Template-type: ReDIF-Article 1.0 Author-Name: OECD Title: The recent financial market turmoil, contagion risks and policy responses Abstract: This article examines the recent financial market turmoil, contagion risks and policy responses. It begins by looking at the origins of the crisis, then considers the impact of the crisis on markets and the financial sector, and concludes by offering some policy lessons from the downturn. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 9-28 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLC3VJCMV Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Title: The subprime crisis: Size, deleveraging and some policy options Abstract: The paper revises our previous USD 300 bn estimate for mortgage related losses to a range of USD 350-420 bn. In doing this the paper explicitly rejects the previous approach based on implied defaults from ABX pricing, because these prices are affected by illiquidity and extreme volatility; they will likely lead to misleading estimates of losses. Instead it builds a proper default model approach and allows for recovery of collateral via house sales over time. The paper separates out the losses due to commercial banks in the US, and goes on to look at the implied deleveraging required to meet capital standards. It could take 6-12 months for banks to offset losses via earnings alone, depending on Fed rate cuts and the dividend policy of banks. Since even more capital than this is required if banks were to expand their balance sheets, the paper looks at possibilities for capital injections from groups like sovereign wealth funds; and it also looks at a novel plan for the use of public money with an RTC-style approach and the issue of zero coupon bonds. Finally the paper looks at the issues of moral hazard, the likely size of the impact in Europe and Asia and non-bank corporate leverage. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 29-53 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLC3R1346 Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Financial turbulence: Some lessons regarding deposit insurance Abstract: One specific aspect of financial safety nets that has been in the spotlight of late is deposit insurance. As events in markets are still unfolding, it is too soon to draw definitive conclusions regarding the effects of the crisis and the adequacy of financial safety nets, including deposit insurance arrangements. Nonetheless, preliminary suggestions for policy are emerging and the article singles out four areas for special attention. First, as regards coverage, deposit insurance systems with low levels of coverage and/or partial insurance may not be effective in preventing bank runs. Second, for an explicit deposit insurance system to be effective, depositors need to understand the extent of and limits to existing deposit protection schemes. Third, when different institutions are entrusted with responsibilities that are relevant in a crisis situation, ex ante arrangements delimiting the scope of the different responsibilities as well as the respective powers may not be sufficient to ensure co-ordination that is as close and smooth as needed. Fourth, the question as to whether a specific bankruptcy regime for banks is needed remains an important issue. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 55-79 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLC39RHBR Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Challenges related to financial guarantee insurance Abstract: Traditionally, bond insurers have provided guarantees of payments on municipal bonds, where defaults have been very limited. But since the late 1990s they have become increasingly involved as guarantors of elements of various structured financial products: in particular, the credit enhancements provided by these entities have played an important role in making securities based on sub-prime loans attractive to a wide range of investors. It is this trend change in their activity that has become the focal point in concerns about the health of these entities that have grown during the financial turbulence. The note identifies three policy issues that arise in the context of the current challenges facing these entities and it draws some preliminary findings. First, while concerns regarding the potential financial stability implications of further downgrades and/or failures of some of these companies have ebbed somewhat from their peaks in early 2008, the situation still bears monitoring. Second, current developments raise questions regarding the role of financial guarantors in specific financial market segments. In this context, there appears to be a public interest in the continued availability of guarantees on payments on municipal bonds. Private solutions seem to be forthcoming. Third, transparency of the financial guarantee insurance sector is limited. In this context, the performance of credit rating agencies in providing guidance for investors regarding the quality of the guarantees provided by financial guarantors appears to have been uneven. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 81-113 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLC2WDM5D Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Yu-Wei Hu Author-Name: Juan Yermo Title: Sovereign wealth & pension fund issues Abstract: Sovereign Wealth Funds (SWFs) are pools of assets owned and managed directly or indirectly by governments to achieve national objectives. These funds have raised concerns about: i) financial stability; ii) corporate governance and iii) political interference and protectionism. At the same time governments have formed other large pools of capital to finance public pension systems, i.e. Public Pension Reserve Funds (PPRFs). SWFs are set up to diversify and improve the return on foreign exchange reserves or commodity revenue, and to shield the domestic economy from fluctuations in commodity prices. PPRFs are set up to contribute to financing pay-as-you-go pension plans. The total of SWF pools is estimated at around USD 2.6 trillion in 2006/7, and is getting bigger rapidly, owing to current exchange rate policies and oil prices. The total amount for PPRFs is even larger, around USD 4.4 trillion in 2006/7, if the US Trust Fund is included (USD 2.2 trillion if excluded). SWFs and PPRFs share some characteristics, hence give rise to similar concerns. However, their objectives, investment strategies, sources of funding and transparency requirements differ. There is concern about strategic and political objectives of SWFs, and their impact on exchange rates and asset prices. But SWFs also provide mechanisms for breaking up concentrations of portfolios that increase risk. Enhancing governance and transparency of SWFs is important, but such considerations have to be weighed against commercial objectives. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 117-132 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLC2QCNVK Template-type: ReDIF-Article 1.0 Author-Name: Juan Yermo Title: Governance and investment of sovereign and public pension reserve funds in selected OECD countries Abstract: Many countries around the world are partly prefunding their otherwise pay-as-you-go (PAYG) financed social security systems by establishing or further developing existing public pension reserve funds (PPRFs). Most OECD countries have put in place internal and external governance mechanisms and investment controls to ensure the sound management of these funds and better isolate them from undue political influence. These structures and mechanisms are in line with OECD standards of good pension fund governance and investment management. In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds. However, some specific details of the funds’ governance and investment management could be improved in a few countries, such as enhancing the expertise in the funds’ governing boards and constraining discretionary interventions by government. Such reforms will ultimately raise the long-term investment performance of the funds and the solvency of social security systems. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 133-161 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLC05Z1NW Template-type: ReDIF-Article 1.0 Author-Name: Colin Pugh Author-Name: Juan Yermo Title: Funding regulations and risk sharing Abstract: This paper provides a description of the risk sharing features of pension plan design in selected OECD and non-OECD countries and how they correspond with the funding rules applied to pension funds. In addition to leading to a better understanding of differences in funding rules across countries with developed pension fund systems, the study considers the trend towards risk-based regulation. While the document does not enter the debate over the application of riskbased quantitative funding requirements to pension funds (as under Basel II or Solvency II), it identifies the risk factors that should be evaluated and considered in a comprehensive risk-based regulatory approach, whether prescriptive or principles-based. The three main risk factors identified are the nature of risks and the guarantees offered under different plans designs, the extent to which benefits are conditional and can be adjusted, and the extent to which contributions may be raised to cover any funding gap. In addition, the strength of the guarantee or covenant from the sponsoring employer(s) and of insolvency guarantee arrangements should be carefully assessed when designing funding requirements. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 163-196 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLBZZWVZS Template-type: ReDIF-Article 1.0 Author-Name: Jordy Peek Author-Name: Andreas Reuss Author-Name: Gerhard Scheuenstuhl Title: Evaluating the impact of risk-based funding requirements on pension funds Abstract: The objective of this study is to analyse what the quantitative funding requirements for pension funds with defined benefit plans would be, if Solvency II (based on the QIS 3 methodology) would be applied. Also possible extensions of the Solvency II methodology that seem necessary in order to reflect the specifics of pension funds will be discussed. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 197-219 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLBZST3S5 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Workplace-Name: OECD Author-Name: Das Udaibir Author-Email: udas@imf.org Author-Workplace-Name: International Monetary Fund Author-Name: Alison Harwood Author-Name: Ceyla Pazarbasiogl Author-Email: cpazarbasioglu@imf.org Author-Workplace-Name: International Monetary Fund Author-Name: Anderson Silva Author-Email: asilva3@worldbank.org Author-Workplace-Name: The World Bank Title: Use of derivatives for debt management and domestic debt market development: Key conclusions Abstract: The Ninth OECD/World Bank/IMF Annual Global Bond Market Forum held on 22-23 May 2007 in Paris, France, highlighted that there has been very sharp growth in the use of derivative instruments in both mature and emerging market countries. The use of derivative instruments is helping public debt managers in their portfolio management operations and in supporting market development. Several institutional and structural impediments, however, remain toward the more active use of derivative products. Most developed market debt managers use derivative instruments for debt management purposes, while this is the case for only a handful of emerging markets. Several emerging markets, though, are taking steps towards developing the legal environment necessary to support derivative markets, and are addressing the challenges posed by illiquidity of the underlying cash market, deficiencies in prudential regulation, and restrictions on market participation. Journal: OECD Journal: Financial Market Trends Year: 2008 Pages: 223-235 Volume: 2008 Issue: 1 Handle: RePEc:oec:dafkad:5KZLLBZMDMHC Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Author-Name: Se Hoon Lee Title: The current financial crisis: Causes and policy issues Abstract: This article treats some ideas and issues that are part of ongoing reflection at the OECD. They were first raised in a major research article for the Reserve Bank of Australia conference in July 2008, and benefited from policy discussion in and around that conference. One fundamental cause of the crisis was a change in the business model of banking, mixing credit with equity culture. When this model was combined with complex interactions from incentives emanating from macro policies, changes in regulations, taxation, and corporate governance, the current crisis became the inevitable result. The paper points to the need for far-reaching reform for a more sustainable situation in the future. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-21 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KSQFBWT87BQ Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: Lessons from the financial market turmoil: Challenges ahead for the financial industry and policy makers Abstract: This financial crisis, ending a period of search for yield and increased risktaking,has triggered various policy responses, ranging from more ad-hoc measures initially to more structured and co-ordinated financial sector rescue actions as the crisis evolved. Lessons drawn so far should help to devise longer-term, more encompassing and more consistent policies. Various reforms are being proposed by the financial industry as well as by official authorities and international standard-setting bodies, many of which arrive at similar conclusions regarding the causes of and remedies for the crisis. Shortcomings in risk management, including compensation schemes, governance structures, liquidity and counterparty risk, need to be addressed. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-40 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KSQDWV36STJ Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Financial crisis: Deposit insurance and related financial safety net aspects Abstract: Government provision of a financial safety net for banks and other financialinstitutions has been a key element of the policy response to the current financialcrisis. In the process, the design of many safety net elements, such as depositinsurance, has been redrawn in many jurisdictions. In particular, governmentsextended existing guarantees and introduced new ones. While these measures didnot address the root causes of the lack of confidence, they were neverthelesshelpful in avoiding a further accelerated loss of confidence, thus buying valuabletime. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-39 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KZ7VGF50H34 Template-type: ReDIF-Article 1.0 Author-Name: Stephen Lumpkin Author-Workplace-Name: OECD Title: Resolutions of weak institutions: Lessons learned from previous crises Abstract: The present financial crisis may be added to a growing list of episodes worldwide in which financial sector problems have become systemic in nature. Many OECD countries have been affected, either directly or through the transmission of problems cross-border. Most financial crises share a number of common elements.For instance, financial innovation has often played a role in distress episodes, in many cases, having much to do with their idiosyncratic aspects. For example, structured credit products and the latest incarnation of the originate-and-distribute model of intermediation have been at the epicentre of the current crisis. It differs from other crisis episodes in having a sub-component of the residential mortgage sector as its trigger, while previous crises have more often been prompted by problems in the commercial mortgage market and with corporate clients. