Preparing for the Next Financial Crisis

Cover
Half Title
Series Page
Title Page
Copyright Page
Table of Contents
Preface
Introduction
1 Notions
	1.1 Financial Stability
	1.2 Financial Fragility, Liquidity, and Leverage
		1.2.1 Definitions
		1.2.2 Theoretical Underpinnings
			1.2.1.1 The Diamond and Dybvig Model
			1.2.1.2 Subsequent Developments
	1.3 Safe Assets
	1.4 Bubbles and Contagion
		1.4.1 What is a Bubble?
		1.4.2 Contagion or Financial Integration?
	1.5 Moral Hazard and too Big to Fail
		1.5.1 Moral Hazard and Time Consistency
			1.5.1.1 Origin of Moral Hazard
			1.5.1.2 Consequences of Moral Hazard for Financial Stability
		1.5.2 Concentration of the Financial Industry and TBTF
			1.5.2.1 Financial Concentration
			1.5.2.2 TBTF
	1.6 Systemic Risk
		1.6.1 Definition of Systemic Risk
		1.6.2 Sources of Systemic Risk
			1.6.2.1 Banking Activities
			1.6.2.2 Financial Markets
			1.6.2.3 Payment Systems
2 Financial Cycles and Crises
	2.1 Finance and Growth
		2.1.1 Finance Matters for Growth
		2.1.2 Too Much Finance Harms Growth
	2.2 Financial Cycles
		2.2.1 Measuring Financial Cycles
		2.2.2 Drivers of Financial Cycles
			2.2.2.1 Securitization
			2.2.2.2 Shadow Banking
			2.2.2.3 Run-Prone Funding Patterns
		2.2.3 Predicting Financial Cycles
	2.3 Crises
		2.3.1 Empirical Approaches
		2.3.2 Theoretical Approaches
		2.3.3 Recent Developments
3 International Dimensions of Financial Stability
	3.1 A Global Financial Cycle?
		3.1.1 Definition of Global Financial Cycles
		3.1.2 Do Global Financial Cycles Exist?
	3.2 The Euro Area Crisis and Financial Fragmentation
		3.2.1 A Competitiveness Crisis, a Sovereign Debt Crisis, a Banking Crisis
		3.2.2 Financial Fragmentation
	3.3 International Capital Flows and Financial Stability in Emerging Countries
		3.3.1 Benefits and Challenges of Financial Globalization
		3.3.2 Policy Options to Absorb the Impact of International Capital Flows
4 Incentives
	4.1 Motives and Modalities of a Public Intervention
		4.1.1 Why Intervene?
			4.1.1.1 Normative Approach
			4.1.1.2 Positive Approach
		4.1.2 How to Intervene?
			4.1.2.1 Setting of Constraints
			4.1.2.2 Acting on Incentive Schemes
			4.1.2.3 What Works Best?
	4.2 Market Discipline and Transparency
		4.2.1 Credit Rating Agencies
		4.2.2 Accounting Standards
			4.2.2.1 Valuation at Historical Cost or at Fair Value
			4.2.2.2 Perverse Incentives?
		4.2.3 Corporate Governance in Financial Institutions
			4.2.3.1 Specificity of Financial Corporate Governance
			4.2.3.2 Importance of Governance
	4.3 Taxation
		4.3.1 Financial Transactions Tax
			4.3.1.1 Motives
			4.3.1.2 Empirical Studies and Measures Recently Adopted
		4.3.2 Financial Activities Tax
			4.3.2.1 Motives
			4.3.2.2 Implementation
	4.4 Compensation
		4.4.1 Level and Structure of Compensation
			4.4.1.1 Data
			4.4.1.2 Interpretation
		4.4.2 Suggested Intervention
		4.4.3 Measures Adopted
5 Constraints
	5.1 Institutions
		5.1.1 Deposit Insurance
			5.1.1.1 Benefits and Costs of Deposit Insurance
			5.1.1.2 Developments in Deposit Insurance Systems Since the GFC
		5.1.2 Limitations of the Scope of Financial Activities
			5.1.2.1 Benefits and Drawbacks of Universal Banking
			5.1.2.2 Segmentation and Limitation of Banking Activities
			5.1.2.3 Measures Taken or Proposed Since 2008
			5.1.2.4 Issues Related to Regulation of the Shadow Banking System
	5.2 Practices in Financial Markets
		5.2.1 Short Selling
			5.2.1.1 Theory
			5.2.1.2 Empirical Evidence
			5.2.1.3 Regulation
		5.2.2 High-Frequency Trading
			5.2.2.1 Presentation
			5.2.2.2 Concerns
		5.2.3 Exchange-Traded Funds
		5.2.4 Reuse and Rehypothecation of Collateral
	5.3 Financial Market Infrastructures
