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Front Matter

Front Matter

Author(s):
Heiko Hesse
Published Date:
December 2016
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    Essays on the Global Financial Crisis

    Table of Contents

    • Preface

    • Introduction

    • Origins of the Global Financial Crisis and Policy Response

    • I. The Transmission of Liquidity Shocks during the Crisis, with Nathaniel Frank and Brenda González-Hermosillo, 2008

    • A. Introduction

    • B. Transmission of Spillovers during the Subprime Crisis

    • C. Data

    • D. Methodology

    • E. Results

    • F. Conclusion

    • References

    • II. The Effectiveness of Central Bank Interventions during the First Phase of the Subprime Crisis, with Nathaniel Frank, 2009

    • A. Introduction

    • B. Review of Developments and Policy Interventions

    • C. Empirical Analysis

    • D. Bivariate GARCH Framework

    • E. Policy Implications and Conclusions

    • References

    • Spillovers and Contagion

    • III. Financial Spillovers to Emerging Markets during the Global Financial Crisis, with Nathaniel Frank, 2009

    • A. Introduction

    • B. Transmission of Spillovers to EM Countries During the Subprime Crisis: A Qualitative Overview

    • C. Data

    • D. Methodology

    • E. Results

    • F. Conclusion

    • References

    • IV. Global Market Conditions and Systemic Risk, with Brenda González-Hermosillo, 2009

    • A. Introduction

    • B. Overview of Systemic Risk

    • C. Global Market Conditions and Systemic Risk: A Qualitative View

    • D. Markov-Regime Switching Analysis

    • E. Results During the Peak of the Crisis

    • F. Results After Massive Government Programs in 2009 to Address the Global Crisis

    • G. Conclusion

    • References

    • Case Studies

    • V. What do Sovereign Wealth Funds Imply for Financial Stability?, with Tao Sun, 2009

    • A. Introduction

    • B. Literature Review

    • C. Data and Methodology

    • D. Data

    • E. Methodology

    • F. Empirical Results

    • G. Conclusion

    • References

    • VI. Recent Credit Stagnation in the MENA Region: What to Expect? What Can Be Done? with Adolfo Barajas, Ralph Chami and Raphael Espinoza, 2010

    • A. Introduction

    • B. The Recent Credit Cycle in Historical and International Perspective

    • C. Anatomy of the MENA Credit Slowdown

    • D. Econometric Analysis of Bank-Level Credit Growth

    • E. Conclusion

    • References

    • VII. Financial Spillovers and Deleveraging: The Case of Romania, 2012

    • A. Introduction

    • B. Foreign Bank Deleveraging

    • C. Financial Spillover Analysis

    • D. Conclusion References

    • VIII. Progress with Bank Restructuring and Resolution in Europe, with Nadege Jassaud, 2013

    • A. Executive Summary

    • B. Introduction

    • C. Recent Developments

    • D. Crisis Response

    • E. On-Going Challenges

    • F. Resolution and Restructuring Framework

    • G. Resolution Framework for Problem Banks

    • H. Disclosure

    • References

    • Stress Testing Issues

    • IX. Next Generation System-Wide Liquidity Stress Testing, with Christian Schmieder, Benjamin Neuendorfer, Claus Puhr and Stefan Schmitz, 2012

    • A. Introduction

    • B. Review of General Concepts to Assess Liquidity Risks

    • C. Methodological Aspects

    • D. Framework of Next Generation Liquidity Stress Tests

    • E. Design of Stress Scenarios

    • F. Run-off Rates for Different Funding Sources

    • G. Asset side: Fire Sales & Rollover

    • H. Link Between Liquidity and Solvency

    • I. Liquidity Stress Tests in Recent FSAPs and Benchmark Scenarios

    • J. Case Study

    • K. Case Study Fully Fledged Cash Flow Analysis

    • L. Conclusion

    • References

    • X. European FSAP: Technical Note on Stress Testing of Banks, with Daniel Hardy, 2013

    • A. Executive Summary

    • B. Introduction

    • C. Background

    • D. The 2013 Bank Solvency Stress Testing Exercise

    • E. Publication and Transparency

    • F. Consistency and Quality Control Mechanisms

    • G. Input Data Review

    • H. Refinement of Satellite Models

    • I. Achieving Supervisory Orientation

    • J. Future Priorities

    • K. Liquidity Stress Testing

    • A. Literature Review

    • B. Integrating Liquidity and Solvency Risks and Bank Reactions in Stress Tests

    • C. Liquidity Risks Analysis by Authorities

    • D. Basel III and Liquidity Stress Testing

    • XI. How to Capture Macro-Financial Spillover Effects in Stress Tests?, with Ferhan Salman and Christian Schmieder, 2014

    • A. Introduction

    • B. Financial Spillovers from the Euro periphery to the Rest of the World

    • C. DCC GARCH Approach

    • D. Liquidity and Solvency Stress Testing

    • E. Integration of the Financial Spillover Analysis with the Stress Testing Approach

