Framework For Financial Stability Research Articles

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.

Euro Area Policies: 2011 Article IV Consultation--Lessons from the European Financial Stability Framework Exercise; and Selected Issues Paper

The European Union’s (EU) financial stability framework is being markedly strengthened. This is taking place on the heels of a severe financial crisis owing to weaknesses in the banking system interrelated with sovereign difficulties in the euro area periphery. Important progress has been made in designing an institutional framework to secure microeconomic and macroprudential supervision at the EU level, but this new set-up faces a number of challenges. Developments regarding the financial stability may assist in the continuing evolution of the European financial stability architecture.

The Group of Thirty Report: Misconceptions About Money Market Funds

The Group of Thirty in 2009 issued a report entitled “Financial Reform: A Framework for Financial Stability.” The Report highlights concerns about vulnerabilities in the financial system that became evident in the 2008-2009 financial crisis and includes wide-ranging recommendations for financial regulatory reform. The main theme of the Report is the importance of containing systemic risk and maintaining close oversight of “systemically important” financial institutions. The Report's recommendations concerning money market funds are based on the misconceptions that money funds are bank-like, pose systemic risk, are not adequately regulated, and enjoy unfair competitive advantages over banks. The Report would apply inappropriate bank-like regulation to money fund operations without any analysis of the consequences. If the Report’s recommendations were adopted, money market funds would cease to exist and the U.S. financial markets would lose a vital source of liquidity and efficiency.This paper examines the Report’s recommendations, analyzes their potential consequences, and attempts to correct the misconceptions upon which they are based.

Towards an Operational Framework for Financial Stability: 'Fuzzy' Measurement and Its Consequences

Over the last decade or so, addressing financial instability has become a policy priority. Despite the efforts made, policymakers are still a long way from developing a satisfactory operational framework. A major challenge complicating this task is the fuzziness with which financial (in)stability can be measured. We review the available measurement methodologies and point out several weaknesses. In particular, we caution against heavy reliance on the current generation of macro stress tests, arguing that they can lull policymakers into a false sense of security. Nonetheless, we argue that the fuzziness in measurement does not prevent further progress towards an operational framework, as long as it is appropriately accounted for. Crucial features of that framework include: strengthening the macroprudential orientation of financial regulation and supervision; addressing more systematically the procyclicality of the financial system; relying as far as possible on automatic stabilisers rather than discretion, thereby lessening the burden on the real-time measurement of financial stability risks; and setting up institutional arrangements that leverage the comparative expertise of the various authorities involved in safeguarding financial stability, not least financial supervisors and central banks.

International Financial Regulation, Access to Finance, Systemic Stability, and Development

Global financial markets are subject to a complex web of soft law rules and standards called International Financial Regulation. The main rationales/objectives of International Financial Regulation revolve around the protection of investors and depositors and the safeguarding of financial system stability. In recent months International Financial Regulation has come under attack for its lack of proper structures and flawed rules, which have been held to be among the main causes of the global credit crisis. As a result, a major reform exercise is under way. This paper argues that, as part of this reform, policy makers and regulators must attempt to widen the objectives of International Financial Regulation so that they become cognizant of the impact of financial sector development and access to finance on economic growth and poverty eradication. In this context, the paper proposes a global licensing scheme for international investment funds and the reform of the Basle Capital Adequacy Standards. Implementation of the proposals would enable International Financial Regulation to both strengthen the global financial stability framework and facilitate access to finance in poor and very poor countries.

Systemic risk in modern financial systems: analytics and policy design

PurposeIn recent years, the financial system has been changing rapidly. At the same time, macroeconomic volatility has fallen in developed countries. The purpose of this paper is to examine how these developments may have affected the nature of systemic crises. The paper also aims to discuss how central banks and other financial regulators might respond to these developments with a clearer, more rigorous, operational framework for their systemic financial stability work.Design/methodology/approachThe paper describes analytical models developed at the Bank of England to assess how recent developments may have affected the probability and potential impact of systemic financial crises. The results from these models help to shape the practical framework for the Bank's financial stability work.FindingsThe models suggest that financial innovation and integration, coupled with greater macroeconomic stability, have served to make systemic crises in developed countries less likely than in the past, but potentially more severe. Implementing a practical framework for financial stability work in response to this raises many formidable challenges.Practical implicationsIf individuals are risk‐averse, the recent change in the profile of crises could lower welfare and would suggest that policymakers should place a higher premium on actions to monitor and mitigate systemic risk. The analysis also highlights the importance of differentiating the probability of risks from their potential impact.Originality/valueThe paper will be of interest to academics interested in systemic risk, central bankers, financial regulators, and financial market participants.

The Case for a European Banking Charter

Most financial institutions in the European Union (EU) are still based in one country, but a number of large financial institutions (LCFI) have systemic cross-border exposures. The paper explains how, despite much progress, nationally-segmented supervisory frameworks and national accountability for financial stability hinder optimization across borders of banks' operations and efficient and effective LCFI supervision. A full-fledged EU-level prudential regime that operates along-side national regimes--a European Banking Charter (EBC)--could harness market forces to establish a level playing field for financial sector competition, while plugging some significant gaps in Europe's financial stability framework without concentrating excessive powers.