		5.3.1 Role
			5.3.1.1 Benefits and Costs
			5.3.1.2 Risk Management
		5.3.2 Concerns
			5.3.2.1 Risk Concentration and Interconnectedness
			5.3.2.2 Risk Transmission
		5.3.3 Regulation
			5.3.3.1 Supervision and Definition of Standards
			5.3.3.2 Other Measures Proposed
6 Capital and Liquidity Standards
	6.1 Costs and Benefits of Capital and Liquidity Requirements
		6.1.1 Main Issues
			6.1.1.1 Impact on Financial Intermediation
			6.1.1.2 Impact on Output and Credit Supply
			6.1.1.3 Reduction in the Cost of Crisis
		6.1.2 Expected Impact of Regulatory Changes
			6.1.2.1 Differences in Approach
			6.1.2.2 Differences in Assessment
	6.2 Basel I, Basel II, and Procyclicality
		6.2.1 Basel I
		6.2.2 Basel II
			6.2.2.1 Main Features of Basel II
			6.2.2.2 Criticisms Addressed to Basel II
	6.3 Basel III
		6.3.1 Risk-Weighted Capital Ratios
			6.3.1.1 The Strengthening of Qualitative Requirements for Capital
			6.3.1.2 The Strengthening of Quantitative Requirements for Capital
			6.3.1.3 Credit Risk
			6.3.1.4 Market and Counterparty Risk
		6.3.2 Leverage Ratio
			6.3.2.1 Arguments in Favour of the Return to a Simple Measure
			6.3.2.2 Implementation and Impact
		6.3.3 Liquidity Ratios
			6.3.3.1 Liquidity Coverage Ratio to Regulate Liquidity at a One-Month Horizon
			6.3.3.2 Net Stable Funding Ratio to Regulate Maturity Transformation
			6.3.3.3 Implementation and Further Impact
		6.3.4 Interactions Across Regulatory Requirements
	6.4 Objectives and Constraints of Banking Supervision
		6.4.1 Role of Banking Supervision
		6.4.2 Forms of Intervention of Banking Supervision Authorities
			6.4.2.1 Off-Site Supervision
			6.4.2.2 On-Site Inspections
			6.4.2.3 Assessment of Pillar II Requirements
		6.4.3 Financial Stability Depends on Effective Prudential Supervision
	6.5 The Solvency II Directive for Insurance in Europe
		6.5.1 New Quantitative Prudential Rules
			6.5.1.1 A New Accounting Framework to Assess the Solvency of Insurance and Reinsurance Companies
			6.5.1.2 New Prudential Requirements
		6.5.2 Qualitative Requirements have been Strengthened
		6.5.3 Implementation and Preliminary Assessment of Impact
			6.5.3.1 Implementation of Solvency II Regulation
			6.5.3.2 Preliminary Assessment of the Impact of Solvency II Regulation
		6.5.4 The Review of Solvency II
7 Crisis Management and Resolution of Financial Institutions
	7.1 Definition of Financial Contracts
		7.1.1 Bailout
		7.1.2 Voluntary Exchange
		7.1.3 Contingent Capital
			7.1.3.1 Threshold
			7.1.3.2 Conversion Rate
	7.2 Internal Bail-in
		7.2.1 Objectives
		7.2.2 Implementation
			7.2.2.1 Scope
			7.2.2.2 Trigger
		7.2.3 Impact on Financing Costs
		7.2.4 Limitations
			7.2.4.1 Contagion Risk from Bail-in and the Need to Exclude Retail Deposits
			7.2.4.2 Higher Legal Costs
			7.2.4.3 Spill over Risk
	7.3 Resolution of Financial Institutions
		7.3.1 New Objectives
			7.3.1.1 Respond to Crisis Situations by Giving Powers to a Resolution Authority
			7.3.1.2 Generate Financial Resources While Protecting Public Finance by Involving the Private Sector
		7.3.2 Differences Between EU and the US
		7.3.3 Assessment of Resolution Reforms
			7.3.3.1 Effectiveness
			7.3.3.2 Impact
		7.3.4 Cross-Border Resolution
	7.4 Calibration of TLAC
	7.4.1 Objectives of TLAC
	7.4.2 Requirements
	7.4.3 Impact
	7.4.4 Transposition in EU: MREL
8 Macroprudential Policy
	8.1 Objectives
		8.1.1 The Role of Macroprudential Policy
			8.1.1.1 The Need for a Macroprudential Approach
			8.1.1.2 The Complementary Role Between Micro and Macroprudential Policy
		8.1.2 The Definition of the Final Objective
	8.2 Indicators
		8.2.1 Indicators of the Financial Cycle
