Understanding Financial Interconnectedness

Policy Papers ◽  
2010 ◽  
Vol 2010 (23) ◽  
Author(s):  
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Financial Sector ◽  
Executive Board ◽  
Global Finance ◽  
Systemic Risks ◽  
Fault Lines ◽  
Financial Interconnectedness ◽  
Critical Fault

This paper seeks to advance our understanding of global financial interconnectedness by (i) mapping aspects of the architecture of global finance and (ii) investigating critical fault lines related to interconnectedness along which systemic risks were built up and shocks transmitted in the crisis. It thus takes initial steps toward operationalizing enhanced financial sector and macro-financial surveillance called for by the IMF’s Executive Board and by experts such as de Larosiere et al. (2009). Getting a better handle on interconnectedness would strengthen the Fund‘s ability, together with the Financial Stability Board, to track systemic risk concentrations. It would also inform spillover and vulnerability analyses, and sharpen bilateral and multilateral surveillance.

scholarly journals Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment

2018 ◽  
Vol 18 (3) ◽  
pp. 195-224 ◽  
Author(s):  
Martin Hodula ◽  
Lukáš Pfeifer
Keyword(s):  
Monetary Policy ◽  
Systemic Risk ◽  
Financial Stability ◽  
House Prices ◽  
Empirical Support ◽  
Financial Sector ◽  
Economic Policies ◽  
Real Economy ◽  
Monetary Policies ◽  
Fiscal And Monetary Policy

Abstract In this paper, we shed some light on the mutual interplay of economic policy and the financial stability objective. We contribute to the intense discussion regarding the influence of fiscal and monetary policy measures on the real economy and the financial sector. We apply a factor-augmented vector autoregression model to Czech macroeconomic data and model the policy interactions in a data-rich environment. Our findings can be summarized in three main points: First, loose economic policies (especially monetary policy) may translate into a more stable financial sector, albeit only in the short term. In the medium term, an expansion-focused mix of monetary and fiscal policy may contribute to systemic risk accumulation, by substantially increasing credit dynamics and house prices. Second, we find that fiscal and monetary policy impact the financial sector in differential magnitudes and time horizons. And third, we confirm that systemic risk materialization might cause significant output losses and deterioration of public finances, trigger deflationary pressures, and increase the debt service ratio. Overall, our findings provide some empirical support for countercyclical fiscal and monetary policies.

scholarly journals Financial Stability Indicators – The Case of Croatia

2016 ◽  
Vol 5 (1) ◽  
pp. 113-140 ◽  
Author(s):  
Mirna Dumičić
Keyword(s):  
Principal Component Analysis ◽  
Systemic Risk ◽  
Financial Stability ◽  
Principal Component ◽  
Small Open Economies ◽  
Macroprudential Policy ◽  
Policy Makers ◽  
The Public ◽  
Systemic Risks ◽  
Accumulation Index

Abstract This paper considers financial stability through the processes of accumulation and materialisation of systemic risks. To this end, the method of principal component analysis on the example of Croatia has been used to construct two composite indicators – a systemic risk accumulation index and an index reflecting the consequences of systemic risk materialisation. In the construction of the indices, the features and risks specific to small open economies were considered. Such an approach to systemic risk analysis facilitates the monitoring and understanding of the degree of financial stability and communication of macroprudential policy makers with the public.

Gulf Cooperation Council (GCC)—Oil Prices, Financial Stability, and the Use of Countercyclical Macroprudential Policies in the GCC

Policy Papers ◽  
2015 ◽  
Vol 15 (62) ◽  
Author(s):  
Keyword(s):  
Financial Services ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Financial Sector ◽  
Oil Price ◽  
Loan Loss ◽  
Financial Cycle ◽  
Macroprudential Policies ◽  
Systemic Risks ◽  
Wide Range