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-42 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KSQDWRM42NN Template-type: ReDIF-Article 1.0 Author-Name: Pablo Antolín Author-Workplace-Name: OECD Title: Ageing and the payout phase of pensions, annuities and financial markets Abstract: This paper reviews the impact of ageing on private pensions, in particular on the payout phase, assesses the part that annuities can play in financing retirement, and examines the role of financial markets in facilitating the allocation of assets accumulated in defined contribution pension plans.A comprehensive set of recommendations for consideration is provided at the end of the paper. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-19 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KSQDWRBLLMR Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Challenges for financial intermediaries offering asset decumulation products Abstract: The present article focuses on issues related to asset decumulation. In discussing these issues, a key proposition is that financial institutions are most willing and able to offer decumulation products with fixed payment promises to the extent they are able to invest in financial assets that allow them to hedge a considerable part of the risks associated with the payment promises they extend.Indeed, what is sometimes overlooked in discussions bout shifts from asset accumulation to decumulation is that the decumulation phase also involves investment challenges, especially if specific patterns of payouts such as regular payouts of fixed amounts are aimed at. Many writers have argued for some time now that pension fund managers will have difficulty implementing asset-liability matching because there are insufficient quantities of suitable assets. As it turns out, the shortfall in hedging instruments extends to more than just the “toxic” tail of longevity risk, as is commonly being argued. The analysis in this article shows that hedging interest rate risk is also not as straightforward as one may think. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-31 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KSQDWR5KV35 Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Revisiting the asset-meltdown hypothesis Abstract: The present article focuses on the so-called “asset meltdown hypothesis”, which postulates a direct link between demographic developments and the level of assetprices. In particular, proponents of this hypothesis argue, when baby boomers startentering retirement they will become net sellers of financial assets to finance retirement consumption. As subsequent generations are smaller in numbers, other things equal, this would put downward pressure on financial asset prices. Revisiting this hypothesis, there is some support for a link between demographics and financial asset prices, although the link may not be strong. A number of mitigating factors exist, so that “other things” will not be equal. A major question in this context is to what extent demographic developments and their implications for other variables affecting financial asset prices are already reflected in financial asset prices and how fast any additional pressures on financial asset prices will play themselves out. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-14 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KZ7VGC4DLMS Template-type: ReDIF-Article 1.0 Author-Name: Fiona Stewart Author-Name: Juan Yermo Title: Pension fund governance: Challenges and potential solutions Abstract: Good governance is increasingly recognised as an important aspect of an efficient private pension system, enhancing investment performance and benefit security. Yet, despite regulatory and industry initiatives, governance weaknesses persist across OECD and non-OECD countries.This paper highlights the main governance challenges faced by policymakers (particularly with trust-based pension systems), and draws on recent policy initiatives to propose possible solutions to strengthen governance arrangements. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-42 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KZ7VGBSD4KH Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Alison Harwood Author-Name: Philipp Anderson Author-Name: Ceyla Pazarbasioglu Title: Secondary market liquidity in domestic debt markets: Key policy conclusions Abstract: The Tenth OECD/World Bank/IMF Annual Global Bond Market Forum highlighted that liquidity is a complex concept with different dimensions – micro liquidity vs. macro liquidity, market liquidity vs. funding liquidity, endogenous vs. exogenous liquidity, and so on. Relative liquidity (including ‘liquidity freezes or squeezes’) can best be explained by focusing on the market’s institutional structure, in particular the architecture of electronic trading platforms, the importance of OTC trading, the nature and width of the investor base, disclosure requirements, valuation methods, the role of primary dealers including market-making requirements or conventions, tax factors, and the role of issuers of government bonds and other fixed-income instruments in primary and secondary markets. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-6 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KZ7VGBF38R2 Template-type: ReDIF-Article 1.0 Author-Name: Isabelle Ynesta Author-Workplace-Name: OECD Title: Households' wealth composition across OECD countries and financial risks borne by households Abstract: The first section of this article presents a combined analysis of households’ financial and non-financial balance sheets across OECD countries over the period 1995-2006, based on two OECD data collections – financial balance sheet accounts and households’ financial and non-financial assets. The scope of the study mainly covers households’ gross wealth (financial, dwellings and land) and therefore does not include debt. The second section, based on the OECD households’ financial and non-financial assets database, analyses financial risks borne by households investing their savings either in investment fund shares, in life insurance reserves or in pension schemes, and how these allocations have changed and developed over time in various OECD countries. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-25 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KZ7VGB84CF5 Template-type: ReDIF-Article 1.0 Author-Name: Eric Gonnard Author-Workplace-Name: OECD Author-Name: Eun Jung Kim Author-Workplace-Name: OECD Author-Name: Isabelle Ynesta Author-Workplace-Name: OECD Title: Recent trends in institutional investors statistics Abstract: Data to measure and analyse the increasing role of institutional investors in capital markets has been collected and published by the OECD for a number of years. This dataset is now integrated in the framework of the OECD Financial Accounts. This article presents an overview of institutional investors’ assets, their components and their development in the aggregate and by country. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 1-22 Volume: 2008 Issue: 2 Handle: RePEc:oec:dafkad:5KZ7VGB371LS Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Author-Name: Se Hoon Lee Title: Dealing with the crisis and thinking about the exit strategy Abstract: This article looks at the stages of crisis management and some of the different degrees of transparency on losses and risks in the US and Europe. It also compares alternative approaches to dealing with impaired assets used in the USA and Europe. Exposure to off-balance losses remains a key issue. Europe, surprisingly, has been and remains the major issuer of collateralised synthetic obligations that have been so prominent in the crisis. The capital needs of banks over the next few years is examined, and great uncertainties remain due to the unknown extent to which off-balance sheet vehicles will need to be consolidated. Finally, the requirements of longer-run reform are outlined. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 11-28 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZSBSPMN Template-type: ReDIF-Article 1.0 Author-Name: Hans Christiansen Author-Workplace-Name: OECD Author-Name: Alissa Koldertsova Author-Workplace-Name: OECD Title: The role of stock exchanges in corporate governance Abstract: Historically, the main direct contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. Stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies. Demutualisation and the subsequent self-listing of exchanges have spurred debate on the role of exchanges. Regulators have been concerned about conflicts of interest between exchanges' for-profit activities and their regulatory responsabilities. The conversion of exchanges to listed companies is thought to have intensified competition. And, the sharper competition has forced the question of whether there is a risk of a regulatory 'race to the bottom'. Recently, the rise of alternative trading systems (ATS), first in the United States and then in Europe have had a profound impact. Their existence has induced exchanges to cut fees and in some cases launch their own off-exchange trading platforms. The effect of ATSs on corporate governance is not clear. Two practical concerns voiced so far are, first, that trading fragmentation may reduce the transparency of the markets for corporate control and adverse consequences for price discovery. Secondly, exchanges are uneasy about the prospect of having to continue performing their traditional regulatory and other corporate-governance enhancing functions amid a shrinking revenue base. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 209-238 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZKH7LKJ Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: The turmoil and the financial industry: Developments and policy responses Abstract: The situation in financial markets deteriorated over the past year, but government actions have helped to avert an even bigger crisis. While some signs of recovery are on the horizon, the banking sectors in many countries are not yet on solid footing. Recent government programmes that deal with banks’ ‘toxic assets’ are welcome in this regard. But further reaching financial sector reforms such as those recently endorsed by the G20 leaders and proposed in Europe and the United States are necessary in order to establish a sound financial system. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 29-60 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZPLZ8WF Template-type: ReDIF-Article 1.0 Author-Name: Grant Kirkpatrick Author-Workplace-Name: OECD Title: The corporate governance lessons from the financial crisis Abstract: This report analyses the impact of failures and weaknesses in corporate governance on the financial crisis, including risk management systems and executive salaries. It concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. Accounting standards and regulatory requirements have also proved insufficient in some areas. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests. The article also suggests that the importance of qualified board oversight and robust risk management is not limited to financial institutions. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries. The current turmoil suggests a need for the OECD to re-examine the adequacy of its corporate governance principles in these key areas. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 61-87 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZPHDV0X Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Expanded government guarantees for bank liabilities: Selected issues Abstract: Government provision of a safety net for financial institutions has been a key element of the policy response to the current crisis. In the process, existing guarantees have been expanded and new ones introduced, including, in particular, in relation to bank liabilities. Among other things, such guarantees create costs that arise as a result of potential distortions of incentives and competition. To limit such distortions it is important to specify risk-based premiums for additional government-provided guarantees, and to the extent that guarantees are priced appropriately potential distortions also should be limited. The evidence however has been mixed in this regard. The present article discusses pricing and some other selected issues related to the recent expansion of guarantees for bank liabilities. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 89-123 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZP44K9Q Template-type: ReDIF-Article 1.0 Author-Name: Pablo Antolín Author-Workplace-Name: OECD Author-Name: Fiona Stewart Title: Private pensions and policy responses to the financial economic crisis Abstract: This article discusses responses to current financial and economic crisis by regulators, supervisorss and policy makers in the area of private pensions. These responses are examined in the light of international guidelines, best practices and recommendations to improve the design of private pensions. Policy makers are reminded that private pensions continue to play an important role in a balanced pension system, with security coming from diversity of provision. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 127-141 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZNX79XX Template-type: ReDIF-Article 1.0 Author-Name: Ignazio Visco Title: Retirement saving and the payout phase: How to get there and how to get the most of it Abstract: In the wake of a dramatic financial crisis and with the first waves of baby boomers approaching retirement we hardly need to think about how best to arrive at the pension funds' payout phase. This paper argues that there is an urgent need to raise retirement saving, to reduce defined contribution plan members' exposure to investment risks and to provide the financial industry with cheap and safe payout instruments. These challenges are also likely to call for a more active government role. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 143-162 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZNT6FD2 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Pascal Janssen Author-Name: Niels Kortleve Author-Name: Juan Yermo Title: Evaluating risk sharing in private pensions plans Abstract: The principal purpose of this article is to analyse the trade-off between the (un)certainty in contributions on the one hand and benefits on the other that is embedded in different pension arrangements. The article employs the funding ratio (ratio of assets to liabilities) and the replacement rate (ratio of benefits to salaries) as key criteria for evaluating the risk sharing characteristics of a private pension plan from the perspective of the plan member. The stochastic simulations performed show that hybrid plans (those in between traditional DB and individual DC) appear to be more efficient and sustainable forms of risk sharing than either of the other two. Of the three main hybrid plans analysed, conditional indexation plans appear to have the greatest potential as sustainable forms of risk sharing. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 163-184 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZN648VH Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Arzu Gok Title: OECD sovereign borrowing outlook 2009 Abstract: Many OECD governments are facing unprecedented challenges in the markets for bonds and bills, as a result of the explosive growth in their borrowing needs. Amidst an unusually uncertain economic outlook, the gross borrowing needs of OECD governments are expected to reach almost USD 12 trillion in 2009. The key policy issue is how to raise smoothly new funds at low cost, while also managing a rapidly growing debt stock. For the time being, several factors are offsetting the trend towards higher yields. But the risk is that when the recovery gains traction and risk aversion falls, yields will start to rise. There are already signs that issuance conditions are becoming tougher with reports of weaker demand at some recent government bond auncts. Thus far, these less successful auctions can best be interpreted as "single market events" and not as unambiguous evidence of systemic market absorption problems. Also from this perspective lowering OECD sovereign ratings is not obvious. The future could become more challenging, given that rising issuance is occurring in tandem with increasing overall debt levels. Also contingent debt is on the rise. In response, sovereign debt managers have begun to plan or implement credible medium-terms exit strategies to avoid future "crowding out" and issuance problems. Although fund raising strategies have become more flexible and somewhat more opportunistic, OECD debt management framework so as to minimise medium-term borrowing costs. The other key challenge, roll-over risk as a result of the increasing use of short-term instruments, is being addressed by OECD debt managers by rebalancing the profile of their issuance programmes by incorporating more long-term instruments. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 187-195 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZNQ2JVF Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Title: New challenges in the use of governement debt issuance procedures, techniques and policies in OECD markets Abstract: Government debt issuance procedures and policies differ across OECD jurisdictions, in particular in terms of technical standards for selling techniques, primary dealer systems and other primary market arrangements. However, the increased integration of global financial markets (including the jump in the integration of European government debt markets since the introduction of the Euro) has been an important catalyst in the standardisation of the structure and types of instruments as well as the convergence of general procedures and policies for the issuance government debt. In many countries, the ongoing credit and economic crises have prompted a review of existing issuance procedures and policies. This article provide (a) a survey of the general characteristics of government debt issuance procedures and related primary dealer (PD) arrangements in the OECD area; and (b) an evaluation of the challenges and changes generated by the impact of the turmoil in global financial markets on issuance procedures and policies. Journal: OECD Journal: Financial Market Trends Year: 2009 Pages: 197-208 Volume: 2009 Issue: 1 Handle: RePEc:oec:dafkad:5KSGJZK6JBLT Template-type: ReDIF-Article 1.0 Author-Name: OECD Title: Policy framework for effective and efficient financial regulation: General guidance and high-level checklist Abstract: The structure and operation of the financial system have undergone marked changes in the past couple of decades, driven by dramatic improvements in technology, rapid product innovation, integration of financial systems, competition in financial services, and policy, regulatory, and trade reforms. These developments have led to a dynamic, sophisticated, and global financial services arena which fostered economic growth. Yet, the financial and economic crisis has brought to the fore many inappropriate or ill-adapted elements of our approach to financial regulation. The crisis has forced us to think hard about the financial system: how it works, the objectives it should fulfil, and the tools and policies to help shape it. The Policy Framework for Effective and Efficient Financial Regulation, supported by General Guidance and a High-Level Checklist, is a tool that can support ongoing efforts by policymakers, regulators, and supervisors to achieve a stronger, more resilient financial system. It is not meant to substitute for the more focused, micro-prudential principles and guidelines of international standard-setting bodies. But it can guide our strategic thinking and promote governmental leadership and action so that the financial system can play its vital role in the functioning of the economy, both domestically as well as globally. The Policy Framework, including the General Guidance and High-Level Checklist, is the product of work by the Committee on Financial Markets and the Insurance and Private Pensions Committee, and was the subject of a broad public consultation. The Policy Framework challenges policy makers to think about the fundamentals of financial regulation in a globalised financial system. It also invites them to improve their understanding of the financial system and work in close cooperation with other countries to develop proper tools and instruments so that public policy objectives are met. I hope that policymakers will use the Policy Framework in setting national policy and in working with international partners. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 267-321 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VKXWNG1 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Arzu Gok Title: The surge in borrowing needs of OECD governments: Revised estimates for 2009 and 2010 Outlook Abstract: OECD governments are facing ongoing, unprecedented challenges in raising smoothly large volumes of funds at lowest possible cost, while balancing refinancing-, repricing- and interest rate risks. Amidst continued uncertainty about the pace of recovery as well as the timing and sequencing of the steps of the exit strategy, gross borrowing needs of OECD governments are expected to reach almost USD 16 trillion in 2009, up from an earlier estimate of around USD 12 trillion. The tentative outlook for 2010 shows a stabilising borrowing picture at around the level of USD 16 trillion. A looming additional challenge is the risk that when the recovery gains traction, yields will start to rise. Although there are signs that issuance conditions are becoming tougher, most OECD debt managers have been successful in financing the surge in funding needs. Less successful auctions can therefore best be interpreted as “single market events” and not as unambiguous evidence of systemic market absorption problems. The future could become more challenging though, given that rising issuance is occurring in tandem with increasing overall debt levels and debt service costs. In response, sovereign debt managers, with the essential support of the fiscal authorities, need to implement a timely and credible medium-term exit strategy to avoid future "crowding out" and systemic issuance problems, while reducing government borrowing costs. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 1-15 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VN9G28Q Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Insurance companies and the financial crisis Abstract: The current financial crisis may primarily be a banking crisis, and the solvency of the insurance sector as a whole does not appear to be threatened. Nonetheless, insurance companies have been affected, and in mostly adverse ways. For many insurers, direct exposure to the epicentre of the crisis, the US mortgage market, and to related securities appears to have been limited. But the financial crisis has nonetheless had an increasingly visible impact on the insurance industry, primarily through their investment portfolios, as the crisis spread and financial market valuations and the outlook for real activity deteriorated significantly. Also, a number of concentrated exposures to credit and market risks have been revealed, including in US mortgage and financial guarantee insurance companies, as well as in parts of certain other insurance-dominated financial groups. Thus, while insurers as a group may have cushioned rather than amplified the downward pressures during the financial crisis, some clearly have added to downward pressures. Financial instruments that were at the core of difficulties served an insurance function and, thus, it is not so surprising that some institutions from that sector have been affected by the crisis on one or the other side of their balance sheets. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 123-151 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KS5D4NPXM36 Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Gert Wehinger Author-Name: Patrick Slovik Title: The elephant in the room: The need to deal with what banks do Abstract: Contagion risk and counterparty failure have been the main hallmarks of the current crisis. While some large diversified banks that focused mainly on commercial banking survived very well, others suffered crippling losses. Sound corporate governance and strong riskmanagement culture should enable banks to avoid excessive leverage and risk taking. The question is whether there is a better way, via leverage rules or rules on the structures of large conglomerates, to ensure volatile investment banking functions do not dominate the future stability of the commercial banking and financial intermediation environment that is so critical for economic activity. While there is a main consensus on the need for reform of capital rules, dynamic provisioning, better co-operation for future crises, centralised trading of derivatives etc., the question is whether such reforms will be sufficient if they do not address contagion and counterparty risk directly. The world outside of policy making is waiting for a fundamental reassessment of banks’ business models: what banks are supposed to do and how they compete with each other. It is the “elephant in the room” on which some policy makers have not yet had the time or inclination to focus. This article emphasises not only the need for transparent and comparable accounting rules and for improvements in corporate governance, but also supports the imposition of a group leverage ratio to provide a binding capital constraint (that Basel riskweighted rules have been unable to achieve) and proposes a Non- Operating Holding Company Structure (NOHC) – reforms that are essential to deal with contagion and counterparty risk that are so integral to the ‘too big to fail’ issue. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 1-27 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VZK29G6 Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: The financial industry and challenges related to post-crises exit strategies Abstract: Financial markets have recovered substantially but vulnerabilities remain significant. Ample liquidity may lead to new bubbles, particularly in some emerging markets, and uncertainties about government exit strategies and regulatory changes threaten a fledgling upswing. Co-ordination and communication of exit policies will be important, and exit from policy stimulus should not be precipitated at the current juncture. While financial institutions have increasingly obtained market financing and paid back state aid, the sector remains fragile; thus, such voluntary pay-backs should meet preconditions aimed at ensuring the soundness and sustainability of the concerned institutions’ balance sheets. At the same time, expectations of future writedowns and more stringent capital rules put pressure on bank lending more generally. Restarting securitisation to support lending would be important and could be fostered by government initiatives focussing on standardisation, transparency and due diligence to restore investor confidence. Regulatory reforms currently being proposed concern accounting rules, capital requirements and compensation issues. However, further reforms are required to address such systemic issues as moral hazard created by public support. Measures would include resolution mechanisms for large and systemically important banks as well as appropriately fire-walled business structures for the financial sector. Peer pressure via co-operation in international standard-setting and relevant bodies should help to keep the reform momentum, overcome political impediments to reform and maintain a level playing field. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 37-53 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VZ88RTD Template-type: ReDIF-Article 1.0 Author-Name: Stephen Lumpkin Author-Workplace-Name: OECD Title: Regulatory issues related to financial innovation Abstract: This note explores various regulatory issues related to financial innovation. It starts from a premise that financial innovations are neither always helpful (or benign) nor always threatening. Innovations have the potential to provide for a more efficient allocation of resources and thereby a higher level of capital productivity and economic growth. Many financial innovations have had this effect. But others have not. Examples of the latter include products that may have been misrepresented to end-users and resulted in delinquencies, bankruptcies or other problems among them, or products that have been inadequately managed with respect to the various credit or market risks they entail. Considerations of problems aside, innovation should be seen as a natural aspect of the workings of a competitive system. Thus, the ideal policy approach is to find an appropriate balance between preserving safety and soundness of the system and allowing financial institutions and markets to perform their intended functions. That approach entails first ensuring that the necessary market-framing and market-perfecting rules are in place and then establishing a proper structure for reviewing financial innovations. Seven steps needed to accomplish this task are outlined in the report. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 1-31 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VZ3B3NX Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Title: Expanded guarantees for banks: Benefits, costs and exit issues Abstract: This article argues that the expansion of existing and the introduction of new guarantees for financial institutions has been a key element of the policy response to the recent financial crisis. Essentially, the government expanded its role as the provider of the safety net for banks by adopting the function of a guarantor of last resort. Among the various policy response measures, the expansion of guarantees has the benefit of entailing lower upfront fiscal costs relative to other options. Guarantees are not without cost however. Even if they do not generate significant upfront fiscal costs, they create contingent fiscal liabilities. Other potential costs include those arising from distortions to competition and incentives (moral hazard). For example, there may be a perception that similar guarantees will always be made available at low costs. The fact that the expansion of guarantees has not been as closely co-ordinated across borders as might have been desired has resulted in additional costs. To avoid additional costs arising from inconsistencies in exit strategies, close communication and coordination regarding pricing and timing issues is required, especially as a more formal framework for the public provision of insurance would still need to be developed. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 55-89 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KS5D4NVPXZP Template-type: ReDIF-Article 1.0 Author-Name: John Thompson Title: Current and structural developments in the financial systems of OECD enhanced engagement countries Abstract: This paper discusses the financial systems of OECD Enhanced Engagement Countries (EE5: Brazil, China, India, Indonesia, and South Africa). Rather than providing a comprehensive survey of each financial system, it is designed to highlight some of the salient features of EE5 financial systems, emphasising those aspects of the system that these countries have in common and those that are different from those in OECD countries. While there are significant differences among EE5 countries, this group shares some distinctive characteristics. EE5 have relatively lower financial assets/GDP ratios and their financial intermediation remains relatively bank dominated and less international. Equity markets have reached proportions comparable to those of OECD countries, but fixed income markets (especially private debt markets) remain relatively backward. At the same time, the financial systems of EE5 countries have been developing rapidly supported by steady reforms. Going forward, many institutions outside OECD countries are likely to become bigger players in financial markets, and the emergence of large asset holdings, rising shares of world equity and bond markets and the emergence of powerful financial institutions in new regions of the world are likely to influence the contours of the world financial system in years to come. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 209-263 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VL426HF Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Title: Responding to the crisis: Changes in OECD government debt issuance procedures, portfolio management and primary dealer systems Abstract: Tougher issuance conditions related to the surge in government borrowing needs are the reasons why issuance arrangements have not always been working as efficiently as before the crisis. This prompted debt management offices (DMOs) in the OECD area to review existing issuance policies and procedures. The crisis also had an impact on the use of indicators or guidelines relating to the key risks of the maturity structure of issuance or outstanding debt. Although OECD issuance procedures are likely to differ considerably at the level of technical standards and detailed institutional arrangements, increased integration of global financial markets has encouraged the standardisation of financial instruments and convergence of general issuance procedures. As a result, OECD issuance policies and procedures are broadly similar with a high degree of transparency and predictability. However, in response to tougher issuance conditions, DMOs have implemented changes in existing issuance procedures and policies that may have led to a somewhat greater diversity of primary market arrangements and procedures. The paper also reviews strategies and indicators for the management of the debt portfolio. Although issuance procedures and targets for portfolio management may have become somewhat more opportunistic in some jurisdictions, debt managers continue to emphasise the importance of transparency and predictability. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 191-206 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMN0VN12RLX Template-type: ReDIF-Article 1.0 Author-Name: Pablo Antolín Author-Workplace-Name: OECD Title: Private pensions and the financial crisis: How to ensure adequate retirement income from DC pension plans Abstract: The current economic and financial crisis has shaken confidence in funded pension systems in general and in defined contribution (DC) pension plans in particular. The crisis has highlighted the impact of market conditions on retirement savings accumulated in DC pension plans and the uncertainty as to whether those retirement savings may prove adequate to finance retirement – particularly for those close to retirement. The purpose of this paper is to provide recommendations on how to ensure adequate retirement income from DC pension plans. In this context, this paper addresses three main questions: 1) How much do people need to save? 2) How can the effects of market risk on DC pension plans be alleviated? 3) How can retirement income be protected during the payout phase? The analysis concludes that in order to deliver adequate retirement income from DC pension plans with a certain degree of certainty, there is a need for comprehensive measures which include: higher contributions; increasing the contribution period by postponing retirement; setting as default options relatively conservative investment policies including life-cycle strategies; and managing risk in the payout phase with inflationindexed life annuities. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 153-179 Volume: 2009 Issue: 2 Handle: RePEc:oec:dafkad:5KMLFRTD6P24 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Thor Saari Title: Statistical Yearbook on African Central Government Debt: Overview of a New OECD Publication Abstract: The borrowing needs of African governments are increasingly met by issuing marketable debt instruments. Leading practices from OECD governments exert an important influence on debt management and the functioning of markets for sovereign debt instruments. This first issue of the Statistical Yearbook on African Central Government Debt provides comprehensive and consistent information on African central government debt instruments. It includes individual country data but also comparative statistics to facilitate pan-African (cross-country) analysis. JEL Classification: G2, G28, H63 Keywords: African borrowing needs and debt instruments, public debt management, Statistical Yearbook on African Central Government Debt Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 181-187 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TNWKNW Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Ove Sten Jensen Author-Name: Thomas Olofsson Title: A Suggested New Approach to the Measurement and Reporting of Gross Short- Term Borrowing Operations by Governments Abstract: As part of its Borrowing Outlook, the OECD estimates gross short– term government borrowing requirements. The article concludes that all methods for measuring short-term borrowing needs studied here – except one – provide either significantly underestimated or substantially overestimated measures. The article therefore suggests adopting the following measure: Gross Short-Term Marketable Borrowing Requirements is equal to Net Short-Term Borrowing Requirements plus the outstanding amount of the stock of short-term instruments. This new measure (referred to as Method 2 in the study) yields, in principle, meaningful estimates, comparable across different countries. JEL Classification: G15, G18, H63, H68. Keywords: measuring gross short-term borrowing requirements, debt Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 171-179 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TNZ6HD Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Vincenzo Guzzo Author-Name: Allison Holland Author-Name: Yibin Mu Title: Debt Markets: Policy Challenges in the Post-Crisis Landscape Abstract: Discussions at the 11th OECD-WBG-IMF Global Bond Market Forum focused on four key areas: i) the impact of crisis-related measures and the potential implications of exit; ii) the measurement of sovereign risk; iii) the determinants of investor demand; and iv) debt managers’ response to the crisis. Overall, participants felt that the steps taken to stabilise financial conditions had generally been effective and that conditions in financial markets were normalising. However, discussions highlighted a number of ongoing risks including: i) while credible consolidation plans were needed, fiscal and monetary policy would be tightened too soon; ii) managing investor uncertainty would prove critical in managing risk in the near-term; and (iii) regulatory changes might lead to a deterioration in conditions in primary and secondary markets and otherwise aggravate the challenges facing debt managers. JEL Classification: G15, G18, G20, G24, G32, G38, H62, H68 Keywords: Outlook on public deficits and government debt, crisis and debt management policies, government debt market, measurement of sovereign risk, investor demand, exit strategy Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 143-169 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TP0TF3 Template-type: ReDIF-Article 1.0 Author-Name: Stephen Lumpkin Author-Workplace-Name: OECD Title: Consumer Protection and Financial Innovation: A Few Basic Propositions Abstract: The issue of financial innovation and consumer protection is mostly about access and suitability. Access refers to a situation in which affordable, mainstream financial products are available to all segments of the population across the range of income levels and demographic characteristics. Suitability addresses the appropriateness of the products for particular consumer groups. Innovative products will tend generally to be either positive for access to finance or neutral. But products that actually result in increased access to finance may nonetheless still raise suitability issues. Innovative products can be particularly difficult for retail consumers to understand and better financial education is needed to help address financial illiteracy. In addition, service providers should have appropriate internal controls to minimise the chances that consumers take on inappropriate exposures. Even the best disclosures, alone, may not be adequate, so to avoid situations in which retail investors become involved with unsuitable products, institutions should be “encouraged” to develop sufficient measures for client protection as part of their product development activities. Stricter penalties should be used when needed to address mis-selling, fraud or firm misconduct. JEL Classification: G01, G28, G38. Keywords: Financial innovation, consumer protection, financial regulation Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 117-139 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TP2JXV Template-type: ReDIF-Article 1.0 Author-Name: Pablo Antolín Author-Workplace-Name: OECD Author-Name: Stéphanie Payet Author-Name: Juan Yermo Author-Workplace-Name: OECD Title: Assessing Default Investment Strategies in Defined Contribution Pension Plans Abstract: This paper assesses the relative performance of different investment strategies for different structures of the payout phase. In particular, it looks at whether the specific glide-path of life-cycle investment strategies and the introduction of dynamic features in the design of default investment strategies affect significantly retirement income outcomes. The analysis concludes that there is no “one-size-fits-all” default investment option. Life-cycle and dynamic investment strategies deliver comparable replacement rates adjusted by risk. However, life-cycle strategies that maintain a constant exposure to equities during most of the accumulation period, switching swiftly to bonds in the last decade before retirement, seem to produce better results and are easier to explain. Dynamic management strategies can provide somewhat higher replacement rates for a given level of risk than the more deterministic strategies, at least in the case of pay-outs in the form of variable withdrawals. The length of the contribution period also affects the ranking of the different investment strategies with life-cycle strategies having a stronger positive impact the shorter is the contribution period. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 87-115 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TP4BHB Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: Risks Ahead for the Financial Industry in a Changing Interest Rate Environment Abstract: The current interest rate environment has been conducive to financial institutions assuming exposure to interest rate risks. As interest rates are expected to rise globally, albeit slowly, and current steep yield curves may soon flatten, such risks may materialise in the near future. At the same time, weaknesses in the banking sector still exist, especially for some segments of the European banking sector. While the effects of changes in interest rates and their structure on financial institutions differ, recent changes in asset and funding structures of banks make them generally more vulnerable to a changing interest rate environment. Currency risk exposure has also grown, and regional concentration may pose specific risks. An unravelling of carry trades will have a negative effect on some institutions. Proper risk management can help during an adjustment process, and regulatory reforms underway will better support risk management functions in financial institutions that are, in any case, already adjusting to the new environment. JEL Classification: G01, G12, G15, G21, G32 Keywords: financial crisis, interest rate risks, sovereign risks, bond markets, banks Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 67-84 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TP5ZHH Template-type: ReDIF-Article 1.0 Author-Name: Aviram Levy Author-Name: Sebastian Schich Title: The Design of Government Guarantees for Bank Bonds: Lessons from the Recent Financial Crisis Abstract: In 2010 authorities have taken the first steps to end some of the public support measures put in place in response to the financial crisis, starting with government guarantees for bond issues. Financial institutions have made extensive use of this tool, which has been effective in avoiding a further tightening of funding conditions, but this type of public support has, nonetheless, raised some concerns. First, the cost of issuing guaranteed bonds has mainly reflected the characteristics of the sovereign guarantor rather than those of the issuer, thus favouring “weak” borrowers with a “strong” sovereign backing. This situation has the potential to distort competition and create incentives for excessive risk taking. Such effects could have been reduced by the choice of a different fee determination mechanism. Second, the continued availability in 2010 of guarantee schemes, despite a declining overall usage, may be alleviating the pressure on some weak financial institutions to address their weaknesses: the average creditworthiness of banks issuing after mid-2009, when market conditions became more favourable, has sharply declined. JEL Classification: G01, G12, G21, G28. Keywords: financial crisis, policy response to the crisis, government guaranteed bonds, competitive distortions Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 35-66 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TP8T40 Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Title: Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity Abstract: In previous studies, the OECD has identified the main hallmarks of the crisis as too-big-to-fail institutions that took on too much risk; insolvency resulting from contagion and counterparty risk; the lack of regulatory and supervisory integration; and the lack of efficient resolution regimes. This article looks at how the Basel III proposals address these issues, helping to reduce the chance of another crisis like the current one. The Basel III capital proposals have some very useful elements, notably a leverage ratio, a capital buffer and the proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses. However, this report also identifies some major concerns. For example, Basel III does not properly address the most fundamental regulatory problem that the “promises” that make up any financial system are not treated equally. This issue has many implications for the reform process, including reform of the structure of the supervision and regulation process and whether the shadow banking system should be incorporated into the regulatory framework – and, if so, how. Finally, modifications in the overall riskweighted asset framework are suggested that would deal with concentration issues. Journal: OECD Journal: Financial Market Trends Year: 2010 Pages: 9-33 Volume: 2010 Issue: 1 Handle: RePEc:oec:dafkad:5KM7K9TPCJMN Template-type: ReDIF-Article 1.0 Author-Name: Alissa Koldertsova Author-Workplace-Name: OECD Title: The Second Corporate Governance Wave in the Middle East and North Africa Abstract: Ten years ago, corporate governance was a nascent concept in the Middle East and North Africa (MENA). This article charts the evolution of corporate governance across the MENA region over the past decade – as a concept and in practice – and proposes potential avenues for future work in this area. Initial interest in corporate governance in the region was propelled by the drive to attract foreign investment and the increasing development of local capital markets. A second wave now appears to be forming and its results will depend largely on the capacity of national regulators to enforce existing corporate governance provisions. JEL Classification: G03, G34 Keywords: corporate governance, Middle East and North Africa (MENA), corporate governance code, security regulators, hawkamah Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 219-226 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGGC0Z1JW7K Template-type: ReDIF-Article 1.0 Author-Name: Pablo Antolín Author-Workplace-Name: OECD Author-Name: Stéphanie Payet Title: Assessing the Labour, Financial and Demographic Risks to Retirement Income from Defined-Contribution Pensions Abstract: This article examines the impact of labour, financial and demographic risks on retirement income from DC pension plans, with a special emphasis on labour-market risk. It uses a stochastic model that incorporates uncertainty about returns on investment, inflation, discount rates, life expectancy, employment prospects and real wages. The analysis herein highlights that labour-market risk, as well as uncertainty about returns on investment and inflation, have the largest impact on retirement income. The results suggest that default life-cycle investment strategies that reduce exposure to risky assets in the last decade before retirement are quite helpful in reducing the risk of sharp reductions in retirement income, in particular when a negative shock to equity markets occurs in the years before retiring. However, life-cycle strategies fail to address issues of retirement income adequacy or smooth out the volatility in retirement income from DC pension plans. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 189-217 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGGC0Z23FR5 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Title: A Public Debt Management Perspective on Proposals for Restrictions on Short Selling of Sovereign Debt Abstract: New restrictions on short-selling sovereign debt need to be supported by concrete evidence that links systematically unrestricted short-selling activities to fraud, abuse or market manipulation. OECD debt managers noted that there is plenty of empirical evidence on the benefits of short selling, including more liquidity, pricing efficiency and better allocated risk. However, solid evidence in the form of empirical data on market instability unambiguously caused by unrestricted short-selling activities (to be counted as ‘costs’) seems to be lacking. Debt managers also noted that the reporting requirements will be costly from a purely administrative point of view. A ban on uncovered short selling transactions of sovereign debt would make risk management more difficult and expensive, with detrimental effects on market efficiency, liquidity and funding costs for sovereigns. Moreover, it is unlikely that such bans would have a stabilising effect in government securities markets during a crisis. Rather than containing the crisis, a ban on short selling of government debt is likely to worsen the situation. The paper concludes that OECD debt managers have a range of tested tools at their disposal for dealing with temporary or chronic dysfunctional measures in sovereign debt markets, ranging from ‘quantity measures’, such as openings, to ‘pricing measures’ such as dynamic fails charges. JEL Classification: E44, G01, G21, G28, E61, H21. Keywords: financial regulation, short-selling, restrictions on short-selling, debt management, risk management, sovereign debt. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 179-185 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGGC0Z25CG4 Template-type: ReDIF-Article 1.0 Author-Name: Toshiyuki Shimada Author-Name: Ting Yang Title: Challenges and Developments in the Financial Systems of the Southeast Asian Economies Abstract: This paper discusses the economies and financial systems of Southeast Asia (SEA) and focuses on challenges and developments in the region. Despite the diversity of SEA economies and some important exceptions, most of them are relatively small but growing strongly. Financial deepening differs among SEA economies. Yet in general, equity markets have grown rapidly and bond markets slowly. The main vulnerabilities of the SEA economies stem from volatile capital flows as well as from decreases in export demand. As a result of national and regional policy responses to the Asian Crisis of 1997/98, the soundness of banking systems has improved, and frameworks to deal with foreign currency liquidity problems and to develop bond markets have been established. Due to these efforts, SEA economies have shown considerable resilience during the current global financial and economic crisis. In some economies, macro-prudential measures may have contributed to this resilience. Capital flows during the current crisis have reminded regional authorities of the risks inherent in these flows. Remaining issues for policy makers to consider are the risks presented by the expanding business activities of banks in the capital and real estate markets, and increasing the participation of SMEs and households in the financial system. JEL Classification: F30, F32, F55, G01, G15, G18, G28, N45 Keywords: Southeast Asia, capital flows, financial crises, financial development, international bond markets Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 137-159 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGGC0Z277LN Template-type: ReDIF-Article 1.0 Author-Name: Stephen Lumpkin Author-Workplace-Name: OECD Title: Risks in Financial Group Structures Abstract: This article looks at the types of risks that may be associated with complex financial groups and then sifts through the weight of the evidence in favour of, and against, the various alternatives used to address those risks. The conclusion drawn is that there is no magic bullet among the available policy options that is sufficient on its own to satisfy the three core policy objectives (i.e. safety and soundness, systemic stability, and conduct of business). Rather, this article argues that the greater financial and economic impacts associated with problems at larger institutions requires a holistic approach that combines transparency, governance, regulation and supervision. JEL Classification: G01, G18, G02, G03, G28, G32. Keywords: financial groups, safety and soundness, systemic stability, contagion, governance, supervision and regulation, market discipline. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 105-136 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGGC0Z2F0G0 Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Patrick Slovik Title: A Market Perspective on the European Sovereign Debt and Banking Crisis Abstract: Europe has been beset by an interrelated banking crisis and sovereign debt crisis. Bond spreads faced by Greece and Ireland, and to a lesser extent Portugal followed by Spain, have increased. This paper explores these issues from the perspective of financial markets, focusing mainly on the four countries in the frontline of these pressures: Greece and Portugal, on the one hand, where the problems are primarily fiscal in nature; and Ireland and Spain, on the other, where banking problems related to the property boom and bust have been the key moving part. The paper first examines the probabilities of default implicit in observable market spreads and considers these calculations against sovereign debt dynamics. It then explores the implications of the interaction between bank losses and fiscal deficits on the one hand, and the feedback that any debt haircuts anticipated by markets could have on bank solvency. The study finds that market-implied sovereign default probabilities do in fact discriminate quite clearly between countries based on five criteria that affect the probability of debt restructuring. The discussion highlights some implications for banking system balance sheets of expected losses and shows the potential impact on them of sovereign restructuring implicit in market analysis. While the paper does not make any recommendations for policy action, it does explore a range of policy options and the implications each might have for the financial markets. JEL Classification: G01, G12, G15, G18, G21, H06, H60, H62, H63, H68 Keywords: financial crisis, sovereign risks, public deficits and debt, bond markets, banks. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 9-36 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGGC0Z2HM9R Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Byoung-Hwan Kim Title: Systemic Financial Crises: How to Fund Resolution Abstract: Systemic financial crises are a recurrent phenomenon, and despite regulatory efforts they are likely to occur again. This report compares the ex ante funding of deposit insurance schemes in a selection of countries, highlighting the “funding gap” left by these arrangements in the recent systemic financial crisis. To fill that gap, different approaches have been adopted across countries in the recent crisis. Where support for the financial sector was provided as part of policy response to the crisis, new taxes have been adopted to generate revenues ex post, although the specific approaches have differed. While there is no single solution in this regard, this report finds that ex ante funded systemic crisis resolution funds, together with strengthened failure resolution powers, are in principle adequate to help fill the gap. JEL Classification: E44, G01, G21, G28, E61, H21. Keywords: systemic financial crisis, systemic crisis resolution fund, deposit insurance, financial activities taxes, ex ante versus ex post funding. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 1-34 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGK9QPNBLXW Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Eylem Vayvada Derya Author-Name: Perla Ibarlucea Flores Title: OECD Sovereign Borrowing Outlook No.3 Abstract: OECD governments are facing ongoing challenges in the markets for government securities as a result of continued strong borrowing amid concerns about the pace of recovery and sovereign risk. The third OECD Sovereign Borrowing Outlook† Raising large volumes of funds at lowest cost, with acceptable roll-over risk, remains a great challenge for several countries, with most OECD debt managers continuing to rebalance the profile of debt portfolios by issuing more long-term instruments and moderating bill issuance. provides revised estimates for 2010 and projections for 2011. Gross borrowing needs of OECD governments are expected to reach almost USD 17.5 trillion in 2010, up from an earlier estimate of almost USD 16 trillion. In 2011, the borrowing needs of OECD sovereigns are projected to reach almost USD 19 trillion, nearly twice that of 2007. Against this backdro,p government debt ratios are expected to further deteriorate. An additional challenge for government issuers is how to deal with the complications generated by the pressures of a rapid increase in sovereign risk, whereby “the market” suddenly perceives the debt of some sovereigns as “risky”. JEL Classification: G14, G15, G18, H6, H60, H62, H63, H68 Keywords: sovereign borrowing, public deficits and debt, roll-over risk, sovereign risk. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 1-15 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGK9QPNFZWH Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: Sovereign Debt Challenges for Banking Systems and Bond Markets Abstract: Discussions at the October 2010 OECD Financial Roundtable conveyed a rather sombre view regarding the current outlook and risks, heightened by financial sector weaknesses, ongoing deleveraging and sovereign debt. Policy makers should be prepared for downside risks to materialise along the way to recovery. Low interest rates and low returns pose specific challenges for institutional investors. While sovereign risk is currently a major concern, its measurement is rather complex and markets do not always provide proper guidance. Sovereign ratings can serve as a useful point of reference but should be made more forward-looking and less procyclical. Should default or debt restructuring become necessary, strong political backing can minimise its costs. The European Financial Stability Facility (EFSF) was seen as helpful in providing a backstop. Some optimism was expressed as to the current fiscal adjustments underway to bring public finances back onto a sustainable path. Banking sectors remain fragile, especially in Europe, where, however, the transparency provided by recent stress tests has calmed some fears. Reactivating the wholesale markets for bank funding will be essential going forward. Capitalisation of the US banking sector has improved, but pockets of risk remain in exposures to commercial property by regional and small banks. Contingent convertible (bail-in) bonds could become a useful instrument for sharing the costs of crises, but they need to be made attractive for investors. JEL Classification: G01, G12, G15, G18, G21, G32, H06, H60, H62, H63, H68 Keywords: financial crisis, sovereign risks, public deficits and debt, bond markets, banks Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 1-34 Volume: 2010 Issue: 2 Handle: RePEc:oec:dafkad:5KGK9QPP5BG5 Template-type: ReDIF-Article 1.0 Author-Name: Raffaele Della Croce Author-Name: Fiona Stewart Author-Name: Juan Yermo Title: Promoting Longer-Term Investment by Institutional Investors: Selected Issues and Policies Abstract: Institutional investors in OECD countries held over USD 65 trillion in assets at the end of 2009, and they are growing fast in emerging economies where Sovereign Wealth Funds still predominate as source of long-term capital. Concerns about short-termism and corporate governance have led to calls for more “responsible” and longer-term investment, especially by institutional investors that manage retirement savings. Long-term investors could provide benefits by acting counter-cyclically, engaging as active shareholders, considering environmental and other longer-term risks and by financing long-term, productive activities that support sustainable growth. This requires transformational change in investor behavior, i.e. a new “investment culture”, and various major policy initiatives. This article has been designed to stimulate discussion on the benefits of long-term investing for growth, sustainable development and financial stability, and regulatory and other barriers that impede such investment. Drawing on existing OECD work and guidelines, it also puts forward tentative policy proposals to encourage long-term investing, thus preparing the ground for further analysis and data collection to be undertaken by the OECD in this area. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 145-164 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55B0Z1KTB Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Perla Ibarlucea Flores Title: OECD Statistical Yearbook on African Central Government Debt: Summary and Overview Abstract: The borrowing requirements of African governments in financing their budget deficits are increasingly met by selling marketable instruments but also by the issuance of non-marketable debt in the form of bi-lateral, multilateral and concessional loans. The second edition of the OECD Statistical Yearbook on African Central Government Debt provides comprehensive quantitative information on African central government debt instruments, including both marketable and non-marketable debt. Individual country data are presented in a comprehensive standard framework to facilitate cross-country comparison. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 277-283 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0GTNN Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Ahmet Keskinler Author-Name: Carrick Lucas Title: Outlook for the Securitisation Market Abstract: Securitisation issuance has slumped in recent years, with the market having become increasingly dependent on central bank and government support in both Europe and the United States. Despite facing a number of threats that could inhibit a recovery in the shorter term, the securitisation market is expected to recover over a longer term horizon. Funding costs have improved, but investor confidence in the asset class remains weak, and the impact of regulatory reform is as yet difficult to fully assess. A long-term sustainable recovery for the securitisation market remains in the hands of regulators and policy makers. They must be awake to the possibility that a recovery in securitisation markets could be a prerequisite to unlocking credit markets in general and supporting a wider global economic recovery. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 259-276 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0JZF5 Template-type: ReDIF-Article 1.0 Author-Name: Pablo Antolín Author-Workplace-Name: OECD Author-Name: Sebastian Schich Author-Workplace-Name: OECD Author-Name: Juan Yermo Author-Workplace-Name: OECD Title: The Economic Impact of Protracted Low Interest Rates on Pension Funds and Insurance Companies Abstract: A period of protracted low interest rates is a feasible, even if not the most likely, scenario going forward and such a scenario would adversely affect pension funds and insurance companies. Protracted low interest rates affect investment opportunities and have a potentially significant adverse effect on life insurance companies and institutions whose liabilities consist of a fixed investment return or benefit promises, such as is the case for defined-benefit pension funds. It cannot be ruled out that the financial institutions affected engage in “gambling for redemption” in an attempt to match the level of return promised to beneficiaries when financial markets were more elevated. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 237-256 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0M56L Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Byoung-Hwan Kim Title: Guarantee Arrangements for Financial Promises: How Widely Should the Safety Net be Cast? Abstract: Guarantees have become the preferred instrument to address many financial policy objectives. The incidence of financial sector guarantee arrangements that address specific policy objectives, such as supporting financial stability, protecting consumers and influencing credit allocations, has increased markedly over the past decades and additional schemes are under consideration. This report identifies considerations regarding consistency and affordability that policymakers should take into account before introducing additional guarantee arrangements. One of them is that the safety net cannot be expanded without limits. In fact, as regards the strength of the net of government-supported guarantees for financial promises, the wider that net is cast (without altering its other key parameters), the thinner it becomes. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 201-235 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0NKF5 Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Title: Global SIFIs, Derivatives and Financial Stability Abstract: This paper looks at Global Systemically Important Financial Institutions (GSIFIs) and the global derivatives business. The derivatives business has grown exponentially versus global GDP in sharp contrast to the primary securities on which derivatives are based. Inter-connectedness risk and unconstrained potential leverage remain the most urgent tasks still facing the financial reform process. Concentrated oligopolistic derivatives markets and the ability of banks to shift promises and/or use their IRB models to estimate ex-ante risk capital – capital that might be needed in the event of a crisis – undermine the intent of financial reform. Nor do netting and clearing eliminate aggregate risk of losses and bankruptcy. The paper repeats the need to implement two of the OECD’s long-standing reform recommendations: a binding leverage ratio based on equity and the separation of high risk investment banking activities from traditional banking. A derivatives transactions tax is also put forward as a possible option that would counter the cross-subsidisation of risk from the too-big-to-fail (TBTF) problem. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 167-200 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0QSBV Template-type: ReDIF-Article 1.0 Author-Name: Zvi Bodie Author-Name: Marie Brière Title: Financing Future Growth: The Need for Financial Innovations Abstract: Attracting long-term investors from the private sector or in public-private partnerships for stable long-term investment in the innovative sectors and industries needed to generate sustained growth is crucial. Long-term investors want assets that generate regular cash flows, often linked to inflation. While equities seem today less appropriate for long-term investors’ needs, particularly in the context of the recent regulatory changes, inflation-linked bonds, very-long dated conventional bonds, project bonds or specific derivatives better meet their requirements. It seems highly likely that the expansion and increasing regulation of long-term investors in both developed and emerging countries will trigger the development of new financial instruments compatible with long-term investment. While long-term investors are the natural sources of growth financing, they are not necessarily capable of assuming all the associated risks. Establishing and/or developing national or supranational institutions that can partly assume or at least structure some of these risks and thus offer end-investors the products they need is therefore essential. Strict regulation of the new markets arising from this process will also be vital. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 141-144 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0V76F Template-type: ReDIF-Article 1.0 Author-Name: Richard Pelly Author-Name: Helmut Krämer-Eis Title: Creating a Better Business Environment for Financing Business, Innovation and Green Growth Abstract: Modern economies are increasingly reliant on innovation to improve their competitiveness and generate growth. However, the financing of innovation in Europe exhibits weaknesses that have been exacerbated by the recent economic and financial crisis, and which could have a material adverse impact on economic growth if left unchecked. This paper explains the European Investment Bank Group’s role in creating a better environment for financing business, innovation and green growth. It briefly presents to the reader the current challenges, both in relation to the availability of equity financing for earlier-stage business, innovation and green growth, but also the stark evidence of a continuing gap in bank lending. Moreover, it provides examples of ways that the financing of innovation can be improved against the backdrop of a flexible, business-oriented EU framework. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 129-140 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0X7XX Template-type: ReDIF-Article 1.0 Author-Name: Thierry Déau Title: How to Foster Investments in Long-Term Assets such as Infrastructure Abstract: Mobilising private sector funding is essential in bridging the infrastructure funding gap. This can be done by appropriate regulation, targeted public financial support, and active involvement by institutional investors. Creating an appropriate policy framework and lifting regulatory constraints on long-term investments will foster financial stability of retirement savings systems and enable the development of strategic infrastructure projects that contribute to long-term growth. As capital markets and bank funding have dried up as sources of infrastructure financing after the global financial crisis, finding alternative long-term debt sources is critical. Private infrastructure financing can be promoted by targeted public measures and by building an infrastructure management culture amongst asset managers. Infrastructure investments also require long-term policy planning, with long-term strategic policy frameworks that exceed political cycles and are built on wide political consensus. Stable and accessible programmes of infrastructure projects and public-private partnerships (PPPs) are key in attracting private sector investors, complemented by adequate regulation. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 119-127 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW0ZG9R Template-type: ReDIF-Article 1.0 Author-Name: Martin Stanley Title: Investing in Infrastructure: Getting the Conditions Right Abstract: Maintaining and building new infrastructure that delivers agglomerative benefits is crucial for promoting sustainable economic growth. Capital needs for infrastructure investment are massive. This capital could be sourced especially from pension funds and other institutional investors for whom infrastructure funds are attractive investment vehicles. But in order to mobilise such private capital, the public sector needs to provide the right framework, e.g. by promoting a “Regulated Asset Base” model to improve capital expenditure, by avoiding undue solvency rules and other regulatory obstacles to long-term investment, and by closing the knowledge gap with regard to infrastructure investments. Governments should also avoid crowding out private sector investment, confining interventions to projects where public risk sharing is necessary, and refrain from making frequent short-term changes to the regulatory framework. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 111-117 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW11GR1 Template-type: ReDIF-Article 1.0 Author-Name: Frederic Ottesen Title: Infrastructure Needs and Pension Investments: Creating the Perfect Match Abstract: The life insurance and pensions sector manages large funds with a truly long time horizon. These investors therefore naturally seek long-dated assets to match their liabilities. Real assets or real cash flows are preferred in order to hedge against inflation, which is particularly relevant for pension funds in order to assure a decent purchasing power for their clients’ retirement income. Many countries have the daunting tasks of refurbishing and expanding infrastructure, maintaining and expanding public real estate – and doing this in an environmentally friendly manner. Well-conceived infrastructure investments promote productivity and efficiency in both the public and private sector and foster economic – potentially also “green” – growth. Large amounts of capital are needed. Many nations cannot tap the private capital markets as easily as before. Infrastructure investments could be the “perfect match” for a portion of pension savings. Therefore, the link between the capital at hand and its accessibility for infrastructure investments needs to be improved, via regulation, co-operation and communication that foster public-private partnerships, as well as government leadership. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 97-109 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW1LM0S Template-type: ReDIF-Article 1.0 Author-Name: Gian Luigi Costanzo Title: The Contribution of the Asset Management Industry to Long-term Growth Abstract: The global asset management industry was severely hit by the worldwide financial crisis, but has recovered well from the crisis. The resiliency of the asset management industry can be explained by a more diversified industry and investors turning to greater diversification in asset classes. The asset management industry is a vital source of economic growth as intermediary in the savings-investment channel. The industry is also one of the most important providers of liquidity needed to ensure smooth functioning of capital markets and provides the means for its clients to diversify their portfolios and achieve their investment goals. Asset managers should act as the ‘stewards’ of their clients’ interest. But less ‘sticky’ liabilities tend to create short-termism of asset managers. A sound governance framework, more transparency, better communication with clients and better management of their expectations may be needed to overcome this problem. But clients themselves, at the institutional as well as retail level, will also have to adopt a more long-term view to appropriately evaluate the risk and returns of their portfolios. Vehicles for longterm retail investment need to be developed and support by fiscal and other incentives may be considered. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 87-96 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW1N6F7 Template-type: ReDIF-Article 1.0 Author-Name: Olivier Mareuse Title: Fostering Long-term Investment and Economic Growth: A Long-term Investor's View Abstract: Active long-term investors are needed for well-functioning financial markets. Long-term investors are also essential for economic growth, as they finance infrastructure and are more likely to become engaged as active shareholders. Since long-term investments are likely to provide higher returns for pensions and long-term savings, they should be able to attract capital from pensions and other long-term savings funds, which are ample due to high savings rates in Europe. But long-term investment should also be encouraged via the regulatory framework and through fiscal incentives. Furthermore, the development of innovative financial instruments will be necessary to foster long-term investment. Finally, co-operation among long-term investors should also help to develop a new “investment culture”. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 83-86 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW1R6R6 Template-type: ReDIF-Article 1.0 Author-Name: Lars Rohde Title: Lessons from the Last Financial Crisis and the Future Role of Institutional Investors Abstract: The dynamics of the financial crisis were driven by underpricing of risk and lack of transparency, which led to a loss of confidence when the bubble finally burst. Crisis resolution involved massive government interventions that caused a permanent transfer of losses to the public sector as well as sovereign-debt crises that may involve painful solutions. Letting banks fail is a necessary disciplinary factor, but this requires a well-defined “game plan” which did not exist in the crisis. Regulatory reforms underway aim at restoring confidence, but they may hamper the long-term potential of institutional investors. Nevertheless, institutional investors should still be able to provide risk capital – except for perhaps pension funds, which have been weakened by demographic developments. Finally, improving governance and reducing excessive risk-taking are important but challenging tasks. More active and involved shareholders could further these goals, but such participation will be hard to achieve. Therefore, transparent bonus and remuneration plans are perhaps the most important initiatives for preventing future systemic financial crises. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 77-82 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW1T335 Template-type: ReDIF-Article 1.0 Author-Name: Franco Bassanini Author-Name: Edoardo Reviglio Title: Financial Stability, Fiscal Consolidation and Long-Term Investment after the Crisis Abstract: In the future there will be a global growing demand for long-term investment, both in mature and in emerging countries, to finance infrastructure, innovation, education, growth, environmental programs. Mature economies will also need to increase their share of long-term investment to exit from the recent crisis, to reinforce their growth rates and global competitiveness and to ensure public debt sustainability. Given the need to enlarge the amount of long-term financing worldwide, policy makers should create a prudential and accounting framework that encourages long-term investment with positive effects for growth and financial market stability. The paper then discusses regulatory issues related to the introduction of a new international and/or European regulatory framework that is more favourable or less penalising for long-term investment, and issues related to the creation of new euro denominated financial instruments for financing infrastructure (long-term equity funds, project bonds and guarantee schemes) and for strengthening stability in EU sovereign bond markets (Eurobonds). Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 31-75 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW1VBJL Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: Fostering Long-term Investment and Economic Growth Summary of a High-Level OECD Financial Roundtable Abstract: As the OECD is celebrating its 50th anniversary, member countries are exiting from the biggest post-war financial and economic crisis and are trying to put their economies back onto strong, sustainable footing. While financial reforms should provide for a better, more sustainable balance between stability and growth, measures to strengthen the savings-investment channel should foster sustainable growth and development. These issues were explored at a High-Level OECD Financial Roundtable and are summarised in this article. Covered are the topics of financial reform to foster stability and long-term growth, the contribution of institutional investors to long-term growth, and creating a better environment for the financing of business innovation and green growth. With strained public sector finances, private capital needs to fill the funding gap for infrastructure and other long-term projects. Appropriate regulatory incentives to overcome short-termism, as well as risk-sharing arrangements e.g. via publicprivate partnerships, are needed in order to encourage market-based, long-term investment and risk capital financing. Better transparency, information and investor education can also play a role in enhancing long-term savings and investment. Journal: OECD Journal: Financial Market Trends Year: 2011 Pages: 9-29 Volume: 2011 Issue: 1 Handle: RePEc:oec:dafkad:5KG55QW1XLR7 Template-type: ReDIF-Article 1.0 Author-Name: OECD Title: Index of Recent Features Abstract: This Index of Recent Features covers FMT issues from Vol. 2008/2, Dec 2008, through to the 2011 Special Supplement. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 283-285 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZK541 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Alison Harwood Author-Name: Allison Holland Title: The Future of Debt Markets Abstract: Discussions at the 12th OECD-WBG-IMF Global Bond Market Forum focused on three key areas related to the future of debt markets: i) the challenges facing new and infrequent sovereign issuers in assuring durable market access in frontier and emerging markets; ii) the future prospects for the securitisation and covered bond markets; and iii) the future role of large bond investors. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 263-281 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZLTG6 Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Ahmet Keskinler Author-Name: Perla Ibarlucea Flores Title: Foreword Abstract: This issue of Financial Market Trends compiles, as always, the articles that have been released online over the past few months. It features, as Part I, selected articles based on presentations given at the Symposium on “Financial crisis management and the use of government guarantees” in October 2011, which were first released between October and December 2011. The Symposium, part of the OECD’s work on financial sector guarantees, gathered policy makers, policy consultants and other academics to discuss the policy response to the financial crisis, the use of guarantees, failure resolution, banking and sovereign debt interconnections, as well as other financial safety net aspects. Policy proposals covered issues as to how to improve the use of government-supported guarantees and the design of the financial safety net, with a view to enhancing existing mechanisms to avert or contain future crises. A summary of the Symposium is included at the end of each of the articles to facilitate their distribution as self-contained papers. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 3-3 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZNN0W Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: The Financial Industry in the New Regulatory Landscape Abstract: The financial market outlook and risks as well as the impact of regulatory reforms on the financial sector were the topics discussed at the October 2011 OECD Financial Roundtable. Concerns about the current situation in financial markets were centred on the sovereign debt and banking crisis in Europe and its repercussions in other parts of the world. Many participants felt that policy makers had not been doing enough to address the crisis and that bold action and ‘circuit breakers’ to stop the negative feedback loops were needed to restore market confidence. Regarding regulation, while the financial industry broadly expressed support for Basel III reforms, some elements like the SIFI surcharge were criticised. The industry was also sceptical regarding the benefits of separation of banks’ businesses (Volcker rule, Vickers proposal) and broadly rejected the EU proposal of a financial transaction tax. While policy makers regarded some of the industry’s regulatory concerns as valid, they stressed the aim of regulatory reforms to make the financial sector safer, thus making downsizing of a certain kind of financial intermediation unavoidable. But the right balance needs to be found in terms of the extent and the timing of regulatory reforms; downsizing in the current situation should perhaps be encouraged less quickly in some cases. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 225-249 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZQP7D Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Title: Solving the Financial and Sovereign Debt Crisis in Europe Abstract: This paper examines the policies that have been proposed to solve the financial and sovereign debt crisis in Europe, against the backdrop of what the real underlying problems are: extreme differences in competitiveness; the absence of a growth strategy; sovereign, household and corporate debt at high levels in the very countries that are least competitive; and banks that have become too large, driven by dangerous trends in ‘capital markets banking’. The paper explains how counterparty risk spreads between banks and how the sovereign and banking crises are serving to exacerbate each other. Of all the policies proposed, the paper highlights those that are coherent and the magnitudes involved if the euro is not to fracture. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 201-224 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZSDWJ Template-type: ReDIF-Article 1.0 Author-Name: Rodrigo Olivares-Caminal Title: The EU Architecture to Avert a Sovereign Debt Crisis Abstract: This paper analyses what has been the EU institutional reaction to the Euro-area sovereign debt problems, focusing in particular on the new architecture designed to avert a financial crisis. It analyses i) the European Financial Stabilisation Mechanism (EFSM), an EU financial assistance feature available to all 27 member states; ii) the European Financial Stabilisation Facility (EFSF), a temporary credit-enhanced Special Purpose Vehicle (SPV) with minimal capitalisation created to raise funds from the capital markets (via an investment grade rating) and to provide financial assistance to distressed euroarea Member States (EAMS) at comparatively lower interest rates; and iii) the European Stability Mechanism (ESM), an intergovernmental organisation under public international law. Finally, some concluding remarks are provided. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 167-197 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZVBHH Template-type: ReDIF-Article 1.0 Author-Name: Christopher Pleister Title: The Federal Agency for Financial Market Stabilisation in Germany: From Rescuing to Restructuring Abstract: One important element of the response to the crisis in Germany was the establishment of a new institution, the Bundesanstalt für Finanzmarktstabilisierung (Federal Agency for Financial Market Stabilisation, henceforth FMSA). The aim was to supplement the range of tasks performed by the Deutsche Bundesbank and the Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority). Neither one of these two institutions nor the legal framework, including especially the insolvency laws, were adequate for rescuing and restructuring stressed banks. While the FMSA was initially conceived as a temporary undertaking, the new German Restructuring Act implies that the FMSA is now a permanent part of the German banking landscape. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 155-165 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWMZXCBP Template-type: ReDIF-Article 1.0 Author-Name: Dalvinder Singh Author-Name: John Raymond LaBrosse Title: Developing a Framework for Effective Financial Crisis Management Abstract: This article discusses the roles and responsibilities of the various agencies that are part of the financial system safety net, and it sets out a framework for the decision-making process for these actors in the management of a financial crisis. In this context, the article discusses issues of micro- and macro-prudential oversight and argues that more needs to be done to ensure accountability, independence, transparency and integrity of the various actors of the financial system safety net. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 125-154 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0H042 Template-type: ReDIF-Article 1.0 Author-Name: Charles A.E. Goodhart Title: The Macro-Prudential Authority: Powers, Scope and Accountability Abstract: Neither the achievement of price stability, via the Monetary Policy Committee (MPC), nor the application of micro-prudential oversight, via the Financial Services Authority (FSA), led to overall financial stability. There is a gap that needs to be filled by a macro-prudential authority (M-PA), the Financial Policy Committee (FPC) in the United Kingdom. The only macro-prudential instrument used heretofore has been the publication of Financial Stability Reviews (FSR). While worthy, these have been ineffective. The M-PA should have the following powers: First, the power to alter the composition of Central Bank (CB) assets, by adding to (subtracting from) its holdings of claims on the private sector. The argument that such actions are ‘quasi-fiscal’, and should therefore not be undertaken, is not supported. Second, the power to adjust margins (Capital adequacy ratios, liquidity ratios, loan-to-value ratios, etc.) to influence the conduct of financial intermediation. The argument that the use of such powers puts the FPC in a difficult conflict with the Monetary Policy Committee (MPC) is not supported... Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 97-123 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0JRR1 Template-type: ReDIF-Article 1.0 Author-Name: Már Guðmundsson Title: The Fault Lines in Cross-Border Banking: Lessons from the Icelandic Case Abstract: This paper discusses the fault lines in cross-border banking, both at the global level and at the European Union/European Economic Area (EU/EEA) level, using the case of the three Icelandic cross-border banks as an example. Cross-currency liquidity risk built up prior to the crisis, especially maturity mismatches in foreign currency. This risk tended to be grossly underestimated at the time. There was a run on banks’ FX liabilities after the collapse of Lehman Brothers in September 2008. The Icelandic banks were highly vulnerable to such a run and lacked a credible lender of last resort (LOLR) in terms of foreign currency. The crisis also exposed serious flaws in the EU and EEA framework for cross-border banking, including deposit insurance. One of the main lessons of the Icelandic experience is that sizeable cross-border banking operations in small countries with their own currency come with very significant risks. The Icelandic experience suggests that further reforms are needed for cross-border banking activities in the Single Market, where the key issue is to match the European passport for banks with pan- European supervision, deposit insurance and LOLR. Domestic banks could remain in the domestic system. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 85-95 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0LLJJ Template-type: ReDIF-Article 1.0 Author-Name: Francesca Campolongo Author-Name: Massimo Marchesi Author-Name: Riccardo De Lisa Title: The Potential Impact of Banking Crises on Public Finances: An Assessment of Selected EU Countries Using SYMBOL Abstract: This paper presents an application of the SYMBOL model, which was recently developed by the European Commission. In this application, we assess the potential impact of a crisis in the banking sector on public finances in four EU Member States chosen as examples. Results show that two Member States have a relatively higher probability of being in a situation where government finances have to cover losses generated in the banking system. