Working Papers
2000
December 1, 2000
Depositor Behavior and Market Discipline in Colombia
Description: This study examines how depositors choose among different banks and over time in Colombia, focusing on whether they discipline bank behavior. By controlling for a more comprehensive set of risk/return factors, the study improves upon conventional market discipline tests. Panel data estimations for 1985-99 show that depositors prefer banks with stronger fundamentals, and that banks tend to improve their fundamentals after being “punished” by depositors. Banks with stronger fundamentals benefit from lower interest costs and higher lending rates. Market (or “regulatory”) discipline therefore appears to exist in Colombia, perhaps thanks to certain key design features of the deposit insurance scheme.
December 1, 2000
Issues in the Unification of Financial Sector Supervision
Description: The paper considers the generic arguments for and against the creation of a unified regulatory agency, covering each of the main types of financial institutions (banks, insurers and securities firms). The strongest arguments for unification are the enhanced oversight of financial conglomerates and the economies of scale they can potentially deliver. However, there are also a number of potentially serious disadvantages to unification, especially the risk that the change process will be mismanaged and will result in a reduction in regulatory capacity. The issue requires careful deliberation and ultimately depends on a matrix of factors which vary in importance from country to country.
December 1, 2000
Measuring Integrated Market and Credit Risks in Bank Portfolios: An Application to a Set of Hypothetical Banks Operation in South Africa
Description: The banking crises of the 1990s emphasize the need to model the connections between volatility and the potential losses faced by financial institutions due to correlated market and credit risks. We present a simulation model that explicitly links changes in the financial environment and the distribution of future bank capital ratios. This forward-looking quantitative risk assessment methodology allows banks and regulators to identify risks before they materialize and make appropriate adjustments to banks’ portfolios. This model was applied to the study of the risk profile of the largest South African banks in the context of the Financial System Stability Assessment (FSSA) (1999).
December 1, 2000
An Incentive Approach to Identifying Financial System Vulnerabilities
Description: This paper underscores the importance of the assessment of incentives of the main agents in a financial system as a key element in the analysis of financial system vulnerability and the surveillance over the financial system. We outline a diagnostic approach for the assessment of incentives. This approach highlights the need for additional research on the relationship between institutional structures and financial vulnerabilities.
December 1, 2000
Inflation in Albania
Description: As Albania has succeeded in reducing inflation to very low levels, understanding the driving forces behind the behavior of the price level becomes increasingly important for policy design. In particular, persistent changes in relative prices may contribute to movements of the aggregate price level, and policymakers need to decide to what extent such effects should be accommodated. The present study provides insight into the nature and extent of relative price adjustments during the transition period, and argues that some of their inflationary effects should not be resisted.
December 1, 2000
Measuring off-Balance-Sheet Leverage
Description: The simultaneous unwinding of leveraged positions can trigger financial market turbulence. Although balance-sheet measures of leverage are available, it is useful to construct a measure of leverage that incorporates both on- and off-balance-sheet activities. This paper provides measures of leverage implicit in derivative contracts by decomposing the contracts into cash market equivalent components. A leverage ratio can then be calculated for this replicating portfolio, which consists of own funds (equity) and borrowed funds equivalents (debt). Methods for aggregating leverage by institution and by markets are presented. The interaction between leverage and risk is discussed, and a modified capital adequacy ratio is calculated, which captures off-balance-sheet exposure.
December 1, 2000
Demand-Side Stabilization Policies: What is the Evidence of their Potential?
Description: Using disaggregated data for the United States, this paper explores the effects of the variability of fiscal and monetary policy shocks. Higher variability of government spending shocks around a steady-state growth trend results, on average, in a decline in aggregate demand growth and inflation, with limited effects on output growth. On the other hand, higher variability of monetary shocks results, on average, in an increase in inflation and a decline in output growth. These results indicate the desirability of avoiding large fluctuations over time in either government spending or the money supply.
December 1, 2000
Loan Review, Provisioning, and Macroeconomic Linkages
Description: Loan review is a process routinely used by banks to assess the current value of loan portfolios. Provisioning is a technique to translate loan review results into the balance sheet. It allows for ongoing valuation of loans. Both are core elements of credit risk management and important to prudential oversight. As illustrated in this paper, valuation feeds into indicators of overall bank soundness and key macroprudential indicators. Country practices and recent moves to more forward-looking models are surveyed. Macroeconomic linkages are highlighted, including tax treatment of provisions, variables of the monetary survey, and procyclical aspects of loan valuation systems.
December 1, 2000
Explaining Economic Growth with Imperfect Credit Markets
Description: The purpose of this paper is to explain the humped-shaped behavior of the growth rate. Within a dynamic general equilibrium framework, it is found that, in the early stages of development, the source of growth is the reallocation of resources from sectors low-productivity sectors to high-productivity sectors (“extensive growth”), resulting in increasing growth rates. In the middle and mature stages of development, the source of growth is the higher average productivity achieved by the competition among entrepreneurs (“intensive growth”). As a result, the growth rate could be increasing in the middle stage and then displays a decreasing pattern during the mature stage.
December 1, 2000
Northwest of Suez: The 1956 Crisis and the IMF
Description: Egypt’s nationalization of the Suez Canal in 1956 and the failed attempt by France, Israel, and Britain to retake it by force constituted a serious political crisis with significant economic consequences. For the United Kingdom, it engendered a financial crisis as well. That all four of the combatants sought and obtained financial assistance from the IMF was highly unusual for the time and had a profound effect on the development of the Fund. This case study illustrates the complexities in isolating the current account as the basis for determining a balance of payments “need” and shows that the speculative attack on sterling—and the Fund’s response to it—were remarkably similar to financial crises in the 1990s.