Economic and financial developments in the GCC economies are interwoven with oil price movements. GCC economies are highly dependent on oil and gas exports. Oil price upturns lead to higher oil revenues, stronger fiscal and external positions, and higher government spending. This boosts corporate profitability and equity prices and strengthens bank balance sheets, but can also lead to the buildup of systemic vulnerabilities in the financial sector. Banks in the GCC are well-capitalized, liquid, and profitable at present, and well-positioned to manage structural systemic risks. However, oil-macro-financial linkages mean that asset quality and liquidity in the financial system may deteriorate in a low oil price environment and financial sector stress may emerge. The scope for amplification of oil price shocks through the financial sector suggests a role for a countercyclical approach to macroprudential policies. Countercyclical macroprudential policy can prove useful to reduce the buildup of systemic risks in the financial sector during upswings, and to cushion against disruption to financial services during periods of financial sector stress. The GCC countries have considerable experience with implementing a wide range of macroprudential policies, but these policies have not generally been adjusted through the cycle. GCC central banks implemented several macroprudential measures before the global financial crisis and have continued to enhance their macroprudential frameworks and toolkits to limit systemic financial sector risks. Although there is some evidence of macroprudential tools being adjusted in a countercyclical way, most of the tools have not been adjusted over the financial cycle. Further enhancements to the GCC macroprudential framework are needed to support the countercyclical use of these policies. A comprehensive and established framework, supported by strong institutional capacity, is essential for countercyclical macroprudential policies. This framework should provide clear assignment of responsibilities and guidance on how policies will be implemented to maintain financial stability and manage systemic risks over the financial cycle. Addressing data gaps and the further development of reliable early warning indicators in signaling potential systemic stress are needed to help guide the countercyclical use of a broad set of macroprudential policies. Expanding the countercyclical policy toolkit and its coverage can help address emerging financial sector risks. The implementation of countercyclical capital buffers and dynamic loan loss provisions could boost resilience in line with systemic risks faced in GCC economies. At the same time, using existing macroprudential policies countercyclically would prove useful to address emerging financial sector risks in a more targeted way. Expanding the coverage of macroprudential tools to nonbanks can help boost effectiveness by reducing leakages.

Mandatory Financial Stability Assessments Under the Financial Sector Assessment Program - Update

Policy Papers ◽  
2013 ◽  
Vol 2013 (94) ◽  
Author(s):  
Keyword(s):  
World Bank ◽  
Financial Stability ◽  
Emerging Market ◽  
Low Frequency ◽  
Financial Sector ◽  
Executive Board ◽  
Assessment Program ◽  
The World Bank ◽  
The World ◽  
The Stability

In September 2010, the Executive Board made financial stability assessments under the Financial Sector Assessment program (FSAP) a regular and mandatory part of bilateral surveillance under Article IV for jurisdictions with systemically important financial sectors. This decision recognized that although financial sector issues were at the core of the Fund’s surveillance mandate, the FSAP as designed in the late 1990s had severe limitations as a tool. Voluntary participation, the low frequency of assessments, and their very broad coverage (particularly in emerging market and developing countries, where assessments are typically conducted jointly with the World Bank) limited the usefulness of the FSAP for surveillance. Building on the revamp of the FSAP during the 2009 program review that delineated the institutional responsibilities of the Fund and the World Bank and defined the content of the stability assessment under the FSAP, the Executive Board took the next step in 2010 to make these stability assessments mandatory every five years for members with systemically important financial sectors

Lehren aus der Krise – Notwendige Änderungen der Finanzmarktregeln und zur Begrenzung systemischer Risiken

2009 ◽  
Vol 58 (3) ◽  
Author(s):  
Otmar Issing ◽  
Stephany Griffith-Jones ◽  
Stefano Pagliari ◽  
Claudia M. Buch ◽  
Katja Neugebauer
Keyword(s):  
Financial Crisis ◽  
Systemic Risk ◽  
Financial Stability ◽  
Market Failure ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Systemic Risks ◽  
State And Market ◽  
Bank For International Settlements ◽  
The International Monetary Fund

