to costs of policy action, degree of foreign penetration and membership in the Banking Union. Findings Observed phase-in patterns of structural capital buffers in the EU are broadly consistent with costs of policy action, degree of foreign penetration and membership in the Banking Union as potential factors. The process of financial integration could be further enhanced through reduced uncertainty in the application of macroprudential policies that constrain capital mobility of cross-border banks. Originality/value This paper anchors macroprudential policies into a wider discussion on the mechanism and implications of ring-fencing in the EU over time. It discusses two policy areas, macroprudential policies and proposals for deeper financial integration, that share the same financial stability objective but tend to emphasize different implications of the mobility of capital and liquidity of cross-border banks in the EU. The study provides a discussion of potential implications of the recent adoption of the CRRII/CRDV legislation for future heterogeneity of macroprudential policies in the EU.

LIQUIDITY REGULATION AND FINANCIAL STABILITY

2018 ◽  
Vol 24 (5) ◽  
pp. 1240-1263
Author(s):  
Yang Li
Keyword(s):  
Political Economy ◽  
Financial Stability ◽  
Deposit Insurance ◽  
Bank Runs ◽  
Limited Commitment ◽  
Financial Intermediaries ◽  
Short Term ◽  
Multiple Dimensions ◽  
Liquidity Regulation

Anticipating a bailout in the event of a crisis distorts financial intermediaries’ incentives in multiple dimensions. Bailout payments can, for example, lead intermediaries to issue too much short-term debt while simultaneously underinvesting in liquid assets. To correct these distortions, policymakers may choose to regulate the composition of both the assets and liabilities of intermediaries. I examine these regulations in a version of the Diamond and Dybvig [(1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419] model with limited commitment. I demonstrate that, contrary to common wisdom, introducing a minimum liquidity requirement can increase intermediaries’ susceptibility to a run by their investors.

Financial Stability, Systemic Risk, and Taxpayers’ Money—The Rationale for a Special Resolution Regime

2016 ◽  
Author(s):  
Michael Schillig
Keyword(s):  
Moral Hazard ◽  
Market Efficiency ◽  
Financial Institutions ◽  
Systemic Risk ◽  
Financial Stability ◽  
Financial System ◽  
System Stability ◽  
Cross Border ◽  
Ex Post ◽  
Ex Ante

Special resolution regimes are generally introduced with the objective of helping to ‘maintain financial stability, minimize systemic risk, protect consumers, limit moral hazard and promote market efficiency’. The recurring themes are financial stability, systemic risk, and taxpayers’ exposure to losses. This chapter explores whether and to what extent a special resolution regime for banks and financial institutions can contribute to the enhancement of financial (system) stability and can limit systemic risk. It seeks to clarify these concepts and discusses possible ex ante incentives that a (recovery and) resolution regime may provide for controlling systemic risk. Further, it focuses on ex post remedies for the curtailment of systemic risk, and considers the international and cross-border implications.

Statement by the Managing Director to the International Monetary and Financial Committee on the IMF Reform Agenda

Policy Papers ◽  
2010 ◽  
Vol 2010 (96) ◽  
Author(s):  
Keyword(s):  
Financial Crisis ◽  
Moral Hazard ◽  
Financial Institutions ◽  
Financial Stability ◽  
Financial Burden ◽  
Reform Agenda ◽  
Cross Border ◽  
Recent Financial Crisis ◽  
Financial Groups ◽  
Made In

The recent financial crisis has given renewed urgency to the need for resolution systems for financial institutions, which both safeguard financial stability and limit moral hazard. However, experience demonstrates that these systems will not be effective unless progress is also made in developing a framework that applies on a cross-border basis. Since many systemically important financial groups operate globally, an uncoordinated application of resolution systems by national authorities will make it much more difficult to both secure the continuity of essential functions (thereby limiting contagion), and ensure that shareholders and creditors bear the financial burden of the resolution process.

The Key Attributes of Effective Resolution Regimes for Financial Institutions - Progress to Date and Next Steps

Policy Papers ◽  
2012 ◽  
Vol 2012 (72) ◽  
Author(s):  
Keyword(s):  
Financial Crisis ◽  
Financial Institutions ◽  
Financial Stability ◽  
Financial Institution ◽  
Third Parties ◽  
Early Termination ◽  
Financial Contracts ◽  
Debt Restructuring ◽  
International Standard ◽  
Cross Border

