Over the last decade or so, addressing financial instability has risen to the top of the policy agenda. This essay argues that in order to improve the safeguards against financial instability, it may be desirable to strengthen further the macroprudential orientation of current prudential frameworks, a process that is already under way. The essay defines, compares and contrasts the macro- and microprudential dimensions that inevitably coexist in financial regulatory and supervisory arrangements, examines the nature of financial instability against this background and draws conclusions about the broad outline of desirable policy efforts.(JEL G2) "Words, like nature, half reveal and half conceal the soul within" Alfred Lord Tennyson "When I use a word… it just means what I choose it to mean – neither more, nor less" Humpty Dumpty

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Towards a Macroprudential Framework for Financial Supervision and Regulation

This paper was presented at the Federal Reserve Bank of Kansas City's Symposium on Monetary Policy and Uncertainty: Adapting to a Changing Economy at Jackson Hole, Wyoming on 28-30 August 2003. The views expressed are those of the authors and do not necessarily reflect those of the BIS.

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Whither monetary and financial stability? the implications of evolving policy regimes

Since the 1980s, a number of episodes of financial market distress have underscored the importance of the smooth functioning of markets for the stability of the financial system. At the heart of these episodes was a sudden and drastic reduction in market liquidity, characterised by disorderly adjustments in asset prices, a sharp increase in the costs of executing transactions and, in the most acute cases, a "seizing up" of markets. This essay explores the anatomy of market distress as well as the policy options to address it. It argues that, despite appearances, the genesis and dynamics of market distress resemble quite closely those of banking distress and that, contrary to conventional wisdom, the growth of markets for tradable instruments, and hence the greater scope to sell assets and raise cash, need not have reduced the likelihood of funding (liquidity) crises. At times of distress, in contrast to more normal times, risk management practices, funding constraints and counterparty risk become critical determinants of market liquidity. Articulating an appropriate policy response calls for an approach that takes full account of the interdependencies between the behaviour of market participants and market dynamics. To date, much useful work has been done to address market distress by improving the market infrastructure and the risk management at individual financial institutions. The territory that remains largely unexplored is precisely the link between the collective actions of individual market participants and market dynamics.

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Market distress and vanishing liquidity : anatomy and policy options

This paper investigates how stock market investors perceive the impact of market structure and efficiency on the long-run performance potential of European banks. To that end, a modified Tobin's Q ratio is introduced as a measure of bank franchise value. This measure is applied to discriminate between the market structure and efficient-structure hypotheses in a coherent forward-looking framework, in which differences in banks' horizontal and vertical differentiation strategies are controlled for. The results show that banks with better management or production technologies possess a long-run competitive advantage. In addition, bank market concentration does not affect all banks equally. Only the banks with a large market share in a concentrated market are able to generate non-competitive rents. The paper further documents that the forward-looking, long-run perspective and the noise-adjustment of the performance measure overcome most of the drawbacks associated with testing these hypotheses in a multi-country set-up. Finally, notwithstanding the international expansion of bank activities, the harmonization of regulation and the macroeconomic convergence in the European Union (EU15), we still find that country-specific macroeconomic variables have a significant impact on bank performance. The findings indicate that there is a trade-off between competition and stability that should be taken into account when assessing mergers or acquisitions. (Published as: Competition versus efficiency: What drives franchise values in European banking?,Journal of Banking & Finance Volume 32, Issue 9, September 2008, Pages 1820-1835)

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2164226_code405653.pdf?abstractid=883591&mirid=2

Competition versus Efficiency: What Drives Franchise Values in European Banking?

The global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries. Differences in bilateral linkages are due to a combination of fiscal trouble and a large banking sector, as Belgium, Italy and Spain are central to shock transmission during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion.

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Measuring Bilateral Spillover and Testing Contagion on Sovereign Bond Markets in Europe

Introduction 1. Survey Lectures from Plenary Sessions 2. Contributions on Technology and Financial Institutions 3. Contributions on Technology and Financial Markets 4. Contributions on Technology and Payments 5. Contributions on Technology and Productivity

Technology and finance : challenges for financial markets, business strategies and policy makers