    • F. Conclusion

    • References

    • Debt Sustainability and Sovereign Debt Restructuring

    • XII. Reprofiling and Domestic Financial Stability: Recent Experiences, 2014

    • References

    • XIII. Is Banks’ Home Bias Good or Bad for Debt Sustainability? with Tamon Asonuma and Said Bakhache, 2015

    • A. Introduction

    • B. Literature Review

    • C. Empirical Analysis on Home Bias

    • D. Borrowing Costs of Sovereigns

    • E. Public Debt

    • F. Primary Balance Adjustments

    • G. Debt under Distress

    • H. Robustness Tests

    • I. Other Home Bias Issues

    • J. Conclusion

    • References

    • BOXES

    • 1 Proposed Resolution Directive–Risks and Areas for Enhancements1

    • 2 Capital Outcome of the 2011 Stress Test and Recapitalization Exercises

    • 3 EBA Stress Tests and Bank Funding Costs

    • 4 Principles for Macro-financial Stress Testing

    • 5 Asset Encumbrance and Liquidity Risk Assessments

    • 6 Integrating Liqudity and Solvency Risks and Bank Reaction in Stress Tests

    • 7 Impact of Sovereign Debt Maturity Extensions on Domestic Bank’s Balance Sheets

    • 8 Central Bank Liquidity Provision in Past Reprofiling Cases

    • 9 Accounting Treatment of Bank Holdings of Government Bonds

    • 10 Banking Sector Developments in Greece during the Crisis

    • FIGURES

    • 1 Selected Conditional Correlations

    • 2 Conditional Correlations from Modified DCC Model

    • 3 U.S., U.K., and Euro area Libor-OIS Spreads

    • 4 Decomposition of U.S. and Euro area Libor-OIS Spreads.

    • 5 Decomposition of Libor-OIS Spreads

    • 6 Markov Switching Mean-variance Model for Euro area and U.S. Libor-OIS

    • 7 Markov Switching ARCH Model for Euro area and U.S. Libor-OIS Spreads

    • 8 Impulse Reponse Functions

    • 9 U.S. and EM Financial Variables

    • 10 U.S. and EM Financial Variables

    • 11 Implied Correlations between U.S. and EM Financial Variables

    • 12 Implied Correlations between U.S. and EM Financial Variables

    • 13 Euro-dollar Forex Swap

    • 14 Markov-Switching ARCH Model of VIX

    • 15 Markov-Switching ARCH Model of TED Spread

    • 16 Euro-Dollar Forex Swap

    • 19 Ratios of SWF Investments and Divestments

    • 20 Recent Declines in Real Credit Growth

    • 22 Frequency of Credit Booms throughout the World, 1983-2008

    • 23 Boom Frequency over Time

    • 24 MENA: Credit Behavior Surrounding Booms

    • 25 Decomposition of the Credit Slowdown in Selected MENA Countries

    • 26 Loan-Deposit Ratios in Selected MENAP Countries

    • 27 Drivers of Lending Growth in MENA Banks

    • 28 Banks’ External Positions

    • 29 CDS and EMBIG Developments

    • 30 Romanian Banks’ Parent Funding

    • 31 Parent Funding by Maturity

    • 32 CESEE Foreign Bank Funding

    • 33 DCC GARCH Equity Market Mode

    • 34 DCC GARCH CDS Model

    • 35 DCC GARCH EMBIG Model

    • 36 ARCH Markov Switching Models

    • 37 Assets of EU and U.S. Banking Groups

    • 38 EU: ECB Monetary Financing Operations vis a vis Euro Area Banks

    • 39 Deleveraging/Restructuring Plans

    • 40 EU: Tier 1 Ratio of EU Banks 2008-12

    • 41 EU Banks NPLs to Total Loans

    • 42 EU: NPLs to Total Loans

    • 43 Overview on Liquidity Risk Framework

    • 44 Outcome of Implied Cash Flow Stress Tests for Stylized Banks

    • 45 Stylised Design of Stress Tests

    • 46 Estimated GARCH Correlations GIIPS with European Countries

    • 47 Estimated GARCH Correlations GIIPS with Non-European Countries

    • 48 Estimated GARCH Correlations GIIPS with EM Countries and Korea

    • 49 Estimated GARCH Correlations GIIPS with Germany and the U.S:

    • 50 Overview of the concept to simulate stress at the bank level

    • 51 Outcome of solvency tests

    • 52 Outcome of liquidity tests

    • 53 Banks’ Domestic Sovereign Holdings/Total Bank Assets and Public Debt

    • 54 Average Public Debt (2007) and Home Bias (average, 2005-07) in AM and EM

    • 55 Bond Spreads and Home Bias in AMs

    • 56 EM Sovereigns Borrowing Costs in the Domestic Market

    • 57 Estimated GARCH Correlations with VIX

    • 58 Public Debt in GDP and Home Bias (Average, 2005-07)

