Procyclical Behavior of Institutional Investors During the Recent Financial Crisis
Procyclical Behavior of Institutional Investors During the Recent Financial Crisis

Author: Mr.Michael G Papaioannou

Publisher: International Monetary Fund

Published: 2013-09-11

Total Pages: 53

ISBN-13: 1484375556

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This paper (i) provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis; (ii) identifies the main factors that could account for such behavior; (iii) discusses the implications of procyclical behavior; and (iv) proposes a framework for sound investment practices for long-term investors. Such procyclical investment behavior is understandable and may be considered rational from an individual institution’s perspective. However, our main conclusion is that behaving in a manner consistent with longterm investing would lead to better long-term, risk-adjusted returns and, importantly, could lessen the potential adverse effects of the procyclical investment behavior of institutional investors on global financial stability.

Financial Crises Explanations, Types, and Implications
Financial Crises Explanations, Types, and Implications

Author: Mr.Stijn Claessens

Publisher: International Monetary Fund

Published: 2013-01-30

Total Pages: 66

ISBN-13: 1475561008

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This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.

Push Factors and Capital Flows to Emerging Markets
Push Factors and Capital Flows to Emerging Markets

Author: Mr.Eugenio Cerutti

Publisher: International Monetary Fund

Published: 2015-06-22

Total Pages: 43

ISBN-13: 1513526634

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This paper analyzes the behavior of gross capital inflows across 34 emerging markets (EMs). We first confirm that aggregate inflows to EMs co-move considerably. We then report three findings: (i) the aggregate co-movement conceals significant heterogeneity across asset types as only bank-related and portfolio bond and equity inflows do co-move; (ii) while global push factors in advanced economies mostly explain the common dynamics, their relative importance varies by type of flow; and (iii) the sensitivity to common dynamics varies significantly across borrower countries, with market structure characteristics (especially the composition of the foreign investor base and the level of liquidity) rather than borrower country’s institutional fundamentals strongly affecting sensitivities. Countries relying more on international funds and global banks are found to be more sensitive to push factors. Our findings suggest that EMs need to closely monitor their lenders and investors to assess their inflow exposures to global push factors.

Procyclicality in Central Bank Reserve Management
Procyclicality in Central Bank Reserve Management

Author: Jukka Pihlman

Publisher: International Monetary Fund

Published: 2010-06-01

Total Pages: 29

ISBN-13: 1455201332

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A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis, when many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety. We estimate that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector. Although clearly not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector, which required offsetting measures by other central banks such as the Federal Reserve and Eurosystem central banks. The behavior highlights a potential conflict between the reserve management and financial stability mandates of central banks. This paper analyzes reserve managers’ actions during the crisis and draws some lessons for strategic asset allocation of reserves going forward.

The Regulatory Responses to the Global Financial Crisis
The Regulatory Responses to the Global Financial Crisis

Author: Mr.Stijn Claessens

Publisher: International Monetary Fund

Published: 2014-03-14

Total Pages: 39

ISBN-13: 1484336658

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We identify current challenges for creating stable, yet efficient financial systems using lessons from recent and past crises. Reforms need to start from three tenets: adopting a system-wide perspective explicitly aimed at addressing market failures; understanding and incorporating into regulations agents’ incentives so as to align them better with societies’ goals; and acknowledging that risks of crises will always remain, in part due to (unknown) unknowns – be they tipping points, fault lines, or spillovers. Corresponding to these three tenets, specific areas for further reforms are identified. Policy makers need to resist, however, fine-tuning regulations: a “do not harm” approach is often preferable. And as risks will remain, crisis management needs to be made an integral part of system design, not relegated to improvisation after the fact.

Global Waves of Debt
Global Waves of Debt

Author: M. Ayhan Kose

Publisher: World Bank Publications

Published: 2021-03-03

Total Pages: 403

ISBN-13: 1464815453

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The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.

Lessons of the Financial Crisis for Future Regulation of Financial Institutions and Markets and for Liquidity Management
Lessons of the Financial Crisis for Future Regulation of Financial Institutions and Markets and for Liquidity Management

Author: International Monetary Fund. Monetary and Capital Markets Department

Publisher: International Monetary Fund

Published: 2009-04-02

Total Pages: 28

ISBN-13: 149833637X

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This paper seeks to draw lessons for financial sector regulation and supervision and central bank liquidity management from the ongoing crisis, focusing principally on implications for the future rather than on immediate crisis management policies. Inadequacies in macroeconomic policies and the design of the international financial architecture exposed in the crisis will also have to be addressed to make the suggested changes in the regulatory framework effective.

Central Bank Reserve Management
Central Bank Reserve Management

Author: Age Bakker

Publisher: Edward Elgar Publishing

Published: 2007-01-01

Total Pages: 271

ISBN-13: 1782541675

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This book addresses the welfare gains and costs of accumulating foreign exchange reserves and the implications for the functioning of the global financial system. The tremendous growth of central bank reserves has led to an increased focus on raising returns in addition to the traditional preference central banks have for maintaining liquid portfolios. Issues such as asset and currency diversification, the impact of new accounting rules and the profit distribution agreements with the government are analysed, adding new insights to the current debate on the optimal size of central bank reserves. This book brings together a wide range of experts from central banks, investment banks and the academic community.

Institutionalizing Countercyclical Investment
Institutionalizing Countercyclical Investment

Author: Bradley Jones

Publisher: International Monetary Fund

Published: 2016-02-29

Total Pages: 43

ISBN-13: 1513513338

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Do portfolio shifts by the world’s largest asset owners respond procyclically to past returns, or countercyclically to valuations? And if countercyclical investment (with both market-stabilizing and return-generating properties) is a public and private good, how might asset owners be empowered to do more of it? These two questions motivate this study. Based on analysis of representative portfolios (totaling $24 trillion) for a range of asset owners (central banks, pension funds, insurers and endowments), portfolio changes typically appear procyclical. In response, I suggest a framework aimed at jointly bolstering long-term returns and financial stability should: (i) embed governance practices to mitigate ‘multi-year return chasing;’ (ii) rebalance to benchmarks with factor exposures best suited to long-term investors; (iii) minimize principal-agent frictions; (iv) calibrate risk management to minimize long-term shortfall risk (not short-term price volatility); and (v) ensure regulatory conventions do not amplify procyclicality at the worst possible times.

Global Financial Stability Report, April 2014
Global Financial Stability Report, April 2014

Author: International Monetary Fund

Publisher: International Monetary Fund

Published: 2014-04-09

Total Pages: 184

ISBN-13: 1475577664

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The April 2014 Global Financial Stability Report finds that, despite much progress, the global financial system remains in a transitional period with stability conditions far from normal. Advanced and emerging market economies alike need to make a successful shift from liquidity- to growth-driven markets, which will require a number of elements, including a normalization of U.S. monetary policy; financial rebalancing in emerging markets; further progress in the euro area integration; and continued implementation of “Abenomics” in Japan. This report also examines how changes in the investor base and financial deepening affect emerging market economies as well as looks at the issue of banks considered too important to fail, providing new estimates of the implicit funding subsidy these banks receive.