Financial Stability Regulation Research Articles

МАКРОПРУДЕНЦИАЛЬНЫЕ ИНСТРУМЕНТЫ УПРАВЛЕНИЯ СИСТЕМНЫМ РИСКОМ НА ФИНАНСОВОМ РЫНКЕ РОССИИ

The article is devoted to the analysis and assessment of the mechanism reventing the occurrence of systemic risk in the Russian financial system through the tools of macroprudential regulation. The degree and spheres of influence of macroprudential regulation tools on the sources of systemic risk are investigated. A scientific hypothesis in achieving financial stability through the tools of macroprudential regulation. Conclusions are drawn about the effectiveness of the tools used in modern Russian practice, an assessment of the prevention of systemic risk in the segments of unsecured and mortgage lending, the foreign exchange market, as well as the adequacy of capital and reserves of the financial system due to macroprudential instruments is carried out, directions for the development of individual elements of the financial stability regulation mechanism are proposed.

NETWORK RESILIENCE IN THE FINANCIAL SECTORS: ADVANCES, KEY ELEMENTS, APPLICATIONS, AND CHALLENGES FOR FINANCIAL STABILITY REGULATION

Security against systemic financial risks is the main theme for financial stability regulation. As modern financial markets are highly interconnected and complex networks, their network resilience is an important indicator of the ability of the financial system to prevent risks. To provide a comprehensive perspective on the network resilience of financial networks, we review the main advances in the literature on network resilience and financial networks. Further, we review the key elements and applications of financial network resilience processing in financial regulation, including financial network information, network resilience measures, financial regulatory technologies, and regulatory applications. Finally, we discuss ongoing challenges and future research directions from the perspective of resilience-based financial systemic risk regulation.

Resurrecting the OFR

The Office of Financial Research (“OFR”) was created to address the gaps in data availability and analysis that hampered governmental authorities in their response to the financial crisis of 2008. It was hoped that the OFR would serve as a type of “early warning system” that would detect emerging systemic risks through data collection and analysis, but the OFR never had the opportunity to live up to its promise. During the Obama administration, it suffered from pushback from other federal agencies; under the Trump administration, the staff and resources of the OFR were decimated. This Article argues that the next administration should seize the opportunity to rebuild the OFR – not only to fulfill the OFR’s initial data collection and analysis functions, but also to address new sources of systemic risk that have emerged since 2010. In particular, the OFR should be rebuilt with the new types of expertise needed to address the growing systemic threats that may arise from climate change and fintech innovation. At present, climate, complexity, computer, and data science expertise are largely unrepresented in the financial regulatory agencies, but financial regulation – particularly financial stability regulation – can no longer be fully effective without them. A resurrected OFR could serve as a hub of these types of expertise, drawing upon them to monitor new types of systemic risks, research innovative solutions to those risks, and also to assist the other US financial federal regulatory agencies with technical expertise as the need arises.

Financial Stability Regulation under Borrowing and Liquidity Externalities

AbstractWe study financial stability regulation in an environment with pecuniary externalities and where banks face both a liability choice (between private money creation and long-term borrowing) and an asset choice (between liquid and illiquid investments). Return risk on illiquid assets gives rise to liquidity risk, because banks that learn to have low future returns find themselves unable to roll over “money-like” debt. Privately optimal borrowing and investment decisions by banks lead, in general, to socially inefficient outcomes. The nature of inefficiency depends critically on the degree to which liquidity risk is systemic: When risk is highly systemic, banks hold the socially optimal amount of liquid assets, but create an excessive amount of money and overinvest in risky assets; when risk is not highly systemic, banks hold too little liquidity, create insufficient private money, and underinvest in risky assets. Quantity- and price-based regulations to address the identified inefficiencies are discussed.

Overhauling China’s Financial Stability Regulation: Policy Riddles and Regulatory Dilemmas

AbstractChina faces a number of important financial-stability risks. A persistent feature of the Chinese banking sector is the rapid formation of non-performing loans (NPLs) during each business cycle. Moreover, lending restrictions and interest-rate caps (“financial repression”) have, in part, given rise to an ever-expanding shadow-banking sector. The article highlights five cardinal sins within the Chinese financial system: (1) bad lending practices by the regulated sector, (2) lax governance, (3) a shadow-banking system that is dominated by short-term claims with no liquidity backstop, (4) stark lack of transparency in the shadow sector, and (5) very high levels of interconnectedness between the shadow and the regulated sector. The article suggests that some of these problems will be alleviated through a regulatory big bang that would abolish the current silo approach to financial regulation streamlining financial stability and conduct/consumer-protection supervision. Furthermore, we recommend the introduction of a binding and all-encompassing leverage ratio that will require banks to hold much higher capital buffers as a means to boost bank resilience, reduce NPLs, and battle interconnectedness with the shadow sector.

