Too Connected to Fail? Inferring Network Ties from Price Co-movements
Jakob Bosma, Michael Koetter, Michael Wedow
Journal of Business and Economic Statistics,
Nr. 1,
2019
Abstract
We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both credit default swap (CDS)-based and equity-based connections are significant predictors of bailouts. Supplementary materials for this article are available online.
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China’s Monetary Policy Communication: Frameworks, Impact, and Recommendations
Michael McMahon, Alfred Schipke, Xiang Li
IMF Working Paper No. 18/244,
2018
Abstract
Financial markets are eager for any signal of monetary policy from the People’s Bank of China (PBC). The importance of effective monetary policy communication will only increase as China continues to liberalize its financial system and open its economy. This paper discusses the country’s unique institutional setup and empirically analyzes the impact on financial markets of the PBC’s main communication channels, including a novel communication channel. The results suggest that there has been significant progress but that PBC communication is still evolving toward the level of other major economies. The paper recommends medium-term policy reforms and reforms that can be adopted quickly.
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The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries
Hans Degryse, Thomas Lambert, Armin Schwienbacher
Economic Journal,
Nr. 611,
2018
Abstract
Voting rights were initially limited to wealthy elites providing political support for stock markets. The franchise expansion induces the median voter to provide political support for banking development, as this new electorate has lower financial holdings and benefits less from the riskiness and financial returns from stock markets. Our panel data evidence covering the years 1830–1999 shows that tighter restrictions on the voting franchise induce greater stock market development, whereas a broader voting franchise is more conducive to the banking sector, consistent with Perotti and von Thadden (2006). The results are robust to controlling for other institutional arrangements and endogeneity.
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Economic Transition in Unified Germany and Implications for Korea
Hyung-Gon Jeong, Gerhard Heimpold
H.-G. Jeong and G. Heimpold (eds.): Economic Transition in Unified Germany and Implications for Korea. Policy References 17-13. Sejong: Korea Institute for International Economic Policy,
2017
Abstract
The reunification of Germany, which marked the end of the Cold War in the 20th century, is regarded as one of the most exemplary cases of social integration in human history. Nearly three decades after the German reunification, the economic and social shocks that occurred at the beginning of the reunification process have largely been resolved. Moreover, the unified Germany has grown into one of the most advanced economies in the world.
The unification process that Germany underwent may not necessarily be the way that the Republic of Korea would choose. However, the economic and social exchanges between East and West Germany prior to unification, and the cooperation in a myriad of policies based on these exchanges, served as the crucial foundation for unification. The case of Germany will surely help us find a better way for the re-unification of the Korean Peninsula.
In this context, this is the first edition of a joint research which provides diverse insights on social and economic issues during the process of unification. It consists of nine chapters whose main topics include policies on macroeconomic stabilization, the privatization of state-owned enterprises in East Germany, labor policies and the migration of labor, integration of the social safety nets of the North and South, and securing finances for reunification. To start with, the first part covers macroeconomic stabilization measures, which include policies implemented by the federal government of Germany to overcome macroeconomic shocks directly after the reunification. There was a temporary setback in the economy at the initial phase of reunification as the investment per GDP went down and the level of fiscal debt escalated, reverting to its original trend prior to the reunification. While it appears the momentum for growth was compromised by reunification from the perspective of growth rate of real GDP, this state did not last long and benefits have outpaced the costs since 2000.
In the section which examines the privatization of state-owned enterprises in East Germany, an analysis was conducted on the modernization of industrial infrastructure of East German firms. There was a surge in investment in East German area at the beginning stages but this was focused on a specific group of firms. Most of the firms were privatized through unofficial channels, with a third of these conducted in a management buy-out (MBO) process that was highly effective. Further analysis of a firm called Jenoptik, which was successfully bailed out, is incorporated as to draw implications of its accomplishments.
In the section on migration, we examine how the gap between the unemployment rates in the West and East have narrowed as the population flow shifted from the West to East. Consequently, there was no significant deviation in terms of the Gross Regional Domestic Product (GRDP) per capita in each state of East Germany. However, as the labor market stabilized in East Germany and population flows have weakened, the deviation will become larger. Meanwhile, if we make a prediction about the movement of population between the North and the South, which show a remarkable difference in their economic circumstances, a radical reunification process such as Germany’s case would force 7% of the population of the North to move towards the South. Upon reunification, the estimated unemployment rate in North Korea would remain at least 30% for the time being. In order to reduce the initial unemployment rate, it is crucial to design a program that trains the unemployed and to build a system that predicts changes in labor demand.
It seems nearly impossible to apply the social safety nets of the South to the North, as there is a systemic difference in ideologies. Taking steps toward integration would be the most suitable option in the case of the Koreas. We propose to build a sound groundwork for stabilizing the interest rates and exchange rates, maintain stable fiscal policies, raise momentum for economic growth and make sure people understand the means required to financially support the North in order to reduce the gap between the two.
This book was jointly organized and edited by Dr. Hyung-gon Jeong of the Korea Institute for International Economic Policy (KIEP) and Dr. Gerhard Heimpold of the Halle Institute for Economic Research (IWH). We believe that this report, which examines numerous social and economic agendas that emerged during the reunification of Germany, will provide truly important reference for both Koreas. It is also our view that it will serve as a stepping-stone to establish policies in regard to South-North exchanges across numerous sectors prior to discussions of reunification. KIEP will continue to work with IWH and contribute its expertise to the establishment of grounds for unification policies.
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Too connected to fail? Wie die Vernetzung der Banken staatliche
Rettungsmaßnahmen vorhersagen kann
Friederike Altgelt, Michael Koetter
Wirtschaft im Wandel,
Nr. 4,
2017
Abstract
Seit der globalen Finanzkrise 2007/2008 liegt aufgrund ihrer Schlüsselrolle für ein funktionierendes Finanzsystem ein besonderer Fokus auf den so genannten systemrelevanten Finanzinstitutionen (systemically important financial institutions, SIFIs). Neben der Größe von Finanzinstitutionen ist auch das Ausmaß ihrer Vernetzung im internationalen Finanzsystem entscheidend für die Klassifikation als systemrelevant. Obwohl die Vernetzung von Banken untereinander in der Regel schwer zu messen ist, kann sie aus der Entwicklung von Prämien von Kreditausfallversicherungen (den so genannten Credit Default Swap (CDS) Spreads) und Aktienrenditen abgeleitet werden. Dieser Beitrag untersucht, inwieweit sich mit Hilfe der sich daraus ergebenden Co-Crash-Probability vor der Finanzkrise vorhersagen lässt, welche Finanzinstitutionen während der Krise Teil von staatlichen Rettungsprogrammen (bailout programmes) wurden.
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Delay Determinants of European Banking Union Implementation
Michael Koetter, Thomas Krause, Lena Tonzer
Abstract
To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.
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