Mr. Giovanni Dell'Ariccia, Caio Ferreira, Nigel Jenkinson, Mr. Luc Laeven, Alberto Martin, Ms. Camelia Minoiu, and Alex Popov
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
The most recent decade has seen a growing presence of banks headquartered in advanced economies (AEs) expanding into emerging markets (EMs). These expansions have brought some benefits to both home and host countries, but the global financial crisis has also unmasked significant vulnerabilities inherent in such relationships. In keeping with past cross-cutting themes papers, this paper focuses on the experiences of four medium-sized ?home countries,? each with significant retail banking links to EMs—Austria, Belgium, the Netherlands, and Spain. These countries were chosen because of their banks' diverse approaches to EM expansion (including the centralization of their funding models) and equally diverse crisis outcomes (fears over Eastern European exposures resulted in extraordinary policy efforts to maintain bank lending), providing fertile ground for analysis and for drawing lessons in the future.
International Monetary Fund. Monetary and Capital Markets Department
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
Mr. Ivailo Arsov, Mr. Elie Canetti, Ms. Laura E. Kodres, and Ms. Srobona Mitra
The G-20 Data Gaps Initiative has called for the IMF to develop standard measures of tail risk, which we identify in this paper with systemic risk. To understand the conditions under which tail risk is present, it is first necessary to develop a measure of what constitutes a systemic stress, or tail, event. We develop such a measure and uses it to assess the performance of eleven near-term systemic risk indicators as ‘early’ warning of distress among top financial institutions in the United States and the euro area. Two indicators perform particularly well in both regions, and a couple of other simple indicators do well across a number of criteria. We also find that the sizes of institutions do not necessarily correspond with their contribution to spillover risk. Some practical guidance for policies is provided.
The report analyses Spain’s financial sector reform program and throws light on the role that the European Financial Stability Facility (EFSF) played in supporting the restructuring and recapitalization of its financial sector. It stated that the two major areas that have been looked at by IMF staff are the macrofinancial context and Spain’s progress in financial sector reforms. The key risk factors that hamper economic development are emphasized, and certain measures to overcome the same are suggested.
The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.