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Resource Library

Resource(s) Found: 14

October 29, 2012

The challenges of surveillance and coordination

Author: Choongsoo Kim

Speech by Mr Choongsoo Kim, Governor of the Bank of Korea, at the International Symposium of the Banque de France: Regulation in the Face of Global Imbalances, Paris, 4 March 2011. Topics include:Global imbalances, and Surveillance and policy coordination, Challenges of surveillance and coordination.

Keywords: G20, surveillance, policy, coordination, risk, accountability, innovation, risk factors

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October 29, 2012

Stability of the World Trade Web Over Time- An Extinction Analysis

Author: Nick Foti, Scott Pauls, and Daniel N. Rockmore

The World Trade Web (WTW) is a weighted network whose nodes correspond to countries with edge weights reecting the value of imports and/or exports between countries. In this paper we introduce to this macroeconomic system the notion of extinction analysis, a technique often used in the analysis of ecosystems, for the purposes of investi- gating the robustness of this network. In particular, we subject the WTW to a principled set of in silico \knockout experiments," akin to those carried out in the investigation of food webs, but suitably adapted to this macroeconomic network. Broadly, our experimentsshow that over time the WTW moves to a \robust yet fragile" con_guration where is it robust under random attacks but fragile under targeted attack. This change in stability is highly correlated with the connectance of the network. Moreover, there is evidence of sharp change in the structure of the network in the 1960s and 1970s, where the most mea- sures of robustness rapidly increase before resuming a declining trend. We interpret these results in the context in the post-World War II move towards globalization. Globalization coincides with the sharp increase in robustness but also with a rise in those measures (e.g., connectance and trade imbalances) which correlate with decreases in robustness. The peak of robustness is reached after the onset of globalization policy but before the negative im- pacts are substantial. In this way we anticipate that knockout experiments like these can play an important role in the evaluation of the stability of economic systems.

Keywords: world trade, depression, import, export, extinction, globalization

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October 29, 2012

Central Banking Lessons from the Crisis

Author: IMF Monetary and Capital Markets Department

"The crisis brought the financial system to the verge of systemic collapse and raised the prospect of depression and deflation. Central banks helped defuse these threats, including through exceptional measures. Considerable efforts are now under way to draw policy lessons from the crisis. For central banks, the crisis seems to provide three important lessons for policy frameworks—mainly concerning systemic financial stability.First, financial stability should be addressed mainly using macroprudential policies. Second, price stability should remain the primary objective of monetary policy. Third, the crisis showed that changes to central bank liquidity operations and broad crisis management frameworks are needed, including to address moral hazard. Preserving price stability and central banks’ hard-won monetary policy independence should be a key focus of reform efforts. Institutional arrangements should ensure that the role of central banks in the design and application of macroprudential measures does not impinge on their ability to deliver price stability. The policy roles of the central bank, the government,and other entities need to be clearly delineated in the wake of the broadening of the scope of their interventions during the crisis."

Keywords: crisis, financial system, Macroprudential policies, liquidity, monetary policy, foreign exchange, open market operations

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October 29, 2012

Stress Testing Credit Risk: The Great Depression Scenario The Great Depression Scenario

Author: Simone Varotto

"By using Moody’s historical corporate default histories we explore the implications of scenarios based on the Great Depression for banks’ economic capital and for existing and proposed regulatory capital requirements. By assuming different degrees of portfolio illiquidity, we then investigate the relationship between liquidity and credit risk and employ our findings to estimate the Incremental Risk Charge (IRC), the new credit risk capital add-on introduced by the Basel Committee for the trading book. Finally, we compare our IRC estimates with stressed market risk measures derived from a sample of corporate bond indices encompassing the recent financial crisis. This allows us to determine the extent to which trading book capital would change in stress conditions under newly proposed rules. We find that, typically, banking book regulation leads to minimum capital levels that would enable banks to withstand Great Depression-like events, except when their portfolios have long average maturity. We also show that although the IRC in the trading book may be considerable, the capital needed to absorb market risk related losses in stressed scenarios can be more than twenty times larger."

Keywords: Credit Risk, Financial Crisis, Economic Capital, Basel II, Liquidity Risk

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October 29, 2012

Chronicle of Currency Collapses: Re-examining the Effects on Output

Author: Matthieu Bussière, Sweta C. Saxena and Camilo E. Tovar

The impact of currency collapses (ie large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (ie ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction; and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, ie one-time events induce exchange rate and output dynamics that differ from consecutive episodes.

Keywords: currency crisis; nominal devaluations; nominal depreciations; exchange rates; real output growth; recovery from crises.

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October 29, 2012

Banking crises and the international monetary system in the Great Depression and now

Author: Richhild Moessner and William A Allen

"We compare the banking crises in 2008-09 and in the GreatDepression, and analyse differences in the policy response to thetwo crises in light of the prevailing international monetary systems. The scale of the 2008-09 banking crisis, as measured by falls in international short-term indebtedness and total bank deposits, was smaller than that of 1931. However, central bank liquidity provision was larger in 2008-09 than in 1931, when it had been constrained in many countries by the gold standard. Liquidity shortages destroyed the international monetary system in 1931. By contrast, central bank liquidity could be, and was, provided much more freely in the flexible exchange rate environment of 2008-9. The amount of liquidity provided was 5 ½ - 7 ½ times as much as in 1931. This forestalled a general loss of confidence in the banking system. Drawing on historical experience, central banks, led by the Federal Reserve, established swap facilities quickly and flexibly to provide international liquidity, in some cases setting no upper limit to the amount that could be borrowed."

Keywords: Banking crisis, international monetary system, Great monetary system, Great Depression, central bank liquidity.

