November 17, 2016
G01 - Financial Crises
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Monetary Policy Tradeoffs Between Financial Stability and Price Stability
We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices. -
Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases
Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. -
Time-Varying Crash Risk: The Role of Stock Market Liquidity
We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on return variance once we include market illiquidity as an economic variable in the model. -
International Banking and Cross-Border Effects of Regulation: Lessons from Canada
We study how changes in prudential requirements affect cross-border lending of Canadian banks by utilizing an index that aggregates adjustments in key regulatory instruments across jurisdictions. -
The Role of Central Banks in Promoting Financial Stability: An International Perspective
The 2007–09 global financial crisis has led policy-makers around the world, including central banks, to refocus their efforts to promote financial stability. As part of this process, central banks became quite active in supporting financial stability in a variety of ways, such as publicly sharing their assessments of financial system vulnerabilities and risks and helping to strengthen regulation, supervision and macroprudential measures. -
Timing of Banks’ Loan Loss Provisioning During the Crisis
We estimate a panel error correction model for loan loss provisions, using unique supervisory data on flow of funds into and out of the allowance for loan losses of 25 Dutch banks in the post-2008 crisis period. We find that these banks aim for an allowance of 49% of impaired loans. -
On the Nexus of Monetary Policy and Financial Stability: Is the Financial System More Resilient?
Monetary policy and financial stability are closely intertwined, and the resilience of the financial system carries weight in this relationship. This paper explores whether the financial system is more resilient as a result of the G20’s post-crisis agenda for financial regulatory reform. -
Estimating Systematic Risk Under Extremely Adverse Market Conditions
This paper considers the problem of estimating a linear model between two heavy-tailed variables if the explanatory variable has an extremely low (or high) value. We propose an estimator for the model coefficient by exploiting the tail dependence between the two variables and prove its asymptotic properties. -
Early Warning of Financial Stress Events: A Credit-Regime-Switching Approach
We propose an early warning model for predicting the likelihood of a financial stress event for a given future time, and examine whether credit plays an important role in the model as a non-linear propagator of shocks.