Credit growth in emerging Europe : a cause for stability concerns?

High credit growth in Emerging Europe, generally considered a sign of catching-up with the"old"Europe, has begun receiving considerable attention among investors and policymakers alike. Given heightened global risks and the demands under the European Union accession process, the need to better understand this high credit growth's drivers, riskiness, and the possible macroeconomic and financial stability consequences is strong. The authors adopt a holistic approach in reviewing the rapid credit growth experienced in the region, examining macroeconomic, financial sector, corporate sector, and asset market consequences and possible vulnerabilities. They consider three possible scenarios-a catching-up with older European countries, a soft landing as experienced by Portugal in the early 2000s, and a hard landing as experienced by Asia in 1997.Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Economic Theory&Research,Investment and Investment Climate

Essays on banking and foreign exchange market instability

Financial intermediation has been associated with several risks. We study sunspot panics, information-based bank runs, contagion, uncertainty about consumption time preference, twin crises and a number of policies attempting to resolve these issues. We offer a basic model where sunspot panics and information-based bank runs co-exist. This framework can be used to evaluate a number of policies. We examine closely the policy of suspension of deposit convertibility and observe a trade-off regarding its implementation. Although suspension eliminates sunspot panics, it presents important drawbacks in an environment vulnerable to information-based bank runs, thus generating a dilemma for policy makers. It removes the advantage of discretionary liquidation of long-term technologies when portfolio returns are expected to be extremely low, and eliminates the signalling property of suspension that continuation of investment is beneficial, which can mitigate the spread of contagion. We offer an alternative solution, with discretionary rules accounting for every possible state of the economy. Studying uncertainty about consumption time preference, we demonstrate that partial suspension is welfare improving on the outcome of full suspension. Nevertheless, in the absence of limitations preventing the formation or the efficient operation of an inter-bank market, borrowing and lending among intermediaries will be the optimal solution. In demonstrating this, we make sure we respect the sequential service constraint that necessitates redemption obligations to be honoured in a first-come first-served basis. Opening up the economy, by the addition of a foreign exchange market and by assuming a fixed exchange rate regime, we study the possibility of twin crises. We abstract from foreign capital as the source of instability and focus on the role of domestic depositors. Speculative opportunities in the currency markets can result in banking crises, while banking crises can lead to betting against the exchange rate regime. Suspension of convertibility can limit funds for speculation, but at the expense of depositors' welfare, thus raising a dilemma for policy makers

Essays on banking and foreign exchange market instability

Financial intermediation has been associated with several risks. We study sunspot panics, information-based bank runs, contagion, uncertainty about consumption time preference, twin crises and a number of policies attempting to resolve these issues. We offer a basic model where sunspot panics and information-based bank runs co-exist. This framework can be used to evaluate a number of policies. We examine closely the policy of suspension of deposit convertibility and observe a trade-off regarding its implementation. Although suspension eliminates sunspot panics, it presents important drawbacks in an environment vulnerable to information-based bank runs, thus generating a dilemma for policy makers. It removes the advantage of discretionary liquidation of long-term technologies when portfolio returns are expected to be extremely low, and eliminates the signalling property of suspension that continuation of investment is beneficial, which can mitigate the spread of contagion. We offer an alternative solution, with discretionary rules accounting for every possible state of the economy. Studying uncertainty about consumption time preference, we demonstrate that partial suspension is welfare improving on the outcome of full suspension. Nevertheless, in the absence of limitations preventing the formation or the efficient operation of an inter-bank market, borrowing and lending among intermediaries will be the optimal solution. In demonstrating this, we make sure we respect the sequential service constraint that necessitates redemption obligations to be honoured in a first-come first-served basis. Opening up the economy, by the addition of a foreign exchange market and by assuming a fixed exchange rate regime, we study the possibility of twin crises. We abstract from foreign capital as the source of instability and focus on the role of domestic depositors. Speculative opportunities in the currency markets can result in banking crises, while banking crises can lead to betting against the exchange rate regime. Suspension of convertibility can limit funds for speculation, but at the expense of depositors' welfare, thus raising a dilemma for policy makers

Essays on banking and foreign exchange market instability

Financial intermediation has been associated with several risks. We study sunspot panics, information-based bank runs, contagion, uncertainty about consumption time preference, twin crises and a number of policies attempting to resolve these issues. We offer a basic model where sunspot panics and information-based bank runs co-exist. This framework can be used to evaluate a number of policies. We examine closely the policy of suspension of deposit convertibility and observe a trade-off regarding its implementation. Although suspension eliminates sunspot panics, it presents important drawbacks in an environment vulnerable to information-based bank runs, thus generating a dilemma for policy makers. It removes the advantage of discretionary liquidation of long-term technologies when portfolio returns are expected to be extremely low, and eliminates the signalling property of suspension that continuation of investment is beneficial, which can mitigate the spread of contagion. We offer an alternative solution, with discretionary rules accounting for every possible state of the economy. Studying uncertainty about consumption time preference, we demonstrate that partial suspension is welfare improving on the outcome of full suspension. Nevertheless, in the absence of limitations preventing the formation or the efficient operation of an inter-bank market, borrowing and lending among intermediaries will be the optimal solution. In demonstrating this, we make sure we respect the sequential service constraint that necessitates redemption obligations to be honoured in a first-come first-served basis. Opening up the economy, by the addition of a foreign exchange market and by assuming a fixed exchange rate regime, we study the possibility of twin crises. We abstract from foreign capital as the source of instability and focus on the role of domestic depositors. Speculative opportunities in the currency markets can result in banking crises, while banking crises can lead to betting against the exchange rate regime. Suspension of convertibility can limit funds for speculation, but at the expense of depositors' welfare, thus raising a dilemma for policy makers.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

A model of the interactions between banking crises and currency crises

A second-generation model of currency crises is combined with a standard banking model. In a pegged exchange rate regime, after funds have been committed to the banks, news arrives about the quality of the banks' assets and about the exchange rate fundamentals. A run on the banks may cause a currency crisis, or vice versa. There are multiple equilibria (with either twin crises or no crisis), depending on depositors' expectations of other depositors' actions. Suspension of deposit convertibility can prevent a speculative attack on the currency, but last resort lending to solvent banks can induce one.