The financial crisis underscored the need to develop an effective international framework to resolve cross-border financial institutions and groups. The development of such a framework has been a priority for the international community. Many important milestones have been achieved—most notably the adoption by the Financial Stability Board (FSB) of the Key Attributes of Effective Resolution Regimes for Financial Institutions (the Key Attributes) which is emerging as a new (nonbinding) international standard. Fund staff have been heavily involved in their development. The Key Attributes specify essential features that should be part of the resolution framework at both the national and international levels, with the key objective of making resolution feasible without severe systemic disruption and without exposing taxpayers to loss. These features include a comprehensive “toolkit” of resolution powers for national authorities, including powers to: (i) assume control of a financial institution from existing managers and owners; (ii) effect a resolution of the troubled institution through the sale or merger of the entity, the transfer of assets and liabilities of the institution to third parties, or through unilateral debt restructuring or “bail-in”; and (iii) support the resolution through a temporary stay on the execution of early termination rights under financial contracts.

scholarly journals DIRECTIONS OF DEVELOPMENT OF THE FINANCIAL SERVICES MARKET OF UKRAINE

2019 ◽  
Vol 4 (5) ◽  
pp. 412 ◽  
Author(s):  
Serhiy Shkarlet ◽  
Valeriia Prokopenko ◽  
Maksym Dubyna
Keyword(s):  
Financial Institutions ◽  
Financial Literacy ◽  
Financial Services ◽  
Financial Stability ◽  
State Regulation ◽  
The State ◽  
Financial Intermediaries ◽  
Regulation System ◽  
Event Analysis ◽  
Public Authorities

Development of the financial services market is an important component of the national economy’s development. Within this market, credit and investment resources are formed, which are the basis of economic development of the real economy sector of the state. It is this that determines the importance of creating conditions for improving the efficiency of financial institutions, which become intermediaries between persons who have free funds and those economic entities that they need. The outlined justifies the relevance of the topic. Consequently, taking into consideration the objective of the study, the following aim of its implementation was set: to identify and substantiate the main determinants of the development of the financial services market in Ukraine. To achieve this goal, the following tasks were set and solved: to identify the main, most important, measures of transformation of the environment of financial institutions functioning; to substantiate the essence of such measures and the peculiarities of their implementation; to specify basic actions within the limits of separate determinants of the financial services market development, to describe their applied character. Method. In the course of the research, a range of different scientific methods was used. Among the general techniques, it is necessary to allocate methods of observation, comparison, abstraction. It is advisable to include the method of economic analysis, synthesis, system approach, content methods, and event analysis in specific research methods. Results. Universal priorities of financial services markets development in different countries are determined and systematized, the analysis of which made it possible to investigate perspective determinants of the development of such a market in Ukraine, peculiarities of their introduction into the functioning of the financial services sphere are described. Among these measures are the following: increase in the stability of financial institutions, increase the transparency of the functioning of producers and consumers of financial services, raising the level of financial literacy in society, reforming the state regulation system of the activities of financial intermediaries, the formation of the trust infrastructure system. Taking into consideration the received scientific outcomes, the justification of peculiarities on the implementation of these priorities in the system of the financial services market functioning in Ukraine is conducted. Practical implications. The research results obtained in the course of the research implementation regarding the possibilities of changing the financial services market for improving the efficiency of financial institutions work have an applied character, and their implementation will make it possible to form a new environment for the functioning of such economic actors. This will facilitate the transformation of financial resources to increase the formation of investment and loan funds. The results obtained can be used by public authorities that regulate the activities of financial institutions in the process of developing new strategic documents for the development of the financial services market in Ukraine. Value/originality. The conducted research is relevant, considering the significant impact of the financial services market on the development of the national economy, the proposed measures for the development of such a market are applied and can be used by public authorities in the regulation of the activities of financial institutions. This research has been conducted within the framework of the scientific work implementation Department of Finance, Banking and Insurance, Chernihiv National University of Technology, Ukraine on the following topics: “Financial stability of economic systems in crisis conditions of management” (No. 0115U001149) and “Development of financial intermediaries in the turbulent conditions of the national economy’s functioning” (No. 0115U001149).

Financial Sustainability and Infrastructure Finance

2018 ◽  
Author(s):  
Felipe Carvalho de Rezende
Keyword(s):  
Financial Institutions ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Financial Sustainability ◽  
Infrastructure Finance ◽  
Strategic Role ◽  
Development Banks ◽  
The Global Financial Crisis ◽  
Capital Development

Among the lessons that can be drawn from the global financial crisis is that private financial institutions have failed to promote the capital development of the affected economies, and to dampen financial fragility. This chapter analyses the macroeconomic role that development banks can play in this context, not only providing long-term funding necessary to promote economic development, but also fostering financial stability. The chapter discusses, in particular, the need for public financial institutions to provide support for infrastructure and sustainable development projects. It concludes that development banks play a strategic role by funding infrastructure projects in particular, and outlines the lessons for enhancing their role as catalysts for mitigating risks associated with such projects.

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