DEBT INSTRUMENTS AND THEIR RISK IN THE CONTEXT OF GLOBAL FINANCIAL CRISIS

Derivatives are financial instruments that derive its value from underlying asset such as bond, loan or credit. Credit derivatives are a subgroup of derivatives and mainly consist of credit default swaps, credit linked note, credit swap options and collateralized debt obligations. Credit derivatives market has experienced an exponential growth in recent years. From almost nothing in 1990s, approached to $60 trillion in 2008. Growth was particularly strong in credit default swaps. Force behind this fast growth is rising demand for hedging and transferring the credit risk. After the credit crisis, misuse of credit derivatives and insufficient regulations are come into light and mostly argued. Many claimed to ban these instruments whereas many other tried to find alternative solutions. The purpose of this paper is to explain the issue of credit derivatives, their mechanism and their role in financial system and global credit crisis.

We discuss the relationship between investor payoffs and credit derivatives such as credit default swaps (CDSs) and mortgage-related collateralized debt obligations (CDOs). In this regard, we investigate the role that the interplay between these components played in the global financial crisis (GFC). More specifically, we develop a stochastic model for investor payoffs from investment in CDO tranches that are protected by CDSs. In a continuous-time framework, this model enables us to solve a stochastic optimal credit default insurance problem that has investor consumption and investment in structured mortgage products as controls. Finally, we provide numerical results involving mezzanine CDO tranches being hedged by CDSs and explain their link with the GFC.

This paper examines the impact of liquidity reforms on financial system stability in Nigeria in the aftermath of the 2007/2008 global financial crisis. The crisis exposed significant vulnerabilities within the global financial system, prompting regulatory bodies to adopt measures including the introduction of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to strengthen the resilience of financial institutions and mitigate systemic risks. Using a Regression Discontinuity Design (RDD), the study analyzes panel data from 14 banks operating in Nigeria over the period 2010 to 2021. The results indicate that both LCR and NSFR significantly and positively influence financial system stability. Specifically, higher compliance with the LCR is associated with improved short-term liquidity risk management, while adherence to the NSFR contributes to greater long-term financial resilience. These findings suggest that the reforms have not only enhanced individual bank solvency but also mitigated systemic risks by reducing the likelihood of liquidity-induced disruptions. The paper contributes to the growing body of literature on post-crisis regulatory reforms by providing empirical evidence from Nigeria, emphasizing the relevance of global liquidity standards in safeguarding financial systems in developing markets. It underscores the need for sustained regulatory oversight and compliance with international liquidity standards to maintain stability and foster trust in the banking sector. The findings have important implications for policymakers and financial regulators. They emphasize the need for continued enforcement of liquidity requirements and suggest that further refinements to the regulatory framework could yield additional stability benefits. This study demonstrates that liquidity reforms, specifically the implementation of LCR and NSFR, have been instrumental in strengthening financial system stability in Nigeria.

This research aims to analyze the financial stability especially in dual banking system in Indonesia and discusses the role of Islamic banks in the financial stability of national banks. In addition, this study also focuses on the analysis of the determinants of financial stability namely on the national banking Industry. This research uses panel data in which combined data between time series and cross section with an observation periods are 2005:1 - 2009:1 by using an internal variable of banks and macroeconomic data. Z-score analysis will be used as main tool analysis regressed with internal variable. Empirical results obtained from this research shows that during the period of 2005:1 - 2009:1 banking financial stability, for both conventional and Islamic and categorized based on an asset scale, the movement of the Z-score value is different. From the Z-score values analysis shows that Islamic banks are the most stable bank with a trend increased sharply when compared with other banks, namely conventional couterparts. If viewed from each category, small conventional banks more stable than small Islamic banks, and there are declining trend in 2005:1 to 2009:1. Whereas for large and middle conventional banks the trend of the Z-score movement are in the same patterns. This study also founds that the determinant of the banking stability can be seen from two sides namely bank's internal factors and macroeconomic factors. Internal factors consist of: Income Diversity (ID), Credit or Financing (Loan), Total Assets (TA), Operational Cost (Cost), Cost Income (CI), Loan Asset (LA), Current Liability (CL), Cash to Current Liabilities (CCL), Capital Bank (MDL). While macroeconomic factors consist of: inflation, BI Rate, Exchange Rate, Composite Index (JCI), the Gross Domestic Product (GDP). This research also examined the extent to which the role of Islamic banks and the global financial crisis to the financial stability of national banking. This analysis shows that the global financial crisis and Islamic banks affect significantly to the financial stability of banking industries in Indonesia.

