Liquidity Risk and Banks’ Bidding Behavior: Evidence from the Global Financial Crisis

Even in countries that were not directly hit by the global financial crisis and where the banking system had a relatively strong liquidity position, there has been a negative spiral between the market and funding liquidity. The authors illustrate this on a case study of the Czech banking system. They construct indices of market and funding liquidity using daily market data, including data on banks’ bidding behavior in repo operations of the Czech National Bank. They find some evidence of a negative feedback effect between market and funding liquidity, especially after the collapse of Lehman Brothers in September 2008.funding liquidity, market liquidity, global financial crisis

Financial Integration of Stock Markets among New EU Member States and the Euro Area

The paper considers the empirical dimension of financial integration among stock-exchange markets in four new European Union member states (Czech Republic, Hungary, Poland, and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock-exchange indices) and at the sectoral level (considering banking, chemical, electricity, and telecommunication indices). Our empirical evaluation consists of (1) a harmonization analysis (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel, and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of respective stock-market integration on both national and sectoral levels between the Czech Republic, Hungary, Poland, and the euro area.beta convergence, new EU member states, sigma convergence, stock markets

Financial Integration of Stock Markets among New EU Member States and the Euro Area

The paper considers the empirical dimension of financial integration among stock markets in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock exchange indices) and at the sectoral level (considering banking, chemical, electricity and telecommunication indices). Our empirical evaluation consists of (1) an analysis of alignment (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of stock market integration on both the national and sectoral levels between the Czech Republic, Hungary, Poland and the euro area

Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?

The last financial crisis significantly changed views concerning the relationship between monetary policy, asset prices and financial stability. We survey the pre-crisis opinions on the appropriate monetary policy reactions to financial market developments and delineate the new consensus which is currently emerging from the lessons taken. The new consensus is an amended model of flexible inflation targeting in which the central bank “should sometimes lean and can clean”. We try to add the small open economy context to the debate and demonstrate that the optimal reactions of monetary policy-makers in small open economies may differ and that sometimes the optimal solution may not even be available due to the policies of the key world central banks acting as price makers. In such instances, second-best policies have to be considered.monetary policy, financial stability, asset markets, macroprudential policy

Loan loss provisioning in selected European banking sectors: do banks really behave in a procyclical way?

This paper sets out to discuss the extent of procyclicality in European banks’ lending behavior and how much the regulatory and accounting framework may contribute to it. The main focus is the behavior of banks regarding provisioning against impaired financial assets. It also discusses whether a through-the-cycle provisioning regime could serve as one of the possible regulatory responses to the ongoing financial crisis. Our applied analysis reveals that European banks are among those that provision in a procyclical manner. On the theoretical level, therefore, through-the-cycle provisioning could be helpful in creating a buffer during good times which could then be used during recessions. On the practical level, however, through-the-cycle provisioning would for numerous reasons be difficult to introduce soon and would first need to be aligned with the other components of the international framework for accounting and for the regulation of financial institutions.Web of Science63432630

Monetary policy in a small economy after tsunami: a new consensus on the horizon?

The last financial crisis significantly changed views concerning the relationship between monetary policy, asset prices and financial stability We survey the pre-crisis opinions on the appropriate monetary policy reactions to financial market developments and delineate the new consensus which is currently emerging from the lessons taken. The new consensus is an amended model of flexible inflation targeting in which the central bank "should sometimes lean and can clean". We try to add the small open economy context to the debate and demonstrate that the optimal reactions of monetary policy-makers in small open economies may differ and that sometimes the optimal solution may not even be available due to the policies of the key world central banks acting as price makers. In such instances, second-best policies have to be considered.Web of Science61133

Liquidity stress testing with second-round effects: application to the Czech banking sector

We build a macro stress-testing model for banks’ market and funding liquidity risks with a survival period of one month. The model takes into account the impact of both bank-specific and market-wide scenarios and includes second-round effects of shocks due to banks’ feedback reactions. The model has three phases: (i) the formation of a balance-sheet liquidity shortfall, (ii) the reaction of banks on financial markets, and (iii) the feedback effects of shocks, such as secondary deposit outflows for reacting banks and additional haircuts on securities. During each phase, we recount the liquidity buffer and examine whether banks hold a sufficiently large amount of liquid assets to be able to survive the liquidity tension in their balance sheets. The framework is applied to the Czech banking sector to illustrate typical calibrations and the impact on banks.Web of Science661493

Financial integration of stock markets among new EU member states and the Euro area

The paper considers the empirical dimension of financial integration among stock markets in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock exchange indices) and at the sectoral level (considering banking, chemical, electricity and telecommunication indices). Our empirical evaluation consists of (1) an analysis of alignment (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of stock market integration on both the national and sectoral levels between the Czech Republic, Hungary, Poland and the euro area

Financial integration at times of financial instability

This article empirically analyzes the phenomenon of financial integration, focusing primarily on assessing the impacts of the current financial crisis. We start our analysis with an overview of cost-benefit considerations associated with the process of financial integration. We go on to examine the relationship between financial integration and financial instability, emphasizing the priority role of financial innovation. The subsequent empirical section provides an analysis of the speed and level of integration of the Czech financial market and the markets of selected inflation-targeting Central European economies (Hungary and Poland) and advanced Western European economies (Sweden and the UK) with the euro area. The results for the Czech Republic reveal that a process of increasing financial integration has been going on steadily since the end of the 1990s and also that the financial crisis caused only temporary price divergence of the Czech financial market from the euro area market.Web of Science631452

Current account reversals and growth: the direct effect Central and Eastern Europe 1923-2000

According to economic theory, the capital inflows reversal - so called sudden stop - has a significant effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the analysis are applied. In the first step we estimate the standard growth equation augmented by an effect of the current account reversal. We find that after a current account reversal the growth rate declines by 1.10 percentage points in the current year. The subsequent analysis of the adjustment dynamics builds upon the notion of convergence. We find the unconditional and conditional convergence coefficients to be -0.47 and -0.52, respectively. This implies that the consequences of the reversal are likely eliminated after 3.3 years when the actual growth rate is back at its equilibrium level, ceteris paribus. Finally, the cumulative loss associated with a sudden stop in capital flows is about 2.3 percentage points. We infer that Central and Eastern European countries are relatively flexible in terms of adjustment and reallocation of resources given the findings in similar literature examining either a more general sample or concentrating on rather different regions