European Banking Distress and EMU: Institutional and Macroeconomic Risks.

Financial stability in Europe has received renewed attention with the advent of a common currency, wave of mergers and acquisitions among financial institutions, and greater market competition (e.g. ECB, 1999; IMF, 1999; OECD, 1999). This paper examines whether EU country banking systems are particularly vulnerable to systemic risk at present. Our approach is to examine episodes of banking sector distress for a large sample of countries, highlighting the experience of the EU. We estimate multivariate probit models linking the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. Institutional characteristics, made available by a new data set on corporate governance in the financial sector not previously used in this type of analysis, include aspects of bank supervision and regulation, restrictions on bank portfolios, and development of the banking system. Given these characteristics, the model predicts a low probability of banking sector distress in EMU countries.

A test for volatility spillovers

This paper proposes a new procedure for analyzing volatility links between di®erent markets based on a bivariate Markov switching model. An empirical application of this procedure to three emerging markets is examined and discussed

What Hurts Most? G-3 Exchange Rate or Interest Rate Volatility

With many emerging market currencies tied to the U.S. dollar either implicitly or explicitly, movements in the exchange values of the currencies of major countries have the potential to influence the competitive position of many developing countries. According to some analysts, establishing target bands to reduce the variability of the G-3 currencies would limit those destabilizing shocks emanating from abroad. This paper examines the argument for such a target zone strictly from an emerging market perspective. Given that sterilized intervention by industrial economies tends to be ineffective and that policy makers show no appetite to return to the controls on international capital flows that helped keep exchange rates stable over the Bretton Woods era, a commitment to damping G-3 exchange rate fluctuations requires a willingness on the part of G-3 authorities to use domestic monetary policy to that end. Under a system of target zones, then, relative prices for emerging market economies may become more stable, but debt-servicing costs may become less predictable. We use a simple trade model to show that the resulting consequences for welfare are ambiguous. Our empirical work supplements the traditional literature on North-South links by examining the importance of the volatilities of G-3 exchange-rates, and U.S. interest rate and consumption on capital flows and economic growth in developing countries over the past thirty years.

Reviews of recent publications

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The Association Between the Long-Term Change in Directly Measured Cardiorespiratory Fitness and Mortality Risk

Introduction: There is a strong inverse association between cardiorespiratory fitness (CRF) and mortality outcomes. This relationship has predominantly been assessed cross-sectionally, however low CRF is a modifiable risk factor, thus assessing this association using a single baseline measure may be sub-optimal. Purpose: To examine the association of the long-term change in CRF, measured using cardiopulmonary exercise testing (CPX) with all-cause and disease-specific mortality. Methods: Participants included 833 apparently healthy men and women (42.9±10.8 years) who underwent two maximal CPXs, the second CPX being ≥ 1 year following the baseline assessment. Participants were followed for 17.7 ± 11.8 years for allcause, cardiovascular disease (CVD), and cancer mortality. Cox-proportional hazard models were performed to determine the association between the change in CRF, computed as visit 1 (V1) peak oxygen consumption (VO2peak (ml·kg-1·min-1)) – visit 2 (V2) VO2peak, and mortality outcomes. Results: During follow-up, 172 participants died. Overall, the change in CPX-derived CRF was inversely related to all-cause, CVD, and cancer mortality (p\u3c0.05). Each 1 ml·kg-1·min-1 increase was associated with a 10.8, 14.7, and 15.9% reductions in allcause, CVD, and cancer mortality, respectively. The inverse relationship between CRF and all-cause mortality remained significant (p\u3c0.05) when men and women were examined independently, after adjusting for years since first CPX, baseline VO2peak, and age. Conclusion: Long-term changes in CRF were inversely related to mortality outcomes, and mortality was better predicted by CRF measured at subsequent examination than baseline CRF. These findings support the recent American Heart Association scientific statement advocating CRF as a clinical vital sign that should be assessed routinely in clinical practice, as well as support regular participation in physical activity to maintain adequate CRF levels across the lifespan

Financial turmoil: Systemic or regional?

This paper summarizes “The Center and the Periphery: The Globalization of Financial Shocks," which presents a new approach to measure and understand systemic financial turbulences. We defined two measures of systemic disturbances: weak- and strong-form globalization and created the corresponding indices of “globalization.” These indices allowed us to capture the routes through which market jitters in one country reach other countries in the same region or even worldwide. They also allowed us to estimate the likelihood of low to high globalization following a variety of shocks in crisis-prone emerging markets and financial centers. One of the preliminary conclusions we draw from this exercise is that financial centers are at the core of “systemic” problems: The “worldwide globalization” of the turbulences in Asia in the Fall of 1997 only occurred after the stock market crash in the United States on October 27, while the Russian downfall spread around the globe only after it triggered fragilities in German banks and helped to provoke LTCM’s recapitalization.contagion, crisis, financial, global, regional

The Unholy Trinity of Financial Contagion

Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries -- which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.

The response speed of the International Monetary Fund. Bruegel Working Paper 2013/03, 16 July 2013

The more severe a financial crisis, the greater has been the likelihood of its management under an IMF-supported programme and the shorter the time from crisis onset to programme initiation. Political links to the United States have increased programme likelihood but have prompted faster response mainly for ‘major’crises. Over time, the IMF’s response has not been robustly faster, but the time sensitivity to the more severe crises and those related to fixed exchange rate regimes did increase from the mid-1980s. Similarly, democracies had tended to stall programme initiation but have become more supportive of financial markets’ demands for quicker action

The unholy trinity of financial contagion

Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries -- which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.financial crises contagion capital flows credit ratings credit banks exchange rates