Financial Sector Regulation and Reforms in Emerging Markets: An Overview

This paper provides an overview of the complex conceptual and practical challenges that emerging market economies face as they attempt to reform their frameworks for financial regulation. These economies are striving to balance the quest for financial stability with the imperatives of financial development and broader financial inclusion. I argue that these objectives can in fact reinforce one another. I also discuss aspects of macroeconomic policies and cross-border regulation that have implications for financial stability and the resilience of the financial sector in emerging markets.emerging markets, financial development, financial regulation, financial inclusion

Graph Theoretic Approaches to Understand Resilience of Complex Systems

Modern society is critically dependent on a network of complex systems for almost every social and economic function. While increasing complexity in large-scale engineered systems offer many advantages including high efficiency, performance and robustness, it inadvertently makes them vulnerable to unanticipated perturbations. A disruption affecting even one component may result in large cascading impacts on the entire system due to high interconnectedness. Large direct and indirect impacts across national and international boundaries of natural disasters like Hurricane Katrina, infrastructure failures like the Northeast blackout, epidemics like the H1N1 influenza, terrorist attacks like the 9/11, and social unrests like the Arab Spring are indicative of the vulnerability associated with growing complexity. There is an urgent need for a quantitative framework to understand resilience of complex systems with different system architectures. In this work, a novel framework is developed that integrates graph theory with statistical and modeling techniques for understanding interconnectedness, interdependencies, and resilience of distinct large-scale systems while remaining cognizant of domain specific details. The framework is applied to three diverse complex systems, 1) Critical Infrastructure Sectors (CIS) of the U.S economy, 2) the Kalundborg Industrial Symbiosis (KIS), Denmark and 3) the London metro-rail infrastructure. These three systems are strategically chosen as they represent complex systems of distinct sizes and span different spatial scales. The framework is utilized for understanding the influence of both network structure level properties and local node and edge level properties on resilience of diverse complex systems. At the national scale, application of this framework on the U.S. economic network reveals that excessive interconnectedness and interdependencies among CIS significantly amplify impacts of targeted disruptions, and negatively influence its resilience. At the regional scale, analysis of KIS reveals that increasing diversity, redundancy, and multi-functionality is imperative for developing resilient and sustainable IS systems. At the urban scale, application of this framework on the London Metro system identifies stations and rail connections that are sources of functional and structural vulnerability, and must be secured for improving resilience. This framework provides a holistic perspective to understand and propose data-driven recommendations to strengthen resilience of large-scale complex engineered systems

The financial crisis: connecting the dots

Financial crises ; Monetary policy ; Regulation

Fund Management and Systemic Risk - Lessons from the Global Financial Crisis

Fund managers play an important role in increasing efficiency and stability in financial markets. But research also indicates that fund management in certain circumstances may contribute to the buildup of systemic risk and severity of financial crises. The global financial crisis provided a number of new experiences on the contribution of fund managers to systemic risk. In this article, we focus on these lessons from the crisis. We distinguish between three sources of systemic risk in the financial system that may arise from fund management: insufficient credit risk transfer to fund managers; runs on funds that cause sudden reductions in funding to banks and other financial entities; and contagion through business ties between fund managers and their sponsors. Our discussion relates to the current intense debate on the role the so-called shadow banking system played in the global financial crisis. Several regulatory initiatives have been launched or suggested to reduce the systemic risk arising from non-bank financial entities, and we briefly discuss the likely impact of these on the sources of systemic risk outlined in the article

Political battles over globalization and forging for the global citizenship

This is an age of communication; collectivism gives rise to global village that calls for a global citizenry. It is easy to be a globalectronic (global and electronic) citizen who attains his nationality through internet, multimedia extension, mobile phones, cyber space, and electronic mail etc. It is well-nigh impossible to be a global citizen as every individual has its idiosyncrasy that always grow up with the social milieu lying around him. Therefore, people living in the North are unable to cope with people living in the South in all aspects of life. Political unevenness between the North and the South is a major source of dichotomy between two poles. Globalization is a source that collects people in the form of a whole but ineffectual in forging them to be a global citizen. All political battles over globalization can become to an end if selective morality diminishes. The South is unable to move in the world at will but the North can. Hence claims of laissez faire, peace, human rights, good governance, and sustainable human development are at stake as pluralism facing crises in morality. Thus it seems difficult to have an end product in the form of a global citizenship. It is only possible when morality prevails in attaining its end product through freedom of expression, freedom of speech and freedom of association. This paper is based on inductive, deductive, and comparative methods of research

Banking flows and financial crisis -- financial interconnectedness and basel III effects

This paper examines the factors that determine banking flows from advanced economies to emerging markets. In addition to the usual determinants of capital flows in terms of global push and local pull factors, it examines the role of bilateral factors, such as growth differentials and economic size, as well as contagion factors and measures of the depth in financial interconnectedness between lenders and borrowers. The analysis finds profound differences across regions. In particular, in spite of the severe impact of the global financial crisis, banking flows in emerging Europe stand out as a more stable region than is the case in other developing regions. Assuming that the determinants of banking flows remain unchanged in the presence of structural changes, the authors use these results to explore the short-term implications of Basel III capital regulations on banking flows to emerging markets.Debt Markets,Banks&Banking Reform,Emerging Markets,Access to Finance,Economic Theory&Research

Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns

Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may be a channel allowing a bank default to spread to other banks. This paper analyzes how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Since information on bilateral exposures was not available in most previous studies, they assumed that banks spread their lending as evenly as possible among all the other banks by maximizing the entropy of interbank linkages. Based on the data available on actual bilateral exposures for all Italian banks, the results obtained by assuming the maximum entropy are compared with those reflecting the observed structure of interbank claims. The comparison indicates that, in line with the thesis prevailing in the literature, the maximum entropy method tends to underestimate the extent of contagion. However, this does not hold in general. Under certain circumstances, depending on the structure of the interbank linkages, the recovery rates of interbank exposures and banksÂ’ capitalization, the maximum entropy approach overestimates the scope for contagion.interbank market, financial contagion, systemic risk, maximum entropy

Financial regulation in the post-crisis environment

The Chicago Fed’s 46th annual Conference on Bank Structure and Competition, which took place May 5–7, 2010, focused on the future of the financial services industry in light of the recent financial crisis and forthcoming industry reforms.Financial crises ; Bank supervision