Towards a regulatory agenda for banking in Europe

Although the world of banking and finance is becoming more integrated every day, in most aspects the world of financial regulation continues to be narrowly defined by national boundaries. The main players here are still national governments and governmental agencies. And until recently, they tended to follow a policy of shielding their activities from scrutiny by their peers and members of the academic community rather than inviting critical assessments and an exchange of ideas. The turbulence in international financial markets in the 1980s, and its impact on U.S. banks, gave rise to the notion that academics working in the field of banking and financial regulation might be in a position to make a contribution to the improvement of regulation in the United States, and thus ultimately to the stability of the entire financial sector. This provided the impetus for the creation of the “U.S. Shadow Financial Regulatory Committee”. In the meantime, similar shadow committees have been founded in Europe and Japan. The specific problems associated with financial regulation in Europe, as well as the specific features which distinguish the European Shadow Financial Regulatory Committee from its counterparts in the U.S. and Japan, derive from the fact that while Europe has already made substantial progress towards economic and political integration, it is still primarily a collection of distinct nation-states with differing institutional set-ups and political and economic traditions. Therefore, any attempt to work towards a European approach to financial regulation must include an effort to promote the development of a European culture of co-operation in this area, and this is precisely what the European Shadow Financial Regulatory Committee (ESFRC) seeks to do. In this paper, Harald Benink, chairman of the ESFRC, and Reinhard H. Schmidt, one of the two German members, discuss the origin, the objectives and the functioning of the committee and the thrust of its recommendations

The New Basel Capital Accord: Making It Effective with Stronger Market Discipline

In January 2001 the Basel Committee on Banking Supervision proposed a new capital adequacy framework to respond to deficiencies in the 1988 Capital Accord on credit risk. The main elements or ‘pillars’ of the proposal are capital requirements based on the internal risk-ratings of individual banks, expanded and active supervision, and information disclosure requirements to enhance market discipline. We discuss the incentive effects of the proposed regulation. In particular, we argue that it provides incentives for banks to develop new ways to evade the intended consequences of the proposed regulation. Supervision alone cannot prevent banks from ‘gaming and manipulation’ of risk-weights based on internal ratings. Furthermore, the proposed third pillar to enhance market discipline of banks’ risk-taking is too weak to achieve its objective. Market discipline can be strengthened by a requirement that banks issue subordinated debt. We propose a first phase for introducing a requirement for large banks to issue subordinated debt as part of the capital requirement

Financial Fragility Indexes for Latin American Countries

This paper studies the financial fragility of seven Latin American countries, in a period in which two global episodes hit financial markets and economies worldwide: the great financial crisis (2007-2009) and the COVID-19 shock (2020-2021). General indexes of financial fragility are constructed using the Ensemble empirical mode decomposition (EEMD) method applied to financial indicators commonly related to the health of the financial system. A fixed weights scheme is used to aggregate these indicators at the country level and by type of indicator. Our results show that the financial fragility of these countries was increasing before and during the first episode, while for the other episode it started to increase during the lockdown period, but suddenly fell in response to the measures taken by the economic authorities. The policy implications derived from this study indicate that both the full implementation of macroprudential (countercyclical) policies for bank activities and the design of a specific regulatory framework for non-bank activities will be key to guarantee a rapid recovery of economies to future financial shocks

A Study of Neo-Austrian Economics using an Artificial Stock Market

An agent-based artificial financial market (AFM) is used to study market efficiency and learning in the context of the Neo-Austrian economic paradigm. Efficiency is defined in terms of the 'excess' profits associated with different trading strategies, where excess for an active trading strategy is defined relative to a dynamic buy and hold benchmark. We define an Inefficiency matrix that takes into account the difference in excess profits of one trading strategy versus another ('signal') relative to the standard error of those profits ('noise') and use this statistical measure to gauge the degree of market efficiency. A one-parameter family of trading strategies is considered, the value of the parameter measuring the relative 'informational' advantage of one strategy versus another. Efficiency is then investigated in terms of the composition of the market defined in terms of the relative proportions of traders using a particular strategy and the parameter values associated with the strategies. We show that markets are more efficient when informational advantages are small (small signal) and when there are many coexisting signals. Learning is introduced by considering 'copycat' traders that learn the relative values of the different strategies in the market and copy the most successful one. We show how such learning leads to a more informationally efficient market but can also lead to a less efficient market as measured in terms of excess profits. It is also shown how the presence of exogeneous information shocks that change trader expectations increases efficiency and complicates the inference problem of copycats.Neoaustrian economics, Market efficiency, Artificial financial market, Learning, Adaptation

Financial Fragility Indexes for Latin American Countries

This paper studies the financial fragility of seven Latin American countries, in a period in which two global episodes hit financial markets and economies worldwide: the great financial crisis (2007-2009) and the COVID-19 shock (2020-2021). General indexes of financial fragility are constructed using the Ensemble empirical mode decomposition (EEMD) method applied to financial indicators commonly related to the health of the financial system. A fixed weights scheme is used to aggregate these indicators at the country level and by type of indicator. Our results show that the financial fragility of these countries was increasing before and during the first episode, while for the other episode it started to increase during the lockdown period, but suddenly fell in response to the measures taken by the economic authorities. The policy implications derived from this study indicate that both the full implementation of macroprudential (countercyclical) policies for bank activities and the design of a specific regulatory framework for non-bank activities will be key to guarantee a rapid recovery of economies to future financial shocks

International Trade in Brown Shares and Economic Development

Using global share ownership data from 2002 to 2021, we find that investors’ aggregate carbon sensitivity, i.e., their tendency to divest from more polluting firms, increases with per capita GDP, especially after the adoption of the Paris Agreement in 2015. As an implication, investors in higher-income countries are predicted to hold greener portfolios, which is borne out by the data. Especially investment managers, who invest on behalf of their clients, and investors with longer investment horizons contribute to the portfolio greening effect of economic development. We find that this effect is weaker for smaller firms and for firms that are included in the MSCI World index

European Shadow Financial Regulatory Committee (ESFRC) (2015) : Escalating Crisis in the Eurozone: The Case for Conditional Debt Relief for Greece (Statement No. 40)

In this statement the European Shadow Financial Regulatory Committee (ESFRC) is advocating a conditional relief of Greek\u27s government debt based on Greece meeting certain targets for structural economic reforms in areas such as its labor market and pensions sector. The authors argue that the position of the European institutions that debt relief for Greece cannot be part of an agreement is based on the illusion that Greece will be able to service its sovereign debt and reduce its debt overhang after implementing a set of fiscal and structural reforms. However, the Greek economy would need to grow at an unrealistic level to achieve debt sustainability solely on the basis of reforms.The authors therefore view a substantial debt relief as inevitable and argue that three questions must be resolved urgently, in order to structure debt relief adequately: First, which groups must accept losses associated with debt relief. Second, how much debt relief should be offered. Third, under what conditions should relief be offered