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Experts reviews

25.03.2014
Inci Otker- Robe,Ines Gonzalez del Mazo, Swati Ghosh
Shadow banking comprises a set of activities, markets, contracts, and institutions that operate partially (or fully) outside the traditional commercial banking sector, and, as such, are either lightly regulated or not regulated at all. The distinguishing feature of shadow banking is that it decomposes the process of credit intermediation into a sequence of discrete operations (FSB 2011a, exhibit 1). A shadow banking system can be composed of a single entity that intermediates between end-suppliers and end-borrowers of funds, or it could involve multiple entities forming a chain (FSB 2011a; Pozsar and others 2010).2 In the latter case, one or more of the entities in the chain might be a bank or a bank-owned entity, but these operations are typically performed by separate specialist nonbank entities that interact across the wholesale financial market and rely on the wholesale market for funding (Comotto 2012). In doing so, shadow banks redistribute risk through credit, maturity and liquidity transformation, raising systemic risks, especially if combined with high leverage.
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25.03.2014
Boøek Vašíèek,Kateøina Šmídková,Marek Rusnák,Jakub Matìjù,Tomas Havranek,Jan Babecký
Using a panel of 40 EU and OECD countries for the period 1970–2010 we construct an early warning system. The system consists of a discrete and a continuous model. In the discrete model, we collect an extensive database of various types of economic crises called CDEC 40-40 and examine potential leading indicators. In the continuous model, we construct an indexof real crisis incidence as the response variable. We determine the optimal lead employing panel vector autoregression for each potential indicator, and then select useful indicators employing Bayesian model averaging. We re-estimate the resulting specification by system GMM and, to allow for country heterogeneity, additionally evaluate the random coefficients estimator and divide countries into clusters. Our results suggest that global variables are among the most useful early warning indicators. In addition, housing prices emerge consistently as important source of risk. Finally, we simulate the past effectiveness of several policy instruments and conclude that some central bank tools (for example, reserves) could be useful in mitigating crisis incidence.
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04.02.2014
Dirk J Bezemer
This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees, and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.
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04.02.2014
Phillip Inman
Only the Bank of England appears to understand the counter-cyclical argument at the moment. Every other regulator in Europe is still exaggerating the cyclical downturn with their policies. The Bank of England wants to encourage investment in riskier securities by making safe haven assets yield negative gains. Moody's encourages the opposite - a flight to safe haven assets after investors digest its message that riskier assets are a route to bankruptcy. This episode is one of many that have worked to undermine the efforts of central banks and governments that make even the slightest move to stem the deflationary trend.
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09.01.2014
Jeffrey J. Schott
This paper assesses the future of the world trading system in the face of diminishing returns from current multilateral trade negotiations and the proliferation of bilateral and regional trade agreements (RTAs). It traces the evolution of the postwar trading regime from the early decades of the General Agreement on Tariffs and Trade (GATT) that were dominated by the United States and the European Communities to the new World Trade Organization (WTO) in which developing countries have begun to play a more important role, especially in the current Doha Round of multilateral trade negotiations (MTNs). The paper discusses the substantive and tactical reasons why the Doha Round has progressed so grudgingly and is unlikely to achieve its ambitious objectives. It then examines why developing countries increasingly have turned to RTAs to complement WTO talks, whether these pacts benefit or hinder MTNs, and how RTAs affect the influence of developing countries in the WTO. The final section of the paper looks at the WTO going forward and posits that, after the Doha Round, the trading system in the 21st century requires substantial reform. The problems of the Doha Round and the proliferation of regionalism confront WTO members with three central challenges: multilateralize multilateralism, multilateralize regionalism, modernize multilateralism.
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