The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. As a consequence, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.

/pdf/macroprudential-policy-a-literature-review-54icqxy2zp.pdf

Macroprudential policy – a literature review

Survey researchers routinely conduct studies that use different methods of data collection and inference. But for at least the past 60 years, the probabilitysampling framework has been used in most surveys. More recently, concerns about coverage and nonresponse coupled with rising costs have led some to wonder whether non-probability sampling methods might be an acceptable alternative, at least under some conditions (Groves 2006; Savage and Burrows 2007). A wide range of non-probability designs exist and are being used in various settings, including case control studies, clinical trials, evaluation research

Summary Report of the AAPOR Task Force on Non-probability Sampling

This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a * We thank Philipp Hartmann for inspiring and supporting this project throughout all stages. Philipp also invented the indicator’s name and its abbreviation CISS (pronounced like “kiss”). We thank Tommy Kostka for excellent research assistance and for several good ideas which helped improving the CISS. Very helpful comments from Geert Bekaert, Wolfgang Lemke, Simone Manganelli and an anonymous referee are gratefully acknowledged. We finally thank participants at the Euro Area Business Cycle Network conference “Econometric Modelling of Macro-Financial Linkages” in Florence and the 5th CSDA International Conference on Computational and Financial Econometrics in London for fruitful discussions and comments. However, the views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank, the Eurosystem or the Magyar Nemzeti Bank.  Corresponding author: Tel. +49 69 1344 7065.

/pdf/ciss-a-composite-indicator-of-systemic-stress-in-the-4aucfr62qw.pdf

CISS - A Composite Indicator of Systemic Stress in the Financial System *

https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp08-36.pdf

The Role of Bank Capital in the Propagation of Shocks

(ProQuest: ... denotes formulae omitted.)The U.S. economy is currently experiencing a period of significant financial stress. This stress has contributed to the downturn in the economy by boosting the cost of credit and making businesses, households, and financial institutions highly cautious. To alleviate the financial stress and counteract its effects on the economy, the Federal Reserve has reduced the federal funds rate target substantially and undertaken unprecedented actions to support the functioning of financial markets. There will come a point, however, when the Federal Reserve needs to remove liquidity from the economy and unwind special lending programs to ensure a return to sustainable growth with low inflation.In past recoveries, the decision when to tighten policy was based mainly on the strength of business and consumer spending and the degree of upward pressure on prices and wages. An additional element in the current exit strategy will be determining if financial stress is no longer high enough to endanger economic recovery. As financial conditions begin to improve, the various measures of financial stress that the Federal Reserve monitors may give mixed signals. In this situation, policymakers would greatly benefit from having a single, comprehensive index of financial stress. Such an index could also prove valuable further down the road, when the Federal Reserve might again need to decide whether financial stress was serious enough to warrant special attention.This article presents a new index of financial stress - the Kansas City Financial Stress Index (KCFSI). The article explains how the components of the KCFSI capture key aspects of financial stress and shows that high values of the KCFSI have tended to coincide with known periods of financial stress. The article also shows that the KCFSI provides valuable information about future economic growth.The first section of the article discusses the key phenomena that economists generally associate with financial stress. The next section describes the set of financial variables selected to represent these features of financial stress and explains how the variables are combined in the KCFSI. The third section examines the behavior of the KCFSI during past episodes of financial stress and explains how the index can be used to determine the severity of financial stress. The fourth section examines the link between the KCFSI and economic activity, including the transmission of financial stress to economic activity through changes in bank lending standards.I. KEY FEATURES OF FINANCIAL STRESSIn most general terms, financial stress can be thought of as an interruption to the normal functioning of financial markets. Agreeing on a more specific definition is not easy, because no two episodes of financial stress are exactly the same. Still, economists tend to associate certain key phenomena with financial stress. The relative importance of these phenomena may differ from one episode of financial stress to another. However, every episode seems to involve at least one of the phenomena, and often all of them.Increased uncertainty about fundamental value of assets. One common sign of financial stress is increased uncertainty among lenders and investors about the fundamental values of financial assets. The fundamental value of an asset is the present discounted value of the future cash flows, such as dividends and interest payments. Increased uncertainty about these fundamental values typically translates into greater volatility in the market prices of the assets.In some cases, increased uncertainty about the fundamental values of assets reflects greater uncertainty about the outlook for rhe economy as a whole and for specific sectors. The prospective cash flows from stocks, bonds, and loans all depend on future economic conditions. As a result, heightened uncertainty about economic conditions can cause lenders and investors to become less sure of the present discounted values of these cash flows. …

/pdf/financial-stress-what-is-it-how-can-it-be-measured-and-why-1sl1aggkrd.pdf

Financial Stress: What Is It, How Can It Be Measured, and Why Does It Matter?

Measuring financial stress in a developed country: An application to Canada

The authors conduct a counterfactual simulation of the proposed rules under the new Basel Capital Accord (Basel II), including the revised treatment of expected and unexpected credit losses proposed by the Basel Committee in October 2003.

/pdf/the-new-basel-capital-accord-and-the-cyclical-behaviour-of-4bjrl1ohjr.pdf

The New Basel Capital Accord and the Cyclical Behaviour of Bank Capital

Within the next several years, implementation of an updated global bank capital accord (Basel II) will commence in a number of countries. The new framework is designed to align bank capital more closely with the likelihood of financial losses and thereby ensure that appropriate levels of capital are held by the banking system. In particular, capital requirements for credit risk will be modified along the lines of how the most sophisticated banks currently calculate capital for their loan portfolios. Since credit risk is strongly related to the business cycle, however, it is useful to examine the degree to which minimum capital requirements for banks are likely to be cyclical. This is achieved by conducting a counterfactual simulation of the proposed rules. When applied to Canadian banking-system data over the period 1984­2003, it is found that minimum required bank capital, as specified by Basel II's first "pillar" for its calculation, will likely fall in level terms. Perhaps more importantly, sensitivity analysis, including that based on different compositions of bank loan portfolios, shows the potential for an increase in the volatility of minimum capital requirements. In addition, changes in minimum required capital and provisions will likely be countercyclical. That is, they will increase during recessions and fall during economic booms. To the extent that these capital requirements influence banks' lending behaviour, there are potential implications for the performance of the economy.

Basel II and the Cyclicality of Bank Capital

The four essays published here provide a useful overview for anyone interested in understanding the issues and policy environment surrounding financial system stability.

/pdf/essays-on-financial-stability-1h1wjtqv0i.pdf

Essays on Financial Stability

Summary. A number of central banks and other institutions publish their own business conditions surveys that rely on complex non-probability sampling methods. The results of these surveys influence policy decisions and affect expectations in financial markets. To date, no one has assessed the accuracy of these surveys because their complex (and often unique) sampling method renders this assessment non-trivial. The paper describes a novel approach for modelling unique sampling methods when many constraints (including quota sampling and clustering) are imposed. When no closed form solution exists, we show how to compute the selection probabilities from each firm in the known population and the dispersion of the sampling distribution by using Monte Carlo techniques. This method can also be used to assess the appropriateness of a survey sample size. Our approach is applicable to many major surveys conducted by various central banks and institutes across the Organisation for Economic Co-operation and Development. To demonstrate the feasibility of our approach, we apply it to the Bank of Canada's ‘Business outlook survey’. Although the survey's coverage is significantly limited, we find, under certain assumptions, no evidence that the Bank of Canada's firm selection process results in a wider dispersion in the sampling distribution than the stratified random sample.

Assessing the accuracy of non-random business conditions surveys: a novel approach

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