Globalization And Systemic Risk (World Scientific Studies in International Economics)

Contents......Page 10
Preface......Page 6
Acknowledgments......Page 8
I. Special Addresses......Page 14
1. Features of Financial Globalization......Page 16
3. How to Control Systemic Risk......Page 19
4. What Needs to Be Changed?......Page 22
5. Role of the International Monetary Fund......Page 23
2. What Have We Learned?......Page 24
2.1 Financial crises can stem from external financial problems......Page 25
2.2 Domestic factors are important, but not only those that were the center of attention before 1995......Page 27
2.3 Phoenix miracles......Page 32
3. Sub-Prime Crisis and Latin America......Page 34
References......Page 37
Remarks on Systemic Risk and the International Lender of Last Resort Frederic S. Mishkin......Page 40
1.1 Restore confidence in the financial system by quickly providing liquidity......Page 43
1.2 Limit moral hazard by encouraging adequate prudential supervision......Page 44
1.3 Act as a lender of last resort infrequently......Page 45
2. Current Challenges for an International Lender of Last Resort......Page 46
1.1 A historical perspective......Page 52
2. Descriptive Evidence: The Credit Cycle......Page 54
3. Descriptive Evidence: The Housing Market......Page 56
4. The Nonbank Financial Sector, Financial Innovation, and Financial Crises......Page 58
5. International Spillovers......Page 59
6. Policy Lessons......Page 60
References......Page 62
II. Current State of Financial Globalization......Page 64
1. Introduction......Page 66
2. Current State of Financial Globalization......Page 67
3. Implications for Financial Stability......Page 77
3.1 Stabilizing effects from improved risk-sharing......Page 78
3.2 Destabilizing effects from financial contagion......Page 83
4. Conclusions......Page 93
References......Page 94
1. Introduction and Summary......Page 98
2. Measuring and Assessing Advances in Financial Integration......Page 100
3. Risk-Adjusted Growth Opportunities and Financial Integration......Page 103
References......Page 107
Financial Globalization in the Asian Region Philip Lowe......Page 110
1.1 Capital flows and saving–investment correlations......Page 111
1.2 Asset price correlations and foreign direct investment......Page 118
2. Further Progress......Page 122
The Current State of Financial Globalization — Good News, and Bad Gerard Caprio, Jr.......Page 126
III. Globalization and Systemic Risk — Theory......Page 132
Incentive Conflict in Central Bank Responses to Sectoral Turmoil in Financial Hub Countries Edward J. Kane......Page 134
1. Understanding National Safety Nets and How Weakly They are Linked......Page 136
1.1 Components of national nets......Page 138
1.2 Tissue connecting national nets in open economies......Page 139
2.1 Dimensions of regulatory culture......Page 140
2.2 Importance of transparency and deterrency......Page 141
2.3 What if monitoring and policing costs were zero?......Page 142
3. Global and National Incentive Conflicts in Safety Net Management......Page 143
3.1 What countries manage the global safety net?......Page 144
3.2 Differences in hub-country cultures......Page 145
3.3 Repurchase agreement as particularly opaque last resort loans......Page 146
3.4 How repurchase agreements substitute for discount-window loans......Page 147
4. Where Implicit Subsidies Originate: The Political Economy of Last Resort Lending......Page 151
5. Policy Implications......Page 153
6. Summary Implications......Page 155
References......Page 156
1. Introduction......Page 158
2.1 Direct benefits of bailouts......Page 160
2.2 Preventing contagion......Page 161
2.3 Indirect contagion......Page 162
3. The International Safety Net: Preventing the International Interbank Market Gridlock......Page 163
4. Cost–Benefit Analysis of a Multinational Bank Bailout......Page 166
4.1 Perfect information......Page 167
4.1.2 Decentralization with two countries......Page 168
5. Implementing the Bailout of a Multinational Bank......Page 172
5.2.1 Improvised cooperation......Page 173
5.2.3 Proxy-based mechanisms......Page 175
5.3 Asymmetric information and regulatory cooperation......Page 176
6. Regulatory Implications......Page 177
References......Page 178
1. Introduction......Page 182
2. Institutional Background......Page 184
3.1 Total assets of foreign banks in Japan......Page 186
3.2 Broad yen carry trade......Page 188
4. Carry Trades and Risk Appetite......Page 192
5. Carry Trades and Monetary Policy......Page 198
References......Page 201
1. Introduction......Page 204
2. Hattori and Shin on the Yen Carry Trade......Page 205
3. The Safety Net......Page 207
4. Kane and Freixas on the LLR in a Global Context......Page 211
References......Page 216
IV. Globalization and Systemic Risk — Nonbank Financial Intermediaries......Page 218
1. Interaction with the Financial System......Page 220
2. Interaction with “Real Life”......Page 222
