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
II. The Effectiveness of Central Bank Interventions during the First Phase of the Subprime Crisis, with Nathaniel Frank, 2009
Spillovers and Contagion
III. Financial Spillovers to Emerging Markets during the Global Financial Crisis, with Nathaniel Frank, 2009
B. Transmission of Spillovers to EM Countries During the Subprime Crisis: A Qualitative Overview
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.