Centrality measures of financial system interconnectedness: A multiple crises study

We explore how asset returns could be a good proxy to detect interlinkages in the financial system. This paper employs a US dataset for the 2002-2021 period. Pairwise returns correlation indicate the interconnectedness at the preliminary stage. The Principal Component Analysis captures a significant portion of variance and detects the co-movement and highly connected state of the financial market during crises. Granger centrality tested with pairwise directional variance decomposition indicates the importance of banks and insurance companies in the US financial system. This paper recommends policymakers use multiple network models to validate and calibrate the SIFIs list.

Microprudential bank capital regulation in a complex system

This paper analyzes the efficacy of microprudential (bank-level) capital requirements in mitigating failure cascades in a network of interconnected banks. In simulation exercises, microprudential capital requirements redistribute the troubled assets of undercapitalized banks more broadly within the network, reducing the immediate likelihood of individual bank failures but increasing the likelihood of large failure cascades. This effect is strongest for simulation parameters that mimic economic downturns. If banks increase leverage in response to weaker capital requirements, failure cascades increase only minimally. These results suggest that current microprudential capital requirements might be counterproductive to the goal of mitigating bank failure cascades.

Financial Crises and Climate Change

Climate change is a big challenge of our time. While there is a bourgeoning literature on the economic impact of climate change, research on how financial crises affect climate change is limited. We empirically use the local projection method to empirically study the impact of past financial crises on climate change vulnerability and resilience indices. Using a dataset covering 178 countries over the period 1995-2019, we observe that resilience to climate change shocks has been increasing and that advanced economies are the least vulnerable. Our econometric results suggest that financial crises (particularly systematic banking ones) tend to lead to a short-run deterioration in a country's resilience to climate change. This effect is more pronounced in developing economies. In downturns, if an economy is hit by a financial crisis, vulnerability to climate change increases.

Changing vulnerability in Asia: contagion and spillovers

An increasing involvement of the Asian market in the global context plays a fundamental role in spreading shocks across the financial system. This paper examines the extent of vulnerability across Asian equity markets and the United States (US) equity market by distinguishing between spillovers and contagion. Spillovers are detected using a generalised historical decomposition method, while contagion is identified using a portfolio mimicking factor framework using moment conditions. The transmission of spillovers is assessed to capture the direction, strength and signs of the spillovers. The findings show evidence of changing vulnerability in Asia and the US. This is as a result of increased spillovers during crisis events and the presence of contagion. Stronger connections during crisis periods are evident as well as a general deepening of the global network. These connections may result in reduced opportunities for emerging markets. The findings suggest that caution is needed when developing regulations or methods to create a stable financial system.

An Entropy Approach to Measure the Dynamic Stock Market Efficiency

We measure stock market efficiency by drawing the comprehensive sample from Asia, Europe, Africa, North-South America, and Pacific Ocean regions and rank the cross-regional stock markets according to their level of informational efficiency. The study period spans from January 1, 1994, to August 3, 2017. We employ the approximate entropy approach and find that stock market efficiency evolves over the period. The degree and nature of evolution vary across regions and the development stage of the markets. The global, regional, domestic economic, and non-economic factors influence the adaptive nature of the stock markets. The emerging stock markets have improved efficiency by financial liberalization policy but are adversely affected by global shocks. The estimates validate the relevance of the adaptive market framework to describe the rejection of random walk without excess returns. The results suggest the growing presence of technical analysis and active portfolio managers. The emerging markets in Asia hold policy lessons for their peers. The findings suggest that global investors need to overcome the homogeneity bias as returns opportunities exist within the region and types of markets.

How new Fed corporate bond programs cushioned the Covid-19 recession

In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned corporate bonds rated as investment grade before the Covid pandemic. We assess the effectiveness of this program using long sample periods, spanning the Great Depression through the Great and Covid Recessions. Findings indicate that the announcement of corporate bond backstop facilities helped stop risk premia from rising further than they had by late-March 2020. In doing so, these backstop facilities limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.

The effect of financial crises on deforestation: a global and regional panel data analysis

Managing our transition to sustainability requires a solid understanding of how conditions of financial crisis affect our natural environment. Yet, there has been little focus on the nature of the relationship between financial crises and environmental sustainability, especially in relation to forests and deforestation. This study addressed this gap by providing novel evidence on the impact of financial crises on deforestation. A panel data approach is used looking at Global Forest Watch deforestation data from > 150 countries in > 100 crises in the twenty-first century. This includes an analysis of crises effects on principle drivers of deforestation; timber and agricultural commodities-palm oil, soybean, coffee, cattle, and cocoa. At a global level, financial crises are associated with a reduction in deforestation rates (- 36 p.p) and deforestation drivers; roundwood (- 6.7 p.p.), cattle (- 2.3 p.p.) and cocoa production (- 8.3 p.p.). Regionally, deforestation rates in Asia, Africa, and Europe decreased by - 83, - 43, and 22 p.p, respectively. Drivers behind these effects may be different, from palm oil (- 1.3 p.p.) and cocoa (- 10.5 p.p.) reductions in Africa, to a combination of timber (- 9.5 p.p) and palm oil in Asia. Moreover, financial crises have a larger effect on deforestation in low-income, than upper middle- and high-income countries (- 51 vs - 39 and - 18 p.p. respectively). Using another main dataset on yearly forest cover-the ESA-Climate Change Initiative-a picture arises showing financial crises leading to small global decreases in forest cover (- 0.1 p.p.) with a small agricultural cover increase (0.1 p.p). Our findings point to financial crises as important moments for global deforestation dynamics. Yet, to consolidate benefits on decreasing deforestation, governments need to enhance their sustainable forest management during crisis periods rather than let it slip down national agendas. Finally, to achieve the SDGs related to forests, better global forest cover datasets are needed, with better forest loss/gain data, disturbance history, and understanding of mosaicked landscape dynamics within a satellite pixel.

Bank ownership, lending, and local economic performance during the 2008-2009 financial crisis

Although government banks are frequently associated with political capture and resource misallocation, they may be well-positioned during times of crisis to provide countercyclical support. Following the collapse of Lehman Brothers in September 2008, Brazil's government banks substantially increased lending. Localities in Brazil with a high share of government banks received more loans and experienced better employment outcomes relative to localities with a low share of government banks. While increased government bank lending mitigated an economic downturn, we find that this lending was politically targeted, inefficiently allocated, and reduced productivity growth.

comparative study

This paper investigates the effects of financial crises-based exchange rate, real interest rate, and personal consumption expenditure on stock market indices and balances of current account in four Asian countries/areas, and the U.S. from 1997 to 2010. Results obtained from Sims's first-order DSGE representation suggest that two policy variables - changes in the exchange rate and changes in the real interest rate lagged by one quarter - act as stabilizers for contemporaneous changes in stock indices for Thailand, Malaysia, and the U.S., but as destabilizers for Taiwan and Hong Kong. However, changes in personal consumption expenditure lagged by one quarter only play a destabilizing role in Hong Kong. For contemporaneous changes in the current account balance, all three policy variables become destabilizers for all five countries except the one-quarter lagged change in real interest rate, which acts as a stabilizer in Malaysia.