			8.2.1.1 Types of Indicators
			8.2.1.2 Relevance of Indicators
		8.2.2 Measurement of Systemic Risk
			8.2.2.1 Measures Available
			8.2.2.2 Assessment
		8.2.3 Role of Stress Tests
			8.2.3.1 Main Principles of Stress Tests
			8.2.3.2 Strengths and Weaknesses of Stress Tests
	8.3 Intermediate Objectives and Instruments
		8.3.1 A Plurality of Intermediate Objectives and Instruments
			8.3.1.1 Intermediate Objectives
			8.3.1.2 Macroprudential Instruments
		8.3.2 Effectiveness and Limits
			8.3.2.1 Principles of Evaluation of Instruments
			8.3.2.2 Applications
	8.4 Questions Related to the Implementation of Macroprudential Policies
		8.4.1 Communication and Responsibility
		8.4.2 International Coordination
		8.4.3 Statistical Information Needs
9 Economic Policies and Financial Stability
	9.1 Monetary Policy
		9.1.1 Levers and Constraints in Crisis Situations
			9.1.1.1 Lender of Last Resort
			9.1.1.2 Relationship with Fiscal Policy
		9.1.2 Interactions Between Monetary Policy and Financial Stability
			9.1.2.1 Has Monetary Policy Been a Source of Financial Instability?
			9.1.2.2 Interactions Between Monetary Policy and Macroprudential Policies
			9.1.2.3 Which Consequences for the Strategy and the Conduct of Monetary Policy?
	9.2 Fiscal Policy
		9.2.1 A Two-Way Link Between Fiscal Policy and Financial Stability
		9.2.2 How Can the Loop be Loosened?
	9.3 Structural Policies
		9.3.1 Tax Policy
			9.3.1.1 Tax Policy and Housing
			9.3.1.2 Tax Policy and Debt Finance
		9.3.2 Housing Policy
		9.3.3 Competition Policy in the Financial Sector
10 Institutions
	10.1 General Issues
		10.1.1 Architecture
			10.1.1.1 Do we Need One Or More Supervisors?
			10.1.1.2 What Role for the Central Bank?
		10.1.2 Governance
			10.1.2.1 Capture and the Revolving Door
			10.1.2.2 Independence and Accountability
	10.2 International Aspects
		10.2.1 Institutions
			10.2.1.1 Groups of Countries
			10.2.1.2 International Monetary Fund
			10.2.1.3 Bank for International Settlements and Associated Institutions
		10.2.2 Extensive Reforms or Improvements to The Existing Framework?
			10.2.2.1 Comprehensive Reforms
			10.2.2.2 Improvements to the Existing Framework
	10.3 European Aspects
		10.3.1 Economic Aspects
			10.3.1.1 Risk Pooling
			10.3.1.2 Enactment of Rules
		10.3.2 Financial System Aspects
			10.3.2.1 The European System of Financial Supervision
			10.3.2.2 Banking Union
11 Emerging Risks and New Challenges
	11.1 The Global Covid-19 Crisis Of 2020
		11.1.1 The Second Global Crisis of the Twenty-First Century?
			11.1.1.1 The Sanitary Crisis
			11.1.1.2 The Liquidity Crisis (March/April 2020)
			11.1.1.3 Consequences for Financial Institutions
			11.1.1.4 Potential Long-Term Financial Stability Consequences of the Crisis
		11.1.2 Policy Responses
			11.1.2.1 Fiscal and Monetary Policies
			11.1.2.2 Prudential Regulation
			11.1.2.3 Responses by Market Authorities
			11.1.2.4 Responses by International and European Institutions
	11.2 New Risks
		11.2.1 Cyber Risk
			11.2.1.1 Definition
			11.2.1.2 Costs
			11.2.1.3 Policies
		11.2.2 Crypto Assets
			11.2.2.1 Definition
			11.2.2.2 Risks and Responses
		11.2.3 Climate Change Related Risks
			11.2.3.1 Definition
		11.2.3.2 Policy Responses
	11.3 New Challenges
		11.3.1 The Feedback Loop Between Inequality, Financial Stability, and Populism
			11.3.1.1 Inequality and Financial Stability
			11.3.1.2 Inequality and Macroprudential Policies
		11.3.2 Population Ageing, Sovereign Debt and Financial Stability
		11.3.3 Complexity in Banking and Finance
			11.3.3.1 Definition
			11.3.3.2 Implication of Complexity for Financial Stability
			11.3.3.3 Evolution Over Time and Policy Responses
Index