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Pierpaolo Grippa and Lucyna Gornicka
Concentration risk is an important feature of many banking sectors, especially in emerging and small economies. Under the Basel Framework, Pillar 1 capital requirements for credit risk do not cover concentration risk, and those calculated under the Internal Ratings Based (IRB) approach explicitly exclude it. Banks are expected to compensate for this by autonomously estimating and setting aside appropriate capital buffers, which supervisors are required to assess and possibly challenge within the Pillar 2 process. Inadequate reflection of this risk can lead to insufficient capital levels even when the capital ratios seem high. We propose a flexible technique, based on a combination of “full” credit portfolio modeling and asymptotic results, to calculate capital requirements for name and sector concentration risk in banks’ portfolios. The proposed approach lends itself to be used in bilateral surveillance, as a potential area for technical assistance on banking supervision, and as a policy tool to gauge the degree of concentration risk in different banking systems.
Marzie Taheri Sanjani
This paper investigates financial frictions in US postwar data to understand the interaction between the real business cycle and the credit market. A Bayesian estimation technique is used to estimate a large Vector Autoregression and New Keynesian models demonstrating how financial shocks can have a large and sluggish impact on the economy. I identify the default risk and the maturity mismatch channels of monetary policy transmission; I further employ a generalized-IRF to establish countercyclicality of risk spreads; and I show that the maturity mismatch shocks produce a stronger impact than the default risk shocks.
Ms. Yan M Sun, Mr. Frigyes F Heinz, and Giang Ho
This paper uses the Global VAR (GVAR) model proposed by Pesaran et al. (2004) to study cross-country linkages among euro area countries, other advanced European countries (including the Nordics, the UK, etc.), and the Central, Eastern and Southeastern European (CESEE) countries. An innovative feature of the paper is the use of combined trade and financial weights (based on BIS reporting banks’ external position data) to capture the very close trade and financial ties of the CESEE countries with the advanced Europe countries. The results show strong co-movements in output growth and interest rates but weaker linkages bewteen inflation and real credit growth within Europe. While the euro area is the dominant source of economic influences, there are also interesting subregional linkages, e.g. between the Nordic and the Baltic countries, and a small but notable impact of CESEE countries on the rest of the Europe.
Mr. Serhan Cevik and Ms. Katerina Teksoz
This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms - strengthening financial intermediation and facilitating the development of liquid domestic capital markets - would advance the effectiveness of monetary transmission mechanisms in the GCC countries.
Abdullah Almounsor
Yemen has had a high and volatile rate of inflation in recent years. This paper studies the underlying determinants of inflation dynamics in Yemen using three different approaches: (i) a single equation model, (ii) a Structural Vector Autoregression Model, and (iii) a Vector Error Correction Model. The outcomes suggest that inflation dynamics in Yemen are driven by international price shocks, exchange rate depreciation, domestic demand shocks, and monetary innovations. The impact of international prices and exchange rate depreciation indicate a significant pass-through of import prices. In the short run, external shocks of international prices and the exchange rate account for most variations in inflation, but domestic shocks to money supply and domestic demand explain larger variations in the medium term.
Marcella Lucchetta and Mr. Gianni De Nicolo
This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4- 2009Q1.
Ms. Silvia Sgherri and Mr. Alessandro Galesi
The recent financial crisis raises important issues about the transmission of financial shocks across borders. In this paper, a global vector autoregressive (GVAR) model is constructed to assess the relevance of international spillovers following a historical slowdown in U.S. equity prices. The GVAR model contains 27 country-specific models, including the United States, 17 European advanced economies, and 9 European emerging economies. Each country model is linked to the others by a set of country-specific foreign variables, computed using bilateral bank lending exposures. Results reveal considerable comovements of equity prices across mature financial markets. However, the effects on credit growth are found to be country-specific. Evidence indicates that asset prices are the main channel through which-in the short run-financial shocks are transmitted internationally, while the contribution of other variables-like the cost and quantity of credit-becomes more important over longer horizons.
International Monetary Fund. Monetary and Capital Markets Department


Published twice yearly, the Global Financial Stability Report (GFSR) was created to provide a more frequent assessment of global financial markets by the IMF and to address emerging market financing in a global context. It provides timely analysis of developments in both mature and emerging market countries and seeks to identify potential fault lines in the global financial system that could lead to crisis. The GFSR aims to deepen its readers’ understanding of global capital flows, which play a critical role as an engine of world economic growth. Of key value, the report focuses on current conditions in global financial markets, highlighting issues of financial imbalances, and of a structural nature, that could pose risks to financial market stability and sustained market access by emerging market borrowers.

International Monetary Fund
The analysis is structured around the standard taxonomy of transmission channels. A monetary tightening must limit banks' ability to supply loans by reducing bank reserves/bank credit. The direct interest rate channel is the strongest channel of the monetary policy transmission mechanism (MPTM), but the exchange rate channel is weak. The government has started addressing the institutional impediments constraining credit to domestic enterprises. Joining the European economic and monetary unit will strengthen the pass-through from policy rates to lending rates.
Mr. Evan C Tanner
This paper extends my previous work by examining the relationship between monetary policy and exchange market pressure (EMP) in 32 emerging market countries. EMP is a gauge of the severity of crises, and part of this paper specifically analyzes crisis periods. Two variables gauge the stance of monetary policy: the growth of central bank domestic credit and the interest differential (domestic versus U.S. dollar). Evidence suggests that monetary policy plays an important role in currency crises. And, in most countries the shocks to monetary policy affect EMP in the direction predicted by traditional approaches: tighter money reduces EMP.