Euro Area – Q&A on QE


By Reza Moghadam and Ranjit Teja 

As inflation has sunk in the euro area, talk of quantitative easing (QE)—and misgivings about it—have soared. Some think QE is not needed; others that it would not work; and yet others that it only creates asset bubbles and may even be “illegal.” In its latest report on the euro area, the IMF assesses recent policy action positively but adds that “… if inflation remains too low, the ECB should consider a substantial balance sheet expansion, including through asset purchases.” Given all the reservations, would the juice be worth the squeeze?

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U.S. Interest Rates: The Potential Shock Heard Around the World


By Serkan Arslanalp and Yingyuan Chen

As the financial market turbulence of May 2013 demonstrated, the timing and management of the U.S. Fed exit from unconventional monetary policy is critical. Our analysis in the latest Global Financial Stability Report  suggests that if the U.S. exit is bumpy (Figure 1), although this is a tail risk and not our prediction, the result could lead to a faster rise in U.S long-term Treasury rates that impacts other bond markets. This could have implications not only for emerging markets, as widely discussed, but, also for other advanced economies.

figure 1

Indeed, historical episodes show that sharp rises in US treasury rates lead to increases in government bond yields across other major advanced economies.

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Are Banks Too Large? Maybe, Maybe Not


By Luc Laeven, Lev Ratnovski, and Hui Tong

Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of “too-big-to-fail” banks has triggered an active debate on the optimal size and range of activities of banks.

But this debate remains inconclusive, in part because the economics of an “optimal” bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.

We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an “optimal” bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.

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Giving Credit Where Credit is Due: How to Design Policies that Work


Oppers_desk_portraitBy Erik Oppers

What’s up with weak credit? Five years into the economic crisis credit is still barely growing, and even declining in many advanced economies. Weak credit growth is a major factor holding back the economic recovery and governments have tried every policy they can come up with to jumpstart credit. Still, banks don’t seem to want to lend. Or is it the corporate sector and households that can’t afford to borrow? Many feel these policies are not working. What are policymakers to do?

Our analysis in the most recent Global Financial Stability Report tries to shed light on all this darkness to help countries figure out how to make these policies work. It turns out there is no cookie-cutter solution: the problem differs from country to country and changes over time. For example, in a number of euro area countries, a lackluster demand for loans limited credit growth early in the crisis, but then banks became reluctant to supply more loans as the crisis in Europe intensified in 2012.

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Fixing the Financial Sector: A Change the UK Must Bank On


Krishna SrinivasanBy Krishna Srinivasan

The UK economy is a long way from a strong and durable recovery. Growth has been flat for more than two years now, per capita income is about 7 percent below its pre-crisis peak, unemployment is elevated at 7.8 percent, with youth unemployment alarmingly high at 21 percent, and credit to the economy remains severely constrained.

Recent data are, however, encouraging, and policies should capitalize on the nascent signs of recovery to secure strong growth and rebalance the economy.  Fixing the financial sector, including by addressing banks’ asset quality, is a pre-requisite for a durable UK recovery. See the IMF’s assessment of the UK economy.

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Banking on Reform: Can Volcker, Vickers and Liikanen Resolve the Too-Important-to-Fail Conundrum?


by José Viñals and Ceyla Pazarbasioglu

The global regulatory landscape governing banks has changed from its pre-crisis status quo.

In addition to the Group of Twenty advanced and emerging economies led global regulatory reforms, like Basel III, the United States and the United Kingdom have decided to directly impose limits on the scope of banks’ businesses. The European Union is contemplating a similar move.

We discussed these structural banking reforms a few weeks ago with officials from finance ministries, central banks, and supervisory authorities from around the world during the IMF and World Bank Spring Meetings. The design and implementation of these measures will have implications for global financial stability and sustainable growth, so we wanted to bring people together for the first global debate of the issue with G20 and other countries.

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The Evolving Role of the Banking Systems in Central, Eastern and Southeastern Europe


moghadamBy Reza Moghadam

What has been the role of foreign banks in financing growth and convergence in Central, Eastern and Southeastern Europe, and how is that role changing? This is discussed in the first issue of a new series of analytical work on the region called Regional Economic Issues, which we launched at a joint IMF/Czech National Bank conference two weeks ago in Prague.

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