Framework For Financial Stability Research Articles

ON THE CONCEPT OF FINANCIAL STABILITY IN THE PUBLIC INTEREST

In this text, the author examines the concept of financial stability and its importance in the public interest, particularly in the context of the European Union (EU). He mainly outlines the core measures in the EU set for maintaining financial stability, including regulation and supervision, supervisory bodies and institutions, financial assistance funds, and monetary policy. The author emphasizes the critical role of financial stability in ensuring households’ and businesses’ access to credit and promoting economic growth, job creation, and rising standards of living. He argues that maintaining financial stability is the key responsibility of central banks and financial regulators and is necessary for achieving broader goals. The author concludes that further multidisciplinary research is needed to fully understand the complex interactions among the various components of the financial stability framework in the EU and to develop more effective policies for maintaining financial stability.

Crises have shaped the European Central Bank

Europe embarked on the Economic and Monetary Union 25 years ago without sufficiently safeguarding some of the essential conditions that must be met to run a monetary union smoothly. The consequences of this omission came to light during the many and unprecedented crises that have shaped the European Central Bank. This article analyses and critically discusses the changing interpretation of the objective of price stability and the use of non-conventional policy instruments to realize this objective. Furthermore, the author analyses the problems with the monetary transmission within the eurozone and the framework for financial stability and supervision.

Assigning Financial Stability Role to Central Banks: The Case of Bank of Sierra Leone

After the great financial crisis of 2007/8 and its contagious effects on economies across the world, many countries including Sierra Leone began focusing more attention on their financial systems stability. The key question for policy makers was which institution could be best assigned the financial stability role, given the current institutional arrangement? This paper attempts to present a clear case on why the Bank of Sierra Leone was best suited for financial stability role as enshrined in the Bank of Sierra Leone Act 2019 and the level of framework necessary for the effective execution of this new objective. In addition, Calvo <i>et al</i> (2018) revealed that of the jurisdictions surveyed, 78 percent allocated financial stability responsibility solely to their central banks, and increasing number of jurisdictions have dedicated inter-agency committee in which the central bank plays an important role. Interestingly, for the case of the West African Monetary Zone (WAMZ) region, the central banks are solely responsible for financial stability and prudential guidelines. From the analysis, we also discovered that while the current institutional arrangement may not be sufficiently adequate for sound financial stability implementation, the process of developing a strong financial stability framework was at an advanced stage. The study thus concludes that assigning this role to the Bank of Sierra Leone was the right move as it was already charged with banks’ prudential guidelines and no other institution in Sierra Leone was better placed for it. The study therefore recommends the need for more financial sector reforms to mitigate risks emanating from financial imbalances and destabilising interaction among various key markets, payment and financial institutions.

An Early Warning Signal (EWS) Model for Predicting Financial Crisis in Emerging African Economies

The devastating effects of the global financial crisis (GFC) have led to a renewed, global interest in the development of an early warning signal (EWS) model. The purpose of the EWS model is to alert policymakers and other stakeholders to the possibility of the occurrence of a crisis. This study estimates a EWS model for predicting the financial crisis in four emerging African economies using a multinomial logit model and a data set covering the period of January 1980 to December 2017. The result of the study suggests that emerging African economies are more likely to face financial crisis as debts continue to rise without a corresponding capacity to withstand capital flow reversal as well as excessive foreign exchange risk due to currency exposure. The result further indicates that rising debt exposure raises the likelihood of the economies remaining in a state of crisis. This result confirms the significance of a financial stability framework that addresses the issues confronting Africa’s emerging economies such as rising debt profile, liquidity and currency risk exposure.

Cook Islands

A mission was requested by the New Zealand authorities to the Cook Islands to focus on policy options for transitioning to high-income status, financial sector stability and regulatory framework, and debt sustainability.1 It evaluated these issues in the context of the medium-term outlook and against the context of a recently developed fiscal framework. The Cook Islands is a self-governing territory in free association with New Zealand, but it is not an IMF member (Box 1).

A Monitoring Framework for Global Financial Stability

This paper describes the conceptual framework that guides assessments of financial stability risks for multilateral surveillance, as currently presented in the Global Financial Stability Report (GFSR). The framework emphasizes consistency in measuring financial vulnerabilities across countries and over time and offers a summary statistic to quantify aggregate financial stability risks. The two parts of the empirical approach—a matrix of specific vulnerabilities and a summary measure of financial stability risks—are distinct but highly complementary for monitoring and policymaking.

Interactions between macro-prudential framework and macroeconomic indicators

The present work is an attempt to examine the macro-prudential measures with capital flows, exchange rate, stock prices and GDP of Asian emerging economies. This research is the extension of the developing the early warning signal as Financial Stability Index by Kaur and Gupta (in Conference proceedings in global trends in business & sustainability research, IIT Rourkee, 2017). The study acknowledges the importance of macro-prudential policy intervention for bringing in financial stability in the system. By synthesizing and visualizing information based on the past performance (using panel regression), it can be stated that this paper may be used to facilitate strategic decision-making at the policy level (government) of emerging economies and ensure building up of financial stability framework.

