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Mr. Damien Capelle
This paper develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.
International Monetary Fund. Monetary and Capital Markets Department
This technical note considers the regulation and supervision of fund management and equity and derivatives trading in the United States (U.S.). As one of the main destinations for household savings and a key provider of funding to U.S. corporates, investment funds play a major role in the U.S. financial system. Distortions to equity trading could cause significant loss of confidence in markets, while international post-crisis reforms for OTC derivatives have underlined the importance of greater transparency and the value of central clearing. U.S. companies have also traditionally raised more finance through equity and other capital markets than through bank lending, and so capital markets are of greater structural significance in the U.S. than in some other jurisdictions.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Assistance report on Chile constitute technical advice provided by the staff of the IMF to the Banco Central de Chile (BCCh) in response to their request for technical assistance. The BCCh is considering broadening access to its services beyond commercial banks and some Financial Market Infrastructures. The mission emphasized the overarching requirement for all central bank counterparts to be adequately regulated and supervised, to mitigate the central bank’s operational, financial, and reputational risks. Recent changes to the banking law facilitate consolidation of the banking supervisor into the nonbank supervisor. This move should facilitate equal treatment across participants and reduce the prospect of regulatory arbitrage. The new architecture should ease, though not eliminate, coordination efforts between BCCh and authorities when it comes to maintaining financial stability. By applying the assessment framework to Chile, the mission recommended some minor broadening of Nonbank Financial Institutions access to BCCh services, while noting that it should have the power to provide liquidity to any nonbank financial sector to contain spillovers that may otherwise threaten financial stability more generally.
Mr. John C Caparusso, Ms. Yingyuan Chen, Mr. Peter Dattels, Rohit Goel, and Paul Hiebert
The Global Financial Crisis unleashed changes in the operating and regulatory environments for large international banks. This paper proposes a novel taxonomy to identify and track business model evolution for the 30 Global Systemically Important Banks (G-SIBs). Drawing from banks’ reporting, it identifies strategies along four dimensions –consolidated lines of business and geographic orientation, and the funding models and legal entity structures of international operations. G-SIBs have adjusted their business models, especially by reducing market intensity. While G-SIBs have maintained international orientation, pressures on funding models and entity structures could affect the efficiency of capital flows through the bank channel.
Metodij Hadzi-Vaskov and Mr. Luca A Ricci
This study investigates the nonlinear relationship between public debt and sovereign credit ratings, using a wide sample of over one hundred advanced, emerging, and developing economies. It finds that: i) higher public debt lowers the probability of being placed in a higher rating category; ii) the negative debt-ratings relationship is nonlinear and depends on the rating grade itself; and iii) the identified nonlinearity explains the differential impact of debt on ratings in advanced economies versus in emerging markets and developing economies. These results hold for both gross debt and net debt, and are robust to alternative dependent variable definitions, analytical techniques, and empirical specifications. These findings underscore the potential for fiscal consolidation in helping countries achieve a better credit rating.
Thorvardur Tjoervi Olafsson
This paper develops a small open economy model where global and domestic liquidity is intermediated to the corporate sector through two financial processes. Investment banks intermediate cross-border credit through interlinked debt contracts to entrepreneurs and commercial banks intermediate domestic savings to liquidity constrained final good producers. Both processes are needed to facilitate development of key production inputs. The model captures procyclical investment bank leverage dynamics, global liquidity spillovers, domestic money market pressures, and macrofinancial linkages through which shocks propagate across the two processes, affecting spreads and balance sheets, as well as the real economy through investment and working capital channels.
Mr. Tamim Bayoumi

Abstract

There have been numerous books examining the 2008 financial crisis from either a U.S. or European perspective. Tamim Bayoumi is the first to explain how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined. Starting in the 1980s, Bayoumi outlines the cumulative policy errors that undermined the stability of both the European and U.S. financial sectors, highlighting the catalytic role played by European mega banks that exploited lax regulation to expand into the U.S. market and financed unsustainable bubbles on both continents. U.S. banks increasingly sold sub-par loans to under-regulated European and U.S. shadow banks and, when the bubbles burst, the losses whipsawed back to the core of the European banking system. A much-needed, fresh look at the origins of the crisis, Bayoumi’s analysis concludes that policy makers are ignorant of what still needs to be done both to complete the cleanup and to prevent future crises.