Global financial crisis is not a new phenomenon. The world has witnessed financial crisis since many centuries. The repetition of global financial crisis reveals that global financial setup is not stable thus, prone to frequent financial crisis. However, zero interest rate policy has been launched by developed countries in order to offset the effects of global financial crisis but to date the issue of financial and monetary instability has not been overcome. Interest rate as the main component of financial setup has adversely affected the permanent solution to global financial crisis. The study is undertaken to analyze the effect of interest rate (riba) in propagation of global financial crisis and to analyze the alternate financial mechanism to prevent global financial and economic crisis on permanent basis. However, the qualitative research methodology is pursued to build a conceptual framework by applying inductive paradigm to address the issue of understanding the rationale behind the prohibition of interest based financial paradigm particularly regarding Islamic perspective. The expected outcome suggests that man-made laws in order to subside divine laws in financial paradigm have given rise to financial, ethical and economic crisis. Global financial crisis is the outcome of easy access to credit, abundance of loans upon interest, speculation, greed as well as corruptive motives to exploit each other

Goal – The authors undertake to assess the scale and form of anti-crisis state assistance in the context of restoring the stability of the financial system in the EU. Such assistance is a form of intervention undertaken independently by EU Member States under the conditions of admissibility applicable in the EU. The applied instruments include: state aid (discussed in detail in this paper) and financial assistance on general terms applied in the form of unconventional instruments. The authors attempt to answer two basic questions: Was anti-crisis assistance necessary in the EU in order to maintain the stability of the financial system? What are the long-term consequences of implementing such measures at the EU level and in individual EU Member States?Research methodology – The study uses the method of analysis of partial phenomena and identification of causal changes occurring in the financial system. On this basis, theoretical inference is carried out allowing to determine whether the anti-crisis measures used by EU financial policy have brought tangible results for the financial system and the real economy. In order to formulate final conclusions, available statistical data and the results of research conducted on an international level are analyzed. Next, the current value of financial aid is estimated and the adopted assumptions and efficiency of the implemented instruments of state financial policy are analyzed and assessed.Score – In view of the objective and scope of the conducted research, it is expected that the obtained results will allow the authors to identify the scale of public aid and the assistance provided in the form of unconventional financial policy instruments implemented during the global financial crisis. This approach will make it possible to perform an appraisal of the use of selected mechanisms for stabilizing the financial system. The conducted research should enable the authors to assess the impact of anti-crisis aid on the state of public finances and the stability of the market financial system.

This chapter examines the adaptation of the International Swaps and Derivatives Association (ISDA) framework by means of the 2014 ISDA Credit Derivatives Definitions (2014 Definitions) in addressing how the EU Bank Recovery and Resolution Directive (BRRD) affects credit derivatives. Particularly, it analyses how the institution or obligation to which the credit derivative is referenced becomes subject to the measures. Financial derivatives are financial instruments which provide for an immediate or future exchange of a reference value. Its price inter alia derives from the underlying reference value. Credit Derivatives help transferring the risk of a referenced third party defaulting on its obligation from the buyer to the seller of the Credit Derivative. The chapter explores the documentation of Credit Derivatives and the adjustments made during the financial crisis. It concludes with an analysis of the BRRD from a Credit Derivatives’ perspective and illustrates experiences made during the financial crisis.

This paper examines the functions of IFIs specifically the IMF, World Bank, and BIS in relation to balance of payments in the international financial system. Employing a cross-sectional research methodology, the study analyzes IFI interventions during the Asian Financial Crisis (1997), the Global Financial Crisis (2008), and the COVID-19 pandemic. It evaluates data related to GDP growth, capital flows, and systemic risk measures, and finds that IFIs have a highly positive impact on economic recovery and financial system stability. The study also highlights the importance of advanced technologies, such as big data, machine learning, and artificial intelligence, in improving IFI capacities for evaluating and forecasting financial stability. However, it reveals issues with data quality, methodological limitations, and policy-data gaps, particularly from developing countries where IFIs are crucial. Recommendations are provided for enhancing data acquisition, openness, and the use of big data analytics, along with directions for further research in prognostic modeling and crisis anticipation.

Credit derivatives were the fastest growing financial products in capital markets, assuming complex structures and forms, vilified by some and called financial weapons of mass destruction and by many others who bought, sold and invested in such products, new and modern means to create liquidity and profits. Banks, insurance companies, hedge funds, pension funds, asset managers and structured finance vehicles have used and are likely to continue to use credit derivatives for arbitrage, speculation, hedging, securitization and pass through their credit risks. Essentially these structured products combine insurance and financial innovation to allow risks to be shared far more extensively then “vanilla options, insurance and credit products”. Credit derivatives were introduced in the last decade but have expanded immensely prior to the financial crisis of 2008–2009, both quantitatively and qualitatively in a plethora of marketed names (see M. Gordy’s edited book on Credit Risk Modeling [48] and Jon Gregory, book on Credit Derivatives: The Definitive Guide [50], forerunners of an extensive credit derivatives literature). Credit derivatives came to the attention of the public at large in an article of Global Finance in March 1993, pointing to three Wall Street firms: J.P. Morgan, Merrill Lynch and Bankers Trust who were marketing early forms of credit derivatives (note that only JP Morgan remains standing). Global Finance predicted then that within a few years, credit derivatives would rival the $4-trillion market for interest rate swaps. In retrospect, this turned out to be both true and with far reaching consequences, some of which have been revealed in the 2008 financial crisis. For example, a re-

