Mr. Eugenio M Cerutti, Mr. Patrick M. McGuire, and Mr. Stijn Claessens
The recent financial crisis has shown how interconnected the financial world has become. Shocks in one location or asset class can have a sizable impact on the stability of institutions and markets around the world. But systemic risk analysis is severely hampered by the lack of consistent data that capture the international dimensions of finance. While currently available data can be used more effectively, supervisors and other agencies need more and better data to construct even rudimentary measures of risks in the international financial system. Similarly, market participants need better information on aggregate positions and linkages to appropriately monitor and price risks. Ongoing initiatives that will help in closing data gaps include the G20 Data Gaps Initiative, which recommends the collection of consistent bank-level data for joint analyses and enhancements to existing sets of aggregate statistics, and the enhancement to the BIS international banking statistics.
The recent financial crisis raises important issues about the transmission of financial shocks across borders. In this paper, a global vector autoregressive (GVAR) model is constructed to assess the relevance of international spillovers following a historical slowdown in U.S. equity prices. The GVAR model contains 27 country-specific models, including the United States, 17 European advanced economies, and 9 European emerging economies. Each country model is linked to the others by a set of country-specific foreign variables, computed using bilateral bank lending exposures. Results reveal considerable comovements of equity prices across mature financial markets. However, the effects on credit growth are found to be country-specific. Evidence indicates that asset prices are the main channel through which-in the short run-financial shocks are transmitted internationally, while the contribution of other variables-like the cost and quantity of credit-becomes more important over longer horizons.
Ms. Inci Ötker, Mr. Karl Driessen, and Ms. Zsofia Arvai
This paper focuses on financial interlinkages within Europe and potential contagion channeled through these interlinkages. It discusses the increased role of external financing as a source of funding for credit growth; analyzes potential channels of contagion through financial linkages; and assesses the magnitude of cross-border exposures between emerging and western European countries. Based on the stylized facts on these exposures, the paper provides simple indices of exposure to regional contagion that could help identify the likely pressure points and capture potential spillover effects and propagation channels of a regional shock originating from a given country.
Recent developments have increased questions about vulnerabilities in Central and Eastern European Countries (CEE) that are experiencing credit booms. This paper analyzes the role of foreign-owned banks in these credit booms. The results show that the CEE countries depend on foreign banks, and these foreign banks depend on interbank funding. Lending by foreign banks seems driven by economic growth and interest rate margins. This lending appears independent of economic but not financial conditions in the foreign bank's home country.
Mr. Thorvardur Tjoervi Olafsson and Ms. Julia Majaha-Jartby
The paper's central theme is that where a financial crisis emerges, regional supervisors should have systems in place to effectively respond to their country-specific crises and-in the case of foreign operations and financial conglomerates-to collaborate comprehensively with other supervisory agencies and respective ministries to avert a regional crisis or address the immediate crisis at hand. For financial institutions to expand across borders without undermining regional and global financial stability, supervisory agencies must develop the capacity to collaboratively and collectively handle crises.
Niamh Sheridan, Mr. Alfred Schipke, Ms. Susan M George, and Mr. Christian H. Beddies
In just over a decade after independence, the three Baltic countries, Estonia, Latvia, and Lithuania, have transformed themselves into fully functioning, small open-market economies that will be joining the European Union. Capital Markets and Financial Intermediation in The Baltics analyzes the financial systems of the three countries and discusses some of their unique characteristics. The study also examines current distortions of the systems and discusses whether or not the Baltics should move from an almost exclusively bank-based system to one that relies more on capital markets. In the process, it addresses issues of corporate governance and regional integration.
This study examines the banking crises in Finland, Norway and Sweden, which took place in the early 1990s, and draws some policy conclusions from their experiences. One key conclusion is that factors in addition to business cycle effects explain the Nordic countries financial problems. Although the timing of the deregulation in all three countries coincided with a strongly expansionary macroeconomic momentum, the main reasons for the banking crises were the delayed policy responses, the structural characteristics of the financial systems, and the banks inadequate internal risk-management controls.
Ms. Claudia H Dziobek, Ms. María Nieto, and Mr. Olivier M Frecaut
The 1988 Basle Capital Accord has introduced the norm of a risk-based capital ratio of 8 percent. It was negotiated among the G-10 countries to strengthen their international banks’ capital base while simultaneously levelling the playing field for competition. Since 1988, a large number of non-G-10 countries, although not members of the “Basle Club,” have introduced similar risk-based capital ratios, hoping to achieve similar effects in terms of enhanced safety and competition in their banking markets. This paper explains why the endeavor failed in most cases and discusses what the required conditions would be for effective implementation of the Basle rules beyond the G-10 countries.