AbstractThe latest financial crisis has been caused by a mixture of state and market failure, argues Otmar Issing. To avoid future crises, more transparency is needed - not by gathering more information, but by gathering it systematically and thereby creating “intelligent transparency”. Furthermore, regulation has to be global, he states. The necessary institutions are in place: The International Monetary Fund, the Financial Stability Board and the Bank for International Settlements.Stephany Griffith-Jones and Stefano Pagliari point out, that containing “systemic risk” is one of the most important rationales for regulating financial markets. Our understanding of the sources of systemic risk has repeatedly been challenged by major episodes of financial instability. The crisis that started in the summer of 2007 has been no exception. They discuss how the latest global financial crisis urges analysts and regulators to rethink the origin of systemic risk beyond a narrow focus on the banking sector, beyond the “too big to fail problem”, and beyond a narrow micro-prudential focus. They focus on two regulatory principles: comprehensiveness and countercyclicality.Claudia Buch und Katja Neugebauer review the existing empirical evidence on whether the increase in cross-border activities has allowed banks to diversify risks and to what extent it has increased banks’ exposure to systemic risks.

scholarly journals Impact of diversification on systemic risk of conventional banks listed on the Indonesia Stock Exchange

2020 ◽  
Vol 15 (4) ◽  
pp. 80-87
Author(s):  
Musa Fresno ◽  
Dewi Hanggraeni
Keyword(s):  
Systemic Risk ◽  
Value At Risk ◽  
Financial Stability ◽  
Stock Exchange ◽  
Conditional Value At Risk ◽  
Revenue Diversification ◽  
Variable Approach ◽  
Systemic Risks ◽  
Conventional Banks ◽  
The Impact

It is believed that bank diversification increases financial stability. However, several theories argue that diversification can trigger the spread of failure because of the increased interconnectivity between institutions. The aim of this study is to determine the impact of diversification on the systemic risk of banks. The sample of the study consists of 21 conventional banks listed on the Indonesia Stock Exchange from 2009 to 2018. The study uses firm-year fixed effect panel regression and an instrumental variable approach to examine how firm-specific variables determine the level of systemic risk. Diversification is measured by bank assets, funding, and revenue diversification. To measure the systemic risk, the Conditional Value-at-Risk (ΔCoVaR) methodology is applied. The results show that an increase in funding diversification leads to a decrease in ΔCoVaR, indicating that funding diversification exacerbates the level of systemic risk, whereas asset diversification and revenue diversification do not have significant effects on the level of systemic risk. The empirical findings suggest that the interconnectivity between banks should be reduced by limiting the diversification of funding in the banks to minimize their systemic risks.

scholarly journals Measuring Systemic Risk in the Financial Sector

2014 ◽  
pp. 117-125
Author(s):  
M. A. Shchepeleva
Keyword(s):  
Risk Assessment ◽  
Systemic Risk ◽  
Financial Services ◽  
Financial Stability ◽  
Quantitative Methods ◽  
Financial Sector ◽  
Negative Consequences ◽  
Exogenous Shock ◽  
Qualitative Approaches ◽  
Holistic Understanding

The article discusses quantitative methods of assessing systemic risk of the financial sector and the possibilities of their practical application. Systemic risk, which is manifested in the failure of financial services provision and deterioration of the financial system, is a complex concept that can be realized in several forms: the risk of infection, exogenous shock, leading to a simultaneous decline in all financial institutions, and the risk of «financial fragility accumulation". The main causes of the imbalances in the system are unjustified loose standards of risk assessment during economic booms, procyclical behavior of economic agents and asymmetric information. The spread of the risk is associated with the financial accelerator mechanism. Realization of systemic risk in the financial sector leads to serious negative consequences for the real sector not only in the national economy, but also abroad. Quantitative methods of risk assessment provide national authorities with useful information for macroprudential supervision aimed at maintaining financial stability. At the same time it is very important that the data used by the regulator is accurate and reliable. After 2008 crisis, a large number of qualitative approaches appeared, but they all reflect only certain aspects of the risk. The article focuses on stress tests, early-warning indicators, network models, VaR- methods and specific indices. According to research, different assessment methods produce different results. In addition, due to insufficient statistical database existing models are good at predicting crises with hindsight, but cannot identify stressful episodes ex-ante. Thus model results should be treated with caution and require further scrutiny. To get a holistic understanding of the systemic risk regulating authorities should apply different quantitative methods together with qualitative approaches and expert judgement.

scholarly journals Central Banks, Systemic Risk and Financial Sector Structural Reform