The COVID-19 pandemic has caused a seismic shift in the functioning, stability, and resilience of the global financial system. This shift is the result of an intricate and multi-dimensional impact that the pandemic has unleashed. Within the context of this unprecedented crisis, this paper sets out to investigate the far-reaching effects of the pandemic on the complex web of financial institutions, markets, and regulatory structures. In this research, we investigate the myriad ways in which the global financial system has been impacted by the COVID19 pandemic. It investigates the several ways in which the financial industry has been impacted, doing an analysis of the disruptions, difficulties, and adjustments that have surfaced as a result of this extraordinary crisis. The result reveals the negative impact on financial system. Every crisis is unique in its own way. A decade ago, the financial system, and banks in particular, were at the center of the global financial crisis. They were both the primary cause of the crisis as well as the primary catalyst that precipitated it. This time, the crisis is being caused by a pandemic, and the financial sector is being looked at more as a potential element of the solution than as a potential part of the issue. This is obvious from the enormous and rapid influx of new loans to businesses and people during the current crisis, to help them in the face of cash-flow problems. These loans are often backed by state guarantees. From the point of view of the stability of the financial system, this paper analyzes and compares each of these crises. It starts off by going over some of the events, the lessons, and the policy responses that took place during and after the global financial crisis, with a particular emphasis on the banking system. It illustrates how the responses to the global financial crisis left the financial sector significantly better positioned to deal with the COVID issue while also delivering support to the economy as a whole. In its conclusion, it draws some lessons about the stability of the financial system from recent events, including potential areas for further investigation and reform.

Oil prices volatility and economic performance during COVID-19 and financial crises of 2007–2008

Purpose– This paper aims to answer the following research questions: To what extent do banks use credit derivatives (CDs)? What are the differences between users and non-users? What are the main underlying motivations?Design/methodology/approach– The annual reports of 112 Italian banks are analysed during the 2005-2011 period. By estimating a probit regression model, two incentives for using CD are tested: managing credit risk, and increasing a bank’s income composition/diversification. Different sub-samples are considered. The motivations are further investigated to understand whether they vary before and after the crisis.Findings– A limited number of banks use CD and larger and listed banks are more likely to do so. The results do not support the hedging hypothesis. Signals pointing towards the financial distress hypothesis emerge. Less capitalised banks are more likely to use CD. For listed banks, the findings support the hypothesis that economies of scale exist. After the financial crisis, a number of determinants tend to gain significance, and a speculative driver emerges.Originality/value– Previous studies focus primarily on the USA, and single-country studies do not exist in the literature. Given the importance of risk management that the crisis has reinforced, investigating whether CD use has changed before and after the crisis is of interest. Given the incompleteness of the information on CDs, the paper contributes to increasing the available information on CDs by hand-collecting data from banks’ financial statements.

The traditional central bank consensus is designed around two mandates: monetary and financial stability. Following the Great Stagflation of the 1970s, central banks’ policy objective became biased toward maintaining a low and stable rate of inflation or monetary stability. This was based on the presumption that a stable price level would achieve both monetary and financial system stability. The deemphasis on financial stability remained until the global financial crisis, when the prevailing consensus was exposed for being thoroughly inadequate. A new consensus has emerged that broadens central banks’ financial stability mandate to include macroprudential supervision. This chapter analyzes the new central bank consensus, how this has resulted in institutional redesign, and the effectiveness of discharging postcrisis financial and monetary stability mandates.

Instability of the financial system is very bad impact is the loss of public confidence and declining economic growth and community. Besides the cost of economic recovery particularly the financial sector is very large due to the crisis. While the recovery process also runs less in line with expectations. Therefore, the stability of the financial system must be maintained to ensure the public interest. Research methods used is the method of content analysis by describing and analyzing the existing sources to record these data relate to each other the problem studied. Role of Bank Indonesia in maintaining the the stability of the financial system, among others maintain monetary stability, creating a healthy performance of financial institutions, organize and maintain smooth operation of payment systems, research and monitoring and financial system safety net. strategy of Bank Indonesia in maintaining the the stability of the financial system, among others coordination and cooperation, monitoring, crisis prevention and crisis management. There are three reasons for the importance of the stability of the financial system, namely: monetary stability can only be realized with the financial stability, a stable financial system will creating trust and supportive environment for depositors and investors, encourage efficient financial intermediation, encourage the operation of the market and improve the allocation of economic resources. Bank Indonesia and government has implemented its role and strategy in maintaining the stability of the financial system in Indonesia. Keywords : Role, Strategy, Stability of Financial System

This paper explores the significance of researching the financial collapse in light of the present pandemic and the uncertain economic climate of the Russian-Ukrainian conflict. This paper examines the causes, methods, and repercussions of the most significant financial crisis of 2008 as the focus of our study. This raises the question of whether there is a need for more regulation of the banking industry in order to enhance its ability to respond to future financial crises. Unrestricted lending policies and blind economic expansion strategies have been found to expose financial institutions to larger dangers. The examination of the three regulatory agreements demonstrates that the importance of a robust regulatory framework to increase the financial system's stability cannot be overstated. While the global onset of a financial crisis is a low-probability event, it is of the utmost importance that the regulation of financial institutions constantly adapts to new difficulties and uncertainties in light of shifting economic and geopolitical conditions.