Botswana

This Selected Issues paper examines the stability of the financial sector in Botswana. The financial system has grown rapidly over the years, but there is still substantial scope for expansion. Banks, institutional investors, and the Botswana Stock Exchange have grown steadily over the years based on political and economic stability, savings from diamond exports, and fiscal surpluses. Botswana’s financial stability framework could benefit from upgrading. Data gaps and incomplete information on cross-border capital flows and growing interconnection with the nonbank financial sector may entail risks. In this regard, close cooperation among regulators and proper assessment of macro-financial risks associated with banks’ large exposures will contribute to more effective financial system supervision.

Central bank transparency and financial stability

We develop a comprehensive index of the transparency of central banks regarding their policy framework to safeguard financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that the central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. More developed countries exhibit greater transparency, past episodes of high financial instability have a negative effect on transparency and the legal origin matters, too. In line with theoretical literature, our results also suggest a non-linear effect of central bank financial stability transparency on financial stability. If transparency is too high, it is not beneficial for financial stability.

The framework for financial stability: Serbian and Ukrainian approaches

The development and implementation of any policy require the creation of preconditions for ensuring the independence of such a policy. In order to provide such preconditions, it is necessary to build up an institutional framework and regulate the key principles of development and implementation of an appropriate policy. the macroprudential policy is no exception, either. The macroprudential policy is a new policy area, which aims to identify, analyze and counter risks to the financial system as a whole, as opposed to traditional microprudential regulation and supervision, whose focus is exclusively on the risks of individual institutions. In many countries, the processes of appropriate legislation and building an institutional framework are ongoing. The article is focused on a comparative analysis of the Serbian and the Ukrainian approaches to macroprudential policymaking. The differences and the similarities between the Ukrainian and the Serbian macroprudential policymaking models are generalized.

The Impact of Global Liquidity on Financial Landscapes and Risks in the ASEAN-5 Countries

This paper analyzes the transmission of global liquidity to the ASEAN-5 countries (ASEAN-5), including the impact on financial landscapes and risks to financial stability. It finds that global liquidity transmission and changing financial landscapes have contributed to increases in risks to financial stability in ASEAN-5. Therefore, policymakers in ASEAN-5 should prepare for possible liquidity tightening, strengthen regulation of nonbanks, and establish a comprehensive financial stability framework. A number of couontries are well-advanced in this process.

The Impact of Global Liquidity on Financial Landscapes and Risks in the ASEAN-5 Countries

This paper analyzes the transmission of global liquidity to the ASEAN-5 countries (ASEAN-5), including the impact on financial landscapes and risks to financial stability. It finds that global liquidity transmission and changing financial landscapes have contributed to increases in risks to financial stability in ASEAN-5. Therefore, policymakers in ASEAN-5 should prepare for possible liquidity tightening, strengthen regulation of nonbanks, and establish a comprehensive financial stability framework. A number of couontries are well-advanced in this process.

Iceland: 2014 Article IV Consultation and Fifth Post-Program Monitoring Discussions-Staff Report; Press Release; and Statement by the Executive Director for Iceland

This 2014 Article IV Consultation highlights that Iceland has reached a relatively strong macroeconomic position with good growth prospects. Unemployment continues to trend down, now at 4 percent. Growth is expected to pick up to about 3 percent over 2015–17, supported by robust domestic demand and tourism. Consumption will be boosted by household debt relief and—together with net trade—will benefit from favorable commodity prices. Good progress has also been made in improving the financial stability framework, but gaps remain.

Helping Europe's Zombie Banks? Open Questions Regarding the Designated Use of the European Bank Resolution Regime

This paper will not address the common sense response to the problem of a banking crisis that would be to prevent banks from failing. The current EU financial stability framework is addressing this task by ensuring that banks are adequately capitalised and supervised. Instead, it will examine the proposed European bank resolution regime, which does not aim at preventing failure but at reducing the impact of failure. Though it may not be its main purpose, an efficient bank resolution regime contributes to the prevention of bank failure by reducing a moral hazard as this may prevent a bank’s management and executives from engaging in excessive risk in cases where they can no longer trust in the government to use public funds to offset bad speculation. Under an efficient bank resolution regime, a failing bank would be subject to a resolution process, and its management and owners would have to face consequences and suffer losses for taking disproportionate risks. This paper will indicate that the upcoming European bank resolution regime does focus less on handling the scenario of an abrupt failing financial institution (a "Lehman scenario") and more on addressing the current problem of the slow recapitalization of European banks (a "zombie bank scenario").