4. Transparency and Disclosure — IAIS and Pillar 3......Page 227
6. Need for Effective Groupwide Supervision......Page 228
7. Conclusion......Page 229
Globalization Duality and Nonbank Financial Intermediaries Mohamed A. El-Erian......Page 230
References......Page 237
1. State-Sponsored Pension Schemes......Page 238
2. Private and State and Local Pension Plans......Page 240
3. Conclusion......Page 242
V. Globalization and Systemic Risk — Banks......Page 244
1. Introduction......Page 246
2. Methodology......Page 250
3. Data......Page 251
4. Common Exposure to Shocks......Page 252
5. Evolution of Systemic Risk......Page 253
6. Are Common Exposure and Systemic Risk Related?......Page 255
7. Conclusion......Page 260
References......Page 261
1. Introduction......Page 264
2. Integration and Systemic Risk......Page 266
3. Securitization and Systemic Risk......Page 269
4. Innovation and Systemic Risk......Page 272
4.1 Using past asset returns......Page 273
4.2 Using linear asset-pricing models......Page 275
5. Incentives and Systemic Risk......Page 276
5.2 Lemons......Page 278
5.3 Combining the frictions......Page 279
6. Tackling Tail Risk......Page 281
6.1 Calibrating tail risk......Page 282
6.3 Liquidity policies and practices......Page 283
References......Page 284
1. Introduction......Page 288
2. Networks of Debt and Contagion of Insolvency: The Eisenberg–Noe Model......Page 290
3. Applications to Domestic and International Banking Systems......Page 293
4. How Could the Model be Improved?......Page 299
5. Conclusions......Page 301
References......Page 302
Globalization and Systemic Risk Grant Spencer......Page 304
VI. Globalization and Systemic Risk — Capital Markets......Page 310
1. Introduction......Page 312
2. Observed Volatilities......Page 314
3. Implied Volatilities......Page 316
4. Skew......Page 318
5. Regression Results......Page 319
6. Conclusion......Page 324
References......Page 325
2.1 Arbitrage, information, and hedge funds......Page 326
2.2 Managerial compensation and performance......Page 328
2.3 Agency problems......Page 329
3. Systemic Risk......Page 332
4. Regulatory Coordination and Competition21......Page 335
References......Page 342
1. Introduction......Page 344
2.1 Style distribution of large funds......Page 346
2.2 Principal component analysis......Page 347
3.1 Equity factors......Page 348
3.2 Bond factors......Page 349
3.4 Emerging market factors......Page 350
4. Exposures of Large Hedge Funds Using Monthly Returns......Page 351
4.1 The effects of serial correlation in hedge fund returns......Page 352
4.2 Exposure of average hedge funds......Page 356
5. Corroboration of Exposures Using Daily Investible Indices......Page 357
References......Page 359
Comments on Session VI: Globalization and Systemic Risk — Capital Markets Liliana Rojas-Suarez......Page 362
VII. Crisis Resolution in a Global Context......Page 368
Global Crisis Management John Lane......Page 370
1. Introduction......Page 374
2. Existing Framework for Safeguarding Financial Stability and the Ongoing EU Debate......Page 376
3. EU’s Challenge of Providing a Pan-European Financial-Stability Public Goods......Page 380
4.1 Decentralized decision-making in providing a “pure” public good (such as European-wide financial stability)......Page 382
4.2 Decentralized decision-making in providing both “exclusive” (nationally-oriented financial stability) and “pure” public goods (European-wide financial stability)15......Page 385
5. Summary and Conclusions......Page 388
References......Page 390
Crisis Resolution in a Global Context: Regulation and Supervision for Cross-Border Banking Mattias Persson......Page 392
1. The Challenges for Crisis Management and Crisis Resolution......Page 393
2. Moving Forward from Today’s Framework......Page 397
3. Conclusion......Page 400
1. Discussion......Page 402
2. Conclusions......Page 405
VIII. Where to Go from Here — Policy Panel......Page 408
Speaking Points for Where to Go from Here? Policy Panel Jaime Caruana......Page 410
The US Government’s Approach to Financial Decisions Kenneth W. Dam......Page 416
1. Introduction......Page 422
2. So What are Some of the Elements of Our Ongoing Supervisory Process That are Designed to Limit the Occurrence of Significant Problems at Major Firms?......Page 423
2.3 A third level of coordination is conceptually between the first two......Page 424
3. What Does This Mean in the Current Situation and Going Forward?......Page 425
Comments on Session VIII: Where to Go from Here — Policy Panel Andrew Sheng......Page 428
1. The Global Economy......Page 429
2. Sub-Prime, Derivatives, and Financial Bubbles......Page 431
3. Lessons from Sub-Prime and Macroeconomy Implications......Page 433
4. Carry Trade......Page 435
5. Where Do We Go from Here?......Page 437
Basel II, Regulation and the Sub-Prime “Crisis” Michael W. Taylor......Page 442
International Agenda......Page 450
Index......Page 454