Financial Stability Monitoring

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWhile the Dodd-Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of preemptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from market failures that can lead to excessive leverage, maturity transformation, interconnectedness, and complexity. These vulnerabilities, when hit by adverse shocks, can lead to fire-sale dynamics, negative feedback loops, and inefficient contractions in the supply of credit. We present a framework that centers on the vulnerabilities that propagate adverse shocks, rather than shocks themselves, which are difficult to predict. Vulnerabilities can emerge in four areas: 1) systemically important financial institutions (SIFIs), 2) shadow banking, 3) asset markets, and 4) the nonfinancial sector. This framework also highlights how policies that reduce the likelihood of systemic crises may do so only by raising the cost of financial intermediation in noncrisis periods.

What Macroeconomic Conditions Lead Financial Crises?

“…5 After illustrating these issues, the analysis demonstrates that other factors -equity prices, house prices, and the current account deficit -have meaningful effects on the probability of a financial crisis and may deserve further emphasis in the policy literature. 6 The focus on valuations in equity and housing markets is consistent with the central role that valuation pressures play in frameworks used for monitoring risks to financial stability (e.g., Adrian, Covitz, and Liang, 2013;Aikman et al, 2017). The analysis suggests economically and statistically significant increases in the probability of a financial crisis associated with rapid run-ups in equity or house prices.…”

“…This is a conclusion in, for example,Schularick and Taylor (2012).2 For example, seeAdrian, Covitz, and Liang (2013) andAikman et al (2017). These frameworks also emphasize the need to consider other indicators.3 For example, the Basel Committee placed a measure of credit relative to GDP at the center of its analysis of conditions that may justify deployment of the Countercyclical Capital Buffer (BCBS, 2010) and member countries of the European Union (EU) are required to report their estimate of "credit gaps" as part of the EU's implementation of the Basel III accord under CRD IV.…”

Financing transition in an adverse context: climate finance beyond carbon finance

“…Their volatility exacerbates real disequilibria, as shown by the cumulative global imbalances in the balance of payments and in the balance sheets of financial institutions, which receded only in the financial crisis. Price reversals arise only through crises that are endogenous as 'booms gone bust', while unknown tipping points shift the mood of market participants from euphoria to panic (Adrian et al 2013).…”

Central bank Credibility Before and After the Crisis

“…This represents the implied volatility in the S&P500 and is often seen as a portent of financial stability since it represents the markets' near term expectation of future stock market volatility. As Adrian et. al.…”