Global Financial Crisis – Policy Response

Abstract Six years after the outbreak of the financial crisis that had shaken the global financial system, experts and analysts all over the world continue discussing the effectiveness, scope and adequacy of mechanisms and measures implemented in the meantime, as well as the adequacy of the underlying theoretical concept. A global consent has been reached on ensuring financial stability through the interaction of monetary, fiscal and prudential policy to ensure the necessary macroprudential dimension of regulatory and supervisory frameworks. The USA crisis spilled over to Europe. Strong support of governments to bail out banks quickly resulted in sovereign debt crises in some peripheral EU Member States. Fiscal insolvency of these countries strongly shook the EU and increased doubts in the monetary union survival. The European Union stood united to defend the euro and responded strongly with a new complex and comprehensive financial stability framework. This supranational framework is a counterpart to the global financial stability framework created by the G20 member countries. Starting from the specific features of the monetary policy whose capacities are determined by euroisation, available instruments and resources for preventive supervisory activities, as well as the role of the government in crisis management, Montenegro created a framework for maintaining financial stability and prescribed fostering and maintaining financial stability as the main objective of the Central Bank of Montenegro.

Fiinancial Stability and Reform of the Financial System

Abstract The paper describes the main features of financial stability and the preparation of the reform of the global financial system. The mortgage crisis in the USA brought about the global financial crisis. This crisis was the result of the failure of financial regulation, including supervision, and the failure of the management of the banking industry. Therefore, the international community, including Group 20, urged the appropriate institutions to introduce a comprehensive reform of the financial sector. To avoid a potential financial crisis, the creation of the framework for financial stability would be needed. In line with this, the paper examines the interaction between both monetary and fiscal policies, including micro-and macroprudential policies and their instruments. Although still is going on discussion on definition of macroprudential policy, there is a generally accepted opinion that macroprudential policy should limit systemic risk. In addition, this policy should focus on interaction between the financial system and the real economy. Furthermore, micro- andmacroprudential policy should use appropriate instruments in dealing with the systemic risk. In this regard, the article undescores that put in a place the frameworkfor financial stability will create favorable conditions for decision-makers how they should to respond to financial imbalances. The paper also pointed out some potential economic costs related to the implementation of the overall international reform of the financial sector. Based on comprehensive literature study, the author came to the conclusion that despite the fact that there will be some economic costs related to implementing the overall regulatory reform of the financial sector, the main benefit from the long-term perspective will be avoiding the potential financial crisis in the future. To fulfill all the requirements for global financial reform, international cooperation will be needed.

Turkey’s experience with the global crisis: restructuring policies within a financial stability framework

The challenges threatening financial stability have grown owing to the increasing uncertainties in the global markets since the financial crisis. This has led policymakers to grant a larger role to financial stability in their implementations. Accordingly, the Turkish Central Bank modified its existing inflation targeting framework by explicitly highlighting the role of financial stability rather than imposing capital controls solely. Required reserves, interest rate corridor and liquidity management policies are utilized in addition to the one-week repo rate. We conclude that Turkey’s new policy mix has so far been effective at discouraging capital short-term inflows, representing an alternative approach to capital controls.

Financial Stability Reports: What are They Good for?

The global financial crisis has renewed policymakers' interest in improving the policy framework for financial stability, and an open question is to what extent and in what form should financial stability reports be part of it. We examine the recent experience with central banks’ financial stability reports, and find - despite some progress in recent years - that forward-looking perspective and analysis of financial interconnectedness are often lacking. We also find that higher-quality reports tend to be associated with more stable financial environments. However, there is only a weak empirical link between financial stability report publication per se and financial stability. This suggests room for improvement in terms of the quality of financial stability reports.

Financial Stability Reports:What Are they Good for?

The global financial crisis has renewed policymakers' interest in improving the policy framework for financial stability, and an open question is to what extent and in what form should financial stability reports be part of it. We examine the recent experience with central banks' financial stability reports, and find?despite some progress in recent years?that forward-looking perspective and analysis of financial interconnectedness are often lacking. We also find that higher-quality reports tend to be associated with more stable financial environments. However, there is only a weak empirical link between financial stability report publication per se and financial stability. This suggests room for improvement in terms of the quality of financial stability reports.

Měnová politika: staré lekce, nové výzvy

The relatively long term period of stability before the present crises called even "Great Moderation" or "Golden Age of Central Banking" indicated that the infl ation targeting was a success story. As of 2008 a lot has changed and the debate over "Leaning against the wind or Clean afterwards?" is being revisited among central bankers and academicians. At the same time the question "Does money matter in monetary policy" is on the table again. This paper focuses on the discussion of these issues; moreover, some new challenges that emerged in previous three years are discussed. The crisis has highlighted an urgent need to incorporate banks and financial frictions into monetary policy modelling framework - therefore some new findings on this field of research are outlined. An important lesson from the crises is that price stability is not a sufficient precondition for financial stability, therefore an operational framework for financial stability is being searched - this is subject of the final part of this paper.