Liquidity Black Holes: And Why Modern Financial Regulation in Developed Countries is making Short-Term Capital Flows to Developing Countries Even More Volatile

Financial regulation, Liquidity black holes, Investor behaviour

The Role of Policy and Banking Supervision in the Light of the Credit Crisis

The zeitgeist of finance over the last decade was "marketization": the switch from bank finance to market finance as loans were originated and securitized by banks, rated by agencies and then relocated to investors. A cynic may say that a better description of what went on was regulatory arbitrage. Risks were transferred, on paper at least, from the regulated sector to the unregulated sector. But it is important to recall that bank supervisors in Europe and elsewhere welcomed the marketization of financial risk. They saw it as a way of spreading risks. They saw risks being removed and distributed away from a small number of large and systemically important banks to a large number of investors. The marketization of finance was as much a conspiracy of the Gnomes of Basle as it was of the Gnomes of Zurich. It is part and parcel of the approach to banking embedded in the new Basle accord on credit risk (Basle II)

Implications for liquidity from innovation and transparency in the European corporate bond market

This paper offers a new framework for the assessment of financial market liquidity and identifies two types: search liquidity and systemic liquidity. Search liquidity, i.e. liquidity in “normal” times, is driven by search costs required for a trader to find a willing buyer for an asset he/she is trying to sell or vice versa. Search liquidity is asset specific. Systemic liquidity, i.e. liquidity in “stressed” times, is driven by the homogeneity of investors - the degree to which one’s decision to sell is related to the decision to sell made by other market players at the same time. Systemic liquidity is specific to market participants’ behaviour. This framework proves fairly powerful in identifying the role of credit derivatives and transparency for liquidity of corporate bond markets. We have applied it to the illiquid segments of the European credit market and found that credit derivatives are likely to improve search liquidity as well as systemic liquidity. However, it is possible that in their popular use today, credit derivatives reinforce a concentration of positions that can worsen systemic liquidity. We also found that post-trade transparency has surprisingly little bearing on liquidity in that where it improves liquidity it is merely acting as a proxy for pre-trade transparency or transparency of holdings. We conclude that if liquidity is the objective, pre-trade transparency, as well as some delayed transparency on net exposures and concentrations, is likely to be more supportive of both search and systemic liquidity than post-trade transparency. JEL Classification: G14, G15, G18.Financial market functioning, liquidity, transparency, credit markets and financial innovation.

Crisis management, burden sharing and solidarity mechanisms in the EU: a follow-up study to financial supervision and crisis management in the EU

The financial crisis that began in 2007 as a liquidity crisis for banks has transformed itself into a sovereign debt crisis that threatens the viability of the eurozone and the foundations of the European Union. In this study, we analyse some of the recent regulatory initiatives in response to the crisis and their implications for the EU financial system and economy. Although EU policymakers are adopting important institutional reforms to create a more robust macro-prudential supervisory framework, serious gaps and weakness remain in EU regulation, crisis management, and burden sharing. We conclude that in liberalised international financial markets it will always be very difficult for regulators to control systemic risks and that alternative regulatory approaches should be considered

Rsp5/​Nedd4 is the main ubiquitin ligase that targets cytosolic misfolded proteins following heat stress

The heat-shock response is a complex cellular program that induces major changes in protein translation, folding and degradation to alleviate toxicity caused by protein misfolding. Although heat shock has been widely used to study proteostasis, it remained unclear how misfolded proteins are targeted for proteolysis in these conditions. We found that ​Rsp5 and its mammalian homologue ​Nedd4 are important E3 ligases responsible for the increased ubiquitylation induced by heat stress. We determined that ​Rsp5 ubiquitylates mainly cytosolic misfolded proteins upon heat shock for proteasome degradation. We found that ubiquitylation of heat-induced substrates requires the Hsp40 co-chaperone ​Ydj1 that is further associated with ​Rsp5 upon heat shock. In addition, ubiquitylation is also promoted by PY ​Rsp5-binding motifs found primarily in the structured regions of stress-induced substrates, which can act as heat-induced degrons. Our results support a bipartite recognition mechanism combining direct and chaperone-dependent ubiquitylation of misfolded cytosolic proteins by ​Rsp5

Comparison of substrate specificity of the ubiquitin ligases Nedd4 and Nedd4-2 using proteome arrays

Target recognition by the ubiquitin system is mediated by E3 ubiquitin ligases. Nedd4 family members are E3 ligases comprised of a C2 domain, 2–4 WW domains that bind PY motifs (L/PPxY) and a ubiquitin ligase HECT domain. The nine Nedd4 family proteins in mammals include two close relatives: Nedd4 (Nedd4-1) and Nedd4L (Nedd4-2), but their global substrate recognition or differences in substrate specificity are unknown. We performed in vitro ubiquitylation and binding assays of human Nedd4-1 and Nedd4-2, and rat-Nedd4-1, using protein microarrays spotted with ∼8200 human proteins. Top hits (substrates) for the ubiquitylation and binding assays mostly contain PY motifs. Although several substrates were recognized by both Nedd4-1 and Nedd4-2, others were specific to only one, with several Tyr kinases preferred by Nedd4-1 and some ion channels by Nedd4-2; this was subsequently validated in vivo. Accordingly, Nedd4-1 knockdown or knockout in cells led to sustained signalling via some of its substrate Tyr kinases (e.g. FGFR), suggesting Nedd4-1 suppresses their signalling. These results demonstrate the feasibility of identifying substrates and deciphering substrate specificity of mammalian E3 ligases

Macro-Prudential Regulation. ECMI Commentary No. 25, 4 August 2009

This is not the first international banking crisis the world has seen. The previous ones occurred without credit default swaps, special investment vehicles, or even credit ratings. If crises keep repeating themselves, it seems reasonable to argue that policy-makers need to carefully consider what they are doing and not just ‘double-up’ by superficially reacting to the specific features of today’s crisis. While we cannot hope to prevent them, we can perhaps make crises fewer and milder, by adopting and implementing better regulation—in particular, more macro-prudential regulation