Competition and Financial Regulation

This paper focuses on the interactions between financial regulation and competition in financial markets. Those interactions run deep, and involve consideration of both microand macro-prudential regulation, consumer protection, and access/network regulation. Three fundamental issues permeate the analysis. First, competition is associated with failure and exit of suppliers from the industry (as per Schumpeter’s well known “process of creative destruction” metaphor) – which has implications for financial stability regulation if exit is disorderly. Second, digital technology is rapidly changing the competitive landscape of financial markets, raising issues about the appropriate design of financial regulation and its perimeter. Third, information deficiencies and behavioural biases of consumers of financial services and products, and consequent responses of financial firms to those, are important determinants of the nature of competition in financial markets.

The Precautionary Principle: Financial Regulation's Missing Ingredient

The financial crisis of 2007-2008 showed up many inadequacies in the pre-crisis approach to financial stability regulation. The response from legislators and regulators has been to implement a broad new range of regulatory tools – individual solutions to individual regulatory failings highlighted by the crisis. But the prevailing cost-benefit philosophy that informed financial stability regulation in the United States prior to the crisis persists today – there has been no real effort to rethink the overarching philosophy behind financial stability regulation. Because a cost-benefit approach gives too much primacy to the short-term interests of the financial industry, this Article rejects cost-benefit analysis and develops a substitute precautionary philosophy for financial stability regulation, drawing analogies from the literature on the use of the precautionary principle in regulating complex environmental systems. A precautionary philosophy is more responsive than cost-benefit analysis to the complexity and fragility of the financial system, directing financial regulators to err on the side of caution and to prioritize the stability of the financial system over the short-term interests of the financial sector. While this Article is primarily intended to advocate a change in the philosophy that underpins financial stability regulation (and thus provide a cogent theoretical framework for regulators implementing Dodd-Frank and future reforms), this Article also explores a more practical framework for precautionary review of innovative financial products. This operates as a concrete illustration of how the precautionary philosophy might be operationalized: the key practical implication of such an approach is that it will shift the regulatory burden to the financial industry to demonstrate why regulation of a new product is unnecessary. As this Article demonstrates, this burden-shifting entails many benefits, including mitigating issues of regulatory capture and collective action problems, and remediating limits on regulatory funding and expertise.

Monetary Policy as Financial-Stability Regulation

This paper develops a model that speaks to the goals and methods of financial-stability policies. There are three main points. First, from a normative perspective, the model defines the fundamental market failure to be addressed, namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short-term debt and leave the system excessively vulnerable to costly financial crises. Second, it shows how in a simple economy where commercial banks are the only lenders, conventional monetary-policy tools such as open-market operations can be used to regulate this externality, while in more advanced economies it may be helpful to supplement monetary policy with other measures. Third, from a positive perspective, the model provides an account of how monetary policy can influence bank lending and real activity, even in a world where prices adjust frictionlessly and there are other transactions media besides bank-created money that are outside the control of the central bank.

Financial stability regulation in Brazil (1998-2008)

A useful starting point for this discussion may be the acknowledgment of some key features of the Brazilian Financial System (BFS): i. The BFS is a bank-based system, led by financial conglomerates organized around large public and private banks; ii. Large banks are organized as universal banks (called multiple banks) but there are two other important segments in the banking system: stand-alone investment banks and medium/small banks. Investment banks deal with securities markets, asset management, derivatives, MA iii. Contrary to other experiences with high inflation, the BSF actually thrived during the about 25 years in which the Brazilian economy exhibited sustained rapid rates of price increases, since the late 1960s to the mid-1990s. The survival, and more than that, actually strong performance of the banking segment of the financial system in the period is due to a combination of factors: widespread indexation, which prevented dollarization and the flight toward dollar-denominated financial assets that could not be created or managed by domestic financial institutions; permanent availability of high-yield financial assets, in the form of public debt securities to sustain profitability for the financial industry and to remunerate investors; the innovative drive of banking firms, particularly in relation to payments systems, which strengthened the use of demand deposits by clients worried with the effect of high inflation on the real value of “in-transit” deposits; legal restrictions on the domestic expansion of foreign banks; iv. the ample availability of public debt securities, protected against practiBrazilian Journal of Political Economy, vol. 31, no 5 (125), pp. 858-862, Special edition 2011