    • 59 Fiscal Reactions and Home Bias

    • 60 Debt in Distress and Home Bias

    • 61 European Banks’ Domestic Holdings of Sovereign Debt

    • TABLES

    • 1 Markow Switching Parameters for Leveles and Volatility Models

    • 2 Bivariate VAR Model

    • 3 Impact of Central Bank Interventions on LIBOR-OIS Spreads

    • 4 Country of Target Firms

    • 5 Acquiring SWFs

    • 6 Stock Market Reactions to Announcements of SWF Investments and Divestments

    • 7 Stock Market Reactions to Announcements of SWF Investments and Divestments

    • 8 Balance Sheet Decomposition of Changes in Credit Growth in the MENA Region

    • 9 MENA Countries-Regressions for Bank-Level Loan Growth

    • 10 External Positions of BIS-reporting Banks vis-à-vis CESEE

    • 11 EU: Public Interventions in the EU Banking Sector: 2008-11

    • 12 Comparison of Pros and Cons of Balance Sheet Type TD and BU Liquidity Stress

    • Tests

    • 13 Overview on the Main Elements of Three Liquidity Tests

    • 14 Magnitude of Runs on Funding–Empirical Evidence and Stress Test Assumptions

    • 15 Supervisory Haircuts Based on Solvency Regime and Liquidity Regime

    • 16 Benchmark Scenarios

    • 17 Implied Cash Flow Case Study–Sample Banks

    • 18 Outcome of Fully Fledged Cash Flow Stress Tests for Stylized Banks

    • 19 Indicators of Fundamentals and Policy Track Record

    • 20 Summary of Home Bias Indicators (average, 2005-07 and 2009-11)

    • 21 Average EM and AM Estimated GARCH Correlations with VIX

    • 22 Estimated Fiscal Policy Reactions

    • ANNEXES

    • 1 Figures

    • 2 DCC GARCH Methodology

    • 3 Markov-Regime Switching Analysis

    • 4 Experience with Asset Quality Reviews

    • 5 Experience with Asset Management Companies in Crisis Countries

    • 6 Reviewing Liquidity Issues during the Financial Crisis

    • 7 Cross-Country Funding Pattern

    • 8 Details on all Modules of the Stress Testing Framework

    • 9 Additional Information on Scenario Specification

    • 10 Link Between Solvency and Liquidity

    • 11 Approaches to Liquidity Stress Testing

    • 12 Outcome of Panel Regressions Assessing Spillover Risks

    • 13 Outline of the DCC GARCH Method

    • 14 Benchmark Stress Scenarios

    • 15 Illustrative Example for the Solvency Test

    • 17 Computations of Home Bias Indicators

    • 18 Details and Sources of Macroeconomic Variables

    • 19 Outline of the DCC GARCH Method

    • 20 Home Bias Regression Tables

    Preface

    After working for a year on the Commission on Growth and Development at the World Bank, I had the fortune of joining the IMF in September 2007 at the very beginning of the financial crisis that had its origins in the United States. In my first assignment in the Global Financial Crisis Division and on the GFSR, I was immediately drawn into crisis-related research and policy work such as the transmission of liquidity shocks, central bank interventions, systemic risks, emerging market spillovers or contagion. It has been an exciting time ever since on my different IMF assignments.

    “Essays on the Global Financial Crisis” brings together research and policy work that I have worked on over the last nine years at the IMF. In predominantly joint work with my co-authors, the book covers a wide range of issues from the origins of the financial crisis, the policy response, spillovers and contagion, case studies, bank stress testing to debt sustainability and sovereign debt restructuring.

    The book chapters are mainly of empirical nature, while also distilling relevant policy conclusions. All individual chapters are published as IMF working papers or part of IMF country reports or policy papers. A number of the chapters have been also published in peer- reviewed journals, e.g. World Economics, International Finance Review, Journal of Emerging Market Finance, Journal of Financial Perspectives, Czech Journal of Economics and Finance or Central Banking. Many of the chapters appeared as shorter blog versions on VOX and EconoMonitor. As a matter of fact, I have been a strong supporter over the years in making my research and policy work accessible to the wider public with shorter and non- technical blog publications. This open access book continues this tradition by combining in one monograph thirteen chapters on diverse but also common issues on the Global Financial Crisis.

    The work would not have been possible without the excellent collaborations of my numerous co-authors over the years. My deepest thanks go out to Nathaniel Frank, Brenda Gonzalez- Hermosillo, Christian Schmieder, Tamon Asonuma, Adolfo Barajas, Said Bakhache, Ralph Chami, Raphael Espinoza, Daniel Hardy, Nadege Jassaud, Benjamin Neuendorfer, Claus Puhr, Ferhan Salman, Stefan Schmitz and Tao Sun. I am also very grateful for the guidance and support of my IMF supervisors in the different book chapters: Charles Enoch, Daniel Hardy, Laura Kodres, Said Bakhache, Reza Baqir, Hugh Bredenkamp, Ralph Chami, Mark Flanagan, Marina Moretti, Genevieve Verdier and Erik de Vrijer.

    The usual disclaimer applies: The views expressed in this open access book are my views and those of the co-authors and should not be attributed to the IMF, its Executive Board, or its management. Any errors and omissions are the solely my responsibility and those of the co-authors.

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