Introduction Morten Balling1. Financial sector development as a tool for EU convergence Luigi Passamonti2. The implications of EU membership on financial systems' stability-oriented economic and financial policies Vahur Kraft3. Role of central banks in promoting financial stability - and the Hungarian experience Zsigmond Jarai4. Banking sector development and economic growth in trasistion countries Tuuli Koivu5. Financial sector efficiency: concepts, measurement, theoretical and empirical evidence Hans Christian Mantler, Gerhard Fink and Peter Haiss6. Financial sector efficiency in the EU accession countries of Central and Eastern Europe (CEE): the impact of policies, and the road ahead Maxwell C. Watson7. Challenging the prudential supervisor: liability versus (regulatory) immunity. Lessons from the EU experience for Central and Eastern European countries Michel Tison8. Reforms enhancing the efficiency of the financial sector and the implications of future EU membership Lelo Liive9. The effect of foreign bank entry on domestic banks in Central and Eastern Europe Peter Zajc10. The efficiency of foreign and domestic banks in Central and Eastern Europe: evidence on economics of scale and scope Christopher J. Green, Victor Murinde and Ivaylo Nikolov11. The efficiency of the banking sector in CEE - inequality and convergence to the EU Mariana Tomova, Nikolay Nenovsky and Totka Naneva12. The Internationalisation of Estonian banks: inward versus outward penetration Mart Sorg, Janek Uiboupin, Urmas Varblane and Vello Vensel13. An early warning model for currency crisis in Central and Eastern Europe Franz Schardax14. Institutional Vulnerability indicators for currency crisis in Central and Eastern European countries Dirk Effenberger15. Implications of the design of monetary policy for financial stability Alicia Garcia-Herrero and Pedro del Rio

Financial Markets in Central and Eastern Europe : Stability and Efficiency

1. Strategic and Organizational Challenges in European Banking Jordi Canals 2. Regulatory Capital Requirements and Financial Stability Jaime Caruana 3. Markets and Institutions: Managing the Evolving Financial Risk Malcolm D. Knight 4. Macroeconomic Consequences of Financial Market Regulation Josef Christl 5. The Changing Pattern of Payments in the United States Anthony M. Santomero 6. The East-West Efficiency Gap in European Banking Marko Kosak & Peter Zajc 7. Foreign Acquisitions and Industry Wealth Effects of Privatisation: Evidence from the Polish Banking Industry Dirk Schiereck, Martin T.Bohl & Olena Havrylchyk 8. Electronic Payments and ATMs: Changing Technology and Cost Efficiency in Banking David B. Humphrey, Santiago Carbo Valverde & Rafael Lopez del Paso 9. Pricing Strategies in European Banking: Specialization, Technology and Intertemporal Smoothing Santiago Carbo Valverde & Francisco Rodriguez Fernandez 10. Bank Efficiency and Mis-specified Input Prices Michael Koetter 11. Competition in a Highly Concentrated Banking Sector - Theoretical Empirical and Practical Considerations for the Netherlands Johannes M. Groeneveld & Wim Boonstra 12. Strategic Management in Banking: In Medio Virtus Jean Dermine 13. Do European Primarily Internet Banks Show Scale and Experience Efficiencies? Maria J. Nieto, Javier Delgado & Ignacio Hernando 14. Bank Risks and the Business Cycle Rudi Vander Vennet, Olivier De Jonghe & Lieven Baele 15. House Prices and Consumer Lending John P. Calverley 16. Capital Markets and Financial Integration in Europe Philipp Hartmann, Simone Manganelli & Cyril Monnet

Competition and Profitability in European Financial Services: Strategic, Systemic and Policy Issues

Financial markets in Central and Eastern Europe : stability and efficiency perspectives

On May 11-12, 2011, SUERF, the Belgian Financial Forum, the Brussels Finance Institute and the Centre for European Policy Studies (CEPS) jointly organised the 29th SUERF Colloquium New paradigms in money and finance? The papers included in this SUERF Study are based on contributions to the Colloquium. The 2008-11 financial crisis has demonstrated unsatisfactory performance in financial institutions and in financial regulation and supervision all over the world. The contributors to the present volume look with critical eyes on financial theories, supervisory structures, (mis)pricing of risk and distorted incentives, risk management models and procedures, conflicts of interest and bank strategies. Their perspectives are quite different, but they share the ambition of finding improved analytical, organizational or managerial approaches so that decisionmakers have a better chance of showing good performance in the future. In essence, they are looking for new paradigms in banking, financial markets and regulation.

Frank Lierman

Papers

Technology and finance : challenges for financial markets, business strategies and policy makers

Financial Markets in Central and Eastern Europe : Stability and Efficiency

Competition and Profitability in European Financial Services: Strategic, Systemic and Policy Issues

Financial markets in Central and Eastern Europe : stability and efficiency perspectives

New Paradigms in Banking, Financial Markets and Regulation?