2018 ◽  
Author(s):  
Saule T. Omarova
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Financial Sector ◽  
Central Banks ◽  
Structural Reform ◽  
Structural Reforms ◽  
Financial Industry ◽  
Financial Firms ◽  
Different Types ◽  
Fundamental Pattern

This chapter contribution to an edited volume examines financial sector structural reform as a critical, though largely under-appreciated to date, dimension of central banks’ post-crisis systemic risk prevention agenda. By limiting the range of permissible transactions or organizational affiliations among different types of financial firms, structural reforms alter the fundamental pattern of interconnectedness in the financial system. In that sense, the chapter argues, reforming the institutional structure of the financial industry operates as a deeper form of the currently evolving macroprudential regulation. The chapter identifies three principal models that form a continuum of potential financial sector structural reform choices and applies this conceptual framework to analysis of post-crisis structural reforms in the U.K., EU, and U.S. It further examines how deeply issues of financial industry structure are embedded in central banks’ regulatory and policy agenda and, in light of this connection, discusses potential implications of current structural reforms for central banks’ post-crisis financial stability mandate.

scholarly journals MACRO-PRUDENTIAL POLICY: ESSENCE AND MEANING

2018 ◽  
pp. 148-152
Author(s):  
ELISO BERIDZE
Keyword(s):  
Financial Stability ◽  
Financial Sector ◽  
Macroprudential Policy ◽  
Market Participants ◽  
Exogenous Shocks ◽  
Systemic Risks ◽  
Banking Institutions ◽  
Policy Risk ◽  
Fiscal And Monetary Policy ◽  
Prudential Policy

Macro-prudential policy implies monitoring, evaluation and carrying out such a supervisory policy of financial stability which will be aimed at eradicating systemic risks and neutralizing pro-cyclic nature of the financial sector (growing to the cycle direction, pro-cyclical). To do this, it is necessary to carry out the supervisory policy: risk assessment; analysis of the activities of banking institutions and preparation of recommendations. Systemic risks include: exogenous shocks (economic fall, external shock, etc.), the second, so-called “contagious shocks” (contagion) that are due to the high integration of the financial sector internationally; the third category is the accumulation of financial imbalance that is the risk of endogenous nature and is often collected by the support of market participants. Against the background of the global crisis, Lehman Brothers’ bankruptcy in September 2009 clearly demonstrated those negative externalities which are linked to the bankruptcy of the systemic bank globally. Consequently, the macroprudential policy aims to reduce the probability of system banks’ bankruptcy and in case of bankruptcy to limit the system’s adverse effect. However, it is important to adequately implement the countercyclical fiscal and monetary policy.

scholarly journals 5.5. ФИНАНСОВАЯ УСТОЙЧИВОСТЬ БАНКОВ: ЗАРУБЕЖНЫЕ И РОССИЙСКИЕ ПОДХОДЫ К ОЦЕНКЕ

2020 ◽  
Author(s):  
A.V. Morozov ◽  
A.V. Morozov ◽  
A.V. Morozov ◽  
A.V. Morozov ◽  
A.V. Morozov
Keyword(s):  
Central Bank ◽  
Russian Federation ◽  
Financial Stability ◽  
Banking Sector ◽  
Financial Sector ◽  
International Experience ◽  
Comprehensive Assessment ◽  
Financial Indicators ◽  
Systemic Risks ◽  
The Russian Federation

В статье рассмотрены подходы международных и национальных надзорных органов к оценке финансовой устойчивости банков и банковского сектора. Автором показано, что подходы международных надзорных органов базируются на сочетании микропруденциального и макропруденциального анализа и включают комплексную оценку основных финансовых показателей и банковских рисков. Подходы Центрального банка РФ опираются на международный опыт и направлены на обеспечение устойчивости банков к системным рискам в финансовом секторе экономики.The article discusses the approaches of international and national supervisory authorities to assess the financial stability of banks and the banking sector. The author shows that the approaches of international supervisory authorities are based on a combination of microprudential and macroprudential analysis and include a comprehensive assessment of key financial indicators and banking risks. The approaches of the Central Bank of the Russian Federation are based on international experience and are aimed at ensuring the resilience of banks to systemic risks in the financial sector of the economy.

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