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October 29, 2012

Recent episodes of credit card distress in Asia

Author: Tae Soo Kang, Guonan Ma

Not only has credit card lending in Asia grown rapidly, but also several episodes of sharp booms and busts have been experienced, posing new risks to financial stability. Policymakers need to learn more about the risks arising from this type of consumer lending and respond with appropriate prudential measures.

Keywords: credit card, crisis, unsecured high-yield, boom, bust, distress

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October 29, 2012

Countercyclical capital buffers: exploring options

Author: Mathias Drehmann, Claudio Borio, Leonardo Gambacorta, Gabriel Jiménez, Carlos Trucharte

"This paper provides some general lessons for the design of countercyclical capital buffers. Its main empirical contribution is to analyse conditioning variables which could guide the build-up and release of capital. A major distinction for countercyclical capital schemes is whether conditioning variables are bank-specific or system-wide. The evidence presented in the paper indicates that the idiosyncratic component can be sizeable when a bank-specific approach is used. This makes a system-wide approach preferable, for which the best variables as signal for the pace and size of the accumulation of the buffers are not necessarily the best for the timing and intensity of the release. The credit-to-GDP ratio seems best for the build-up phase. Some measure of aggregate losses, possibly combined with indicators of credit conditions, seem to perform well for signalling the beginning of the release phase. Nonetheless, the analysis indicates that designing a fully rule-based mechanism may not be possible at this stage as some degree of judgment seems inevitable. A parallel exercise indicates that reducing the sensitivity of the minimum capital requirement is an important element of a credible countercyclical buffer scheme."

Keywords: countercyclical capital buffers, financial stability, procyclicality.

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October 29, 2012

The Global Financial Crisis: Impact on Asia and Emerging Consensus

Author: Sonia Brunschwig, Bruno Carrasco, Tadateru Hayashi, And Hiranya Mukhopadhyay

The good news from this report’s analysis is that emerging economies in Asia in general have weathered the financial crisis better than most of the more advanced economies. While GDP growth declined, active fiscal and monetary policies have likely contributed to a relatively quick rebound and an observed V-shaped recovery. Indeed most of the economies returned to their precrisis growth rates in a period of approximately 1.5 years. 54. The bad news is that there remains significant uncertainty in the future for these economies. There is evidence to suggest that the increase in consumption and investment— reflecting the direct targeting of stimulus policies—may explain the divergence between growth rates in Asia and the G3. However, there is a view that the Asian economies continue to rely heavily on export markets in the more advanced economies suggesting that while there may have been some decoupling, it was more transient in nature. Despite the uncertainty, ADB forecasts robust albeit slightly lower GDP growth rates for Asia in 2011 as compared to 2010.

Keywords: crisis, global financial crisis, policy, liquidity, reserve, Macroprudential

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October 29, 2012

China’s high saving rate: myth and reality

Author: Guonan Ma and Wang Yi

"The saving rate of China is high from many perspectives – historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors – corporate, household and government. Moreover, adjusting for inflation alters interpretations of the time path of the propensity to save in the three sectors. Our evidence casts doubt on the proposition that distortions and subsidies account for China’s rising corporate profits and high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewis-model transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand."

Keywords: Saving; corporate, household and government saving; Chinese economy

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October 29, 2012

Basel II Implementation in Asia

Author: Walter Yao

"The current financial market turmoil has sparked debates across the globe about the supervision and regulation of the financial services industry. As the Basel II capital framework is implemented worldwide, many critics have highlighted weaknesses underscored by the crisis. The most prominent criticisms of the framework include its lack of an explicit liquidity risk capital charge, its over-reliance on credit rating agencies, and its pro-cyclical nature. As top financial leaders are calling for more drastic measures to revamp supervisory structures, the Basel II standard should continue to evolve. Nonetheless, it is useful to review how Asian financial sector regulators are implementing the framework because the guiding principles behind Basel II, while imperfect, highlight an important step for Asian economies to develop more robust banking systems. This Asia Focus report examines Basel II implementation in Asian economies and discusses key issues and challenges facing Asian banks and regulators."

Keywords: basel, basel 2, asia, capital, standards, credit, market, operational, risk

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October 29, 2012

After the storm A new era for risk management in financial services

Author: SAS

After the storm: a new era for risk management in financial services is an Economist IntelligenceUnit report that explores the way in which risk management is changing at the world’s financialinstitutions in response to the global financial and economic crisis. The report is sponsored by SAS. The author was Phil Davis and the editor was Rob Mitchell. The Economist Intelligence Unit bears sole responsibility for the content of this report. Our editorial team executed the online survey, conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Our research for this report drew on two main initiatives: l We conducted an online survey of 334 executives from around the world in March 2009. The survey included companies of a variety of sizes from the financial services industry. All respondents have a primary focus on risk management. To supplement the survey results, the Economist Intelligence Unit conducted a programme of qualitative research, comprising a series of in-depth interviews with industry experts

Keywords: risk management, risk, regulatory, liquidity

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October 29, 2012

Global Risk Management Survey 2011

Author: Aon Risk Solutions

Even as economies show signs of recovery from the global financial crisis, respondents still see economic slowdown as the top risk. For the first time, two new risks enter the top 10 list: failure to innovate/meet customer needs and technology failure/ system failure. The highest percentage for risk readiness (77 percent) is cited for cash flow/liquidity risk, up from 75 percent in the prior survey. Respondents feel least ready for failure to attract or retain top talent—60 percent cite this risk, down from 68 percent.

Keywords: risk, assessment, financing, insurance, captives, risk management, economic slowdown, regulatory, competition

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