How well equipped are today's macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a ...macroprudential regulator would need to implement policies to tackle vulnerabilities from financial system leverage, fragile funding structures, and the build-up in household indebtedness. We specify and calibrate a package of policy interventions to address these vulnerabilities—policies that include implementing the countercyclical capital buffer, requiring that banks extend the maturity of their funding, and restricting mortgage lending at high loan-to-income multiples. We then assess how well placed are two prominent macroprudential regulators, set up since the crisis, to implement such a package. The US Financial Stability Oversight Council has not been designed to implement such measures and would therefore make little difference were we to experience a rerun of the factors that preceded the last crisis. A macroprudential regulator modeled on the UK's Financial Policy Committee stands a better chance because it has many of the necessary powers. But it too would face challenges associated with spotting build-ups in risk with sufficient prescience, acting sufficiently aggressively, and maintaining political backing for its actions.
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CEKLJ, IZUM, KILJ, NUK, ODKLJ, PILJ, SAZU, UL, UM, UPUK
Curbing the Credit Cycle Aikman, David; Haldane, Andrew G.; Nelson, Benjamin D.
The Economic journal (London),
June 2015, Volume:
125, Issue:
585
Journal Article
Peer reviewed
Credit cycles have been a characteristic of advanced economies for over 100 years. On average, a sustained pick-up in the ratio of credit to GDP has been highly correlated with banking crises. The ...boom phases of the cycle are characterised by large deviations in credit from trend. A range of mechanisms can generate these effects, each of which has strategic complementarity between banks at its core. Macro-prudential policy could curb these credit cycles, both through raising the cost of maintaining risky portfolios and through an expectations channel that operates via banks' perceptions of other banks' actions.
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BFBNIB, FZAB, GIS, IJS, INZLJ, IZUM, KILJ, NLZOH, NMLJ, NUK, OILJ, PILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
Abstract
Distinguishing between risk and uncertainty, this article draws on the psychological literature on heuristics to consider whether and when simpler approaches may outperform more complex ...methods for modeling and regulating the financial system. We find that: simple methods can sometimes dominate more complex modeling approaches for calculating banks’ capital requirements, especially when data are limited or underlying risks are fat-tailed; simple indicators often outperformed more complex metrics in predicting individual bank failure during the global financial crisis; when combining different indicators to predict bank failure, simple and easy-to-communicate “fast-and-frugal” decision trees can perform comparably to standard, but more information-intensive, regressions. Taken together, our analyses suggest that because financial systems are better characterized by uncertainty than by risk, simpler approaches to modeling and regulating financial systems can usefully complement more complex ones and ultimately contribute to a safer financial system.
We provide a framework for assessing the build-up of vulnerabilities to the U.S. financial system. We collect forty-six indicators of financial and balance-sheet conditions, cutting across measures ...of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. In our model, unprofitable banks have strong ...incentives to invest in risky assets when macroeconomic fundamentals are good in order to avoid the stigma of being assessed as low ability by the market. We show that across-the-system countercyclical capital requirements that deter such gambling are constrained optimal when fundamentals are neither extremely weak nor extremely strong.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
Uncertainty in macroeconomic policy-making: art or science? Aikman, David; Barrett, Philip; Kapadia, Sujit ...
Philosophical transactions of the Royal Society of London. Series A: Mathematical, physical, and engineering sciences,
12/2011, Volume:
369, Issue:
1956
Journal Article
Peer reviewed
Open access
Uncertainty is pervasive in economic policy-making. Modern economies share similarities with other complex systems in their unpredictability. But economic systems also differ from those in the ...natural sciences because outcomes are affected by the state of beliefs of the systems' participants. The dynamics of beliefs and how they interact with economic outcomes can be rich and unpredictable. This paper relates these ideas to the recent crisis, which has reminded us that we need a financial system that is resilient in the face of the unpredictable and extreme. It also highlights how such uncertainty puts a premium on sound communication strategies by policy-makers. This creates challenges in informing others about the uncertainties in the economy, and how policy is set in the face of those uncertainties. We show how the Bank of England tries to deal with some of these challenges in its communications about monetary policy.
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BFBNIB, NMLJ, NUK, PNG, SAZU, UL, UM, UPUK
Twelve papers featured in a special issue on individual-based modelling in ecology are reviewed in an effort to identify common methodological and theoretical issues. The review focuses on issues ...related to the question of whether and how individual-based modelling is changing ecological theory. One major hindrance impeding the generation of theory from individual-based models (IBMs) is the fact that IBMs are more or less complex computer simulation models. They are thus hard to develop, hard to communicate, and hard to analyse. Solving this problem requires both software tools which help to implement and communicate IBMs and at least the same effort in analysing the models as is currently put into their development. A new field of application of IBMs is Virtual Ecology, i.e. the comparison of simulated data sets with those obtained by virtual (i.e. simulated) ecologists. This method allows field methods, empirical measures and sampling protocols to be optimised. As far as theoretical issues are concerned, individual variability was by far the most important issue discussed in the papers. Previously most studies concentrated on the mechanisms generating individual variability, but there is now also a growing number of models addressing the consequences of individual variability for population and community dynamics. In order to determine these consequences, a currency is required which allows the model populations to be evaluated. Persistence and other stability properties are proposed as such a unifying currency. The lesson contained in our review is that even with just twelve papers more or less explicitly oriented towards ecological theory, elements of a theory that might emerge from individual-based modelling in the future can already be identified.
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IJS, IMTLJ, KILJ, KISLJ, NUK, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
In China, you can smile to pay for fried chicken While everyone is talking about face recognition on new phones, China is already developing some surprising applications for this technology such as ...smiling to pay for your meal, using your face and your voice to access your residence hall at university, enforcing social norms by, for example, naming and shaming jaywalkers, and catching criminals on their day off. 2. China is cracking down on cryptocurrencies This month there was tremendous noise around the boom and bust of bitcoin exchanges and initial coin offerings (ICO), with lots of speculation around the reasons behind the government's policy moves in this area (ranging from stopping capital flight or protecting consumers, to rumours of China setting up its own crypto-currency). China is testing the world's first cargo drone While China is already the world leader in drones - companies such Shenzhen-based DJI have 70% of global market share - it is coming up with increasingly innovative ways of dealing with the ever-growing desire for quick delivery from e-commerce.
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