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 73-84 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0NHBR Template-type: ReDIF-Article 1.0 Author-Name: Giuseppe Grande Author-Name: Aviram Levy Author-Name: Fabio Panetta Author-Name: Andrea Zaghini Title: Public Guarantees on Bank Bonds: Effectiveness and Distortions Abstract: The government guarantees on bank bonds adopted in 2008 in many advanced economies to support the banking systems were broadly effective in resuming bank funding and preventing a credit crunch. The guarantees, however, also caused distortions in the cost of bank borrowing. Their reintroduction might help alleviate the current pressures on banks caused by the sovereign debt crisis, but the pricing mechanism should ensure a level playing field. Moreover, given the sharp deterioration in the creditworthiness of sovereign borrowers, it may be envisaged to entrust the provision of the guarantees to a supranational organisation. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 47-72 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0QG6L Template-type: ReDIF-Article 1.0 Author-Name: Arturo Estrella Author-Name: Sebastian Schich Title: Sovereign and Banking Sector Debt: Interconnections through Guarantees Abstract: Sovereigns effectively provided the function of guarantor-of-last resort in response to the 2008/09 banking crisis, and recent bank funding challenges have led to renewed calls for explicit sovereign bank debt guarantees. The present paper focuses on the interconnections between the values of sovereign and bank debt that arise through sovereign guarantees for banks. We develop a valuation framework based on concepts of contingent claims analysis. In particular, we investigate the value of insurance of risky bank debt when the sovereign providing the guarantee can itself be risky. The framework is in principle applicable both to explicit and implicit guarantees and it is applied here to a measure of implicit external (mostly from the sovereign) support for the debt of a crosssection of 100 large European banks. Consistent with the model, the implicit support is higher, the lower the bank’s stand-alone creditworthiness and the higher the sovereign’s creditworthiness. These results have implications for pricing sovereign bank debt guarantees, be they provided individually by each sovereign for its domestic banks or by several sovereigns jointly. In the former case, stronger sovereigns should charge higher premiums for their bank debt guarantees for a given bank risk if the aim is to avoid creating distortions to competition. In the latter, they should receive greater allotments of premium incomes even where the share of the guarantees provided are identical among sovereigns. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 21-45 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0SFXT Template-type: ReDIF-Article 1.0 Author-Name: Christine M. Cumming Title: Managing Crises without Government Guarantees: How Do We Get There? Abstract: Experience illustrates that, for successful crisis management, there is no substitute for early intervention and, if possible, a private sector solution in preserving value in the firm and limiting externalities. Early intervention, in turn, calls for strong supervision. Even with a much stronger cross-border resolution process, some type of contingent arrangements in reserve will continue to be necessary. Despite their associated problems, guarantees and market backstops have been an important element in preserving liquidity and restoring market functionality and it would be difficult to manage financial crises without them. Other forms of intervention are likely to be more intrusive. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 9-19 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5K9CSWN0XZKG Template-type: ReDIF-Article 1.0 Author-Name: Hans J. Blommestein Author-Name: Ahmet Keskinler Author-Name: Perla Ibarlucea Flores Title: Highlights from the OECD Sovereign Borrowing Outlook 2012 Abstract: OECD governments are facing unprecedented challenges in the markets for government securities as a result of continued strong borrowing amid a highly uncertain environment with growing concerns about the pace of recovery, surging borrowing costs, sovereign risk and contagion pressures. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 253-262 Volume: 2011 Issue: 2 Handle: RePEc:oec:dafkad:5KG0NW45MQZV Template-type: ReDIF-Article 1.0 Author-Name: Naoyuki Yoshino Title: Global imbalances and the development of capital flows among Asian countries Abstract: During the current global crisis, capital inflows into Asian countries have increased, leading to excess liquidity and the risk of potential asset bubbles. A sudden reversal of these inflows would have negative effects on the economies in question. Given the impact of global capital movements on domestic financial systems and thereby on domestic economies, in several Asian countries certain macro-prudential regulations have been put in place, and capital controls and micro-prudential regulations have re-emerged as important tools to handle the issues related to capital inflows from outside of the region. It is important to ensure that global imbalances do not become a source of instability. The issue, thoroughly discussed after the Asian crisis a decade ago, is “using Asian savings for Asian investments” through the development of bond markets and SME’s financial inclusion. Against the backdrop of huge potential demands for infrastructure investment in the Asian region, this note proposes the issuance of “infrastructure revenue bonds” to help develop bond markets in Asia. To facilitate financial inclusion of SMEs, which outnumber other types of business in Asia, this note also proposes creating an SME database and developing regional trust funds. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 81-112 Volume: 2012 Issue: 1 Handle: RePEc:oec:dafkad:5K91HBVFF0XW Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: Bank deleveraging, the move from bank to market-based financing, and SME financing Abstract: Banks have been lowering their high pre-crisis leverage levels and are preparing for stricter regulatory capital requirements, and in the process have been reducing their lending. With the banking sector expected to shrink considerably, other actors, especially institutional investors, and new forms of financial intermediation will have to meet the credit needs of the economy. This may not only require enhancing and enlarging the perimeter of regulatory oversight, but may also need policy incentives to encourage new forms of market based lending, especially as it concerns financing long-term investment, including infrastructure, and SMEs. This was the background for the discussions at the April 2012 OECD Financial Roundtable that this note summarises. On the current outlook, participants agreed that recent policy actions in Europe have had a positive impact but more and longer-term policy actions will be needed to restore confidence among market participants and set the basis for recovery. Deleveraging is necessary but only about half-way completed. Regulatory reforms should support this process in a balanced way, avoid unintended consequences and help the transition towards increased non-bank intermediation by not imposing bank-like regulation on, e.g., insurance companies and hedge funds. Securitisation should be revitalised – perhaps with some (initial) government and regulatory support – to close the bank lending gap, especially for SME lending. Covered bonds can contribute in this, too, but their benefits may be limited, i.a. due to asset encumbrance. Mezzanine financing instruments could be useful for SME financing, and informal forms of equity financing could help small dynamic start-up companies. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 65-79 Volume: 2012 Issue: 1 Handle: RePEc:oec:dafkad:5K91HBVFH9G3 Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Sofia Lindh Title: Implicit guarantees for bank debt: where do we stand? Abstract: The global financial crisis and the policy response to it have placed a sharp spotlight on the issue of implicit guarantees for bank debt. This report discusses the incidence of implicit government guarantees for bank debt, their determinants, and estimates of their value. It shows i) that the extent of implicit guarantees differs from one banking sector to another and, within a given banking sector, from one bank to another, ii) that implicit guarantees are higher the lower the bank’s stand-alone creditworthiness, the higher the creditworthiness of its sovereign and the relatively bigger the bank in its domestic context, iii) that the incidence of implicit guarantees increased since the beginning of the financial crisis, but has decreased more recently, iv) that this recent decrease can be explained to a large extent by declining sovereign strength and hence a reduced capacity of on the part of many sovereigns to provide for such guarantees, but is also consistent with ongoing efforts in many OECD countries to make bank failure resolution regimes and practices more effective, and v) that implicit guarantees persist. Implicit guarantees imply an undesirably close link between the value of bank and sovereign debt. They also imply significant funding cost advantages for the banks that benefit from them, thus implying competitive distortions and an invitation to beneficiary banks to use them and, perhaps, take on too much risk. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 45-63 Volume: 2012 Issue: 1 Handle: RePEc:oec:dafkad:5K91HBVFKM9V Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Title: Deleveraging, Traditional versus Capital Markets Banking and the Urgent Need to Separate and Recapitalise G-SIFI Banks Abstract: Since the crisis, even with massive support from governments and central banks, widespread regulatory changes and promises from bank executives to improve the governance of risk, the world continues to see failures of Globally Systemically Important Financial Institutions (G-SIFIs, like Dexia), and huge losses (most recently from JP Morgan). Banks refuse to lend to each other, the central banks have become the interbank market and ‘bad deleveraging’ bears down on the economy forcing job losses in small- and medium-sized companies. ‘Good deleveraging’ occurs via building capital, and in this respect the US approach to dealing with the crisis provides something of a lesson that policy makers in Europe should take note of. With respect to regulations, the paper shows that capital and liquidity rules create a bias against lending to the enterprise sector (that drives jobs and economic growth). With respect to G-SIFIs, the paper shows how movements in their balance sheets are dominated by derivatives, the exposure to which varies with the cycle in risk. Netting of derivatives provides no protection against market risk, and the collateral and margin calls associated with these swings is both pro-cyclical and dangerous. The paper argues the OECD case that the best way to deal with all of these issues – both materially reducing the risk that arises from too-big-to fail while encouraging well-capitalised retail banks get on with the job of lending to create jobs – is to separate retail banking from securities business and ensure the former is (particularly in Europe) well capitalised. In this respect the paper argues that the non-operating holding company approach with ring-fenced subsidiaries (close to the Vickers proposal in the UK) is perhaps a better model than the US Volcker rule. Journal: OECD Journal: Financial Market Trends Year: 2012 Pages: 7-44 Volume: 2012 Issue: 1 Handle: RePEc:oec:dafkad:5K91HBVGFQ20 Template-type: ReDIF-Article 1.0 Author-Name: Rintaro Tamaki Title: The future of the Asian economic and financial community Abstract: From its beginning, Asia has been an important region for the OECD in terms of its members and partners. While the region’s economic performance is still strong, structural reforms, underpinned by coherent macroeconomic polices, need to be put in place to maintain this positive momentum. This note focuses on three specific medium- to long-term issues that are important in shaping the future of the Asian economic and financial community: First, in the area of trade, the importance of measuring trade in value added terms; second, funding long-term investment, especially in infrastructure, and making these investments “greener”; third, regional financial cooperation in Asia that should become more solid and robust. Some further policy challenges are shortly addressed at the end where several areas of co-operation between the OECD and the Asian region are highlighted and further possibilities for joint work are briefly explored. Journal: OECD Journal: Financial Market Trends Classification-JEL: F10; F20; F21; F30; F32; F33; F60; F65; G10 Year: 2013 Pages: 67-78 Volume: 2012 Issue: 2 Handle: RePEc:oec:dafkad:5K49LCHCLCTD Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: Banking in a challenging environment: Business models, ethics and approaches towards risks Abstract: The current crisis with its on-going banking sector problems has brought to the fore various cases of financial fraud and banking scandals that have additionally undermined the already low confidence in the sector. This has raised concerns about structural flaws in the way banks operate and are being regulated and supervised. Restoring investor confidence may require new approaches to redesign the incentives, rules and regulations for the financial sector. This was the backdrop for the discussions at the October 2012 OECD Financial Roundtable that this article summarises. Topics covered the current outlook and risks for banks as well as banking business models, ethics and approaches towards risks. Participants pointed out that, while downsizing and adjusting their business models, banks had already made improvements in their risk management. At the same time, the now observed renationalisation of assets could worsen the situation particularly in the European periphery. This could be attenuated by a European Banking Union that would also help to break the detrimental link between banks and sovereigns. As banks are deleveraging, non-banks are substituting for part of the reduced bank lending, but to do so would need regulatory support – while the shadow banking sector more generally will come under closer regulatory and supervisory scrutiny. Consumer groups in particular regard financial consumer protection as important to help improve the social value of financial activities that had often been unproductive, if not destructive. Bank representatives opposed regulatory separation of bank business on the grounds that it is insufficient to address problems of risk taking and control. Finally, it was pointed out that regulatory reforms need to be targeted and harness market forces by balancing penalties and rewards. Governance of regulation should also be enhanced, and regulation should be proactive and be complemented by strong macro and micro-supervision. Co-ordinating reforms should ensure a level playing field, but a one-size-fits-all approach should be avoided. Journal: OECD Journal: Financial Market Trends Classification-JEL: G14; G18; G20; G21; G28; G30; G32; G38 Year: 2013 Pages: 79-88 Volume: 2012 Issue: 2 Handle: RePEc:oec:dafkad:5K4BWNPKVK6F Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Business models of banks, leverage and the distance-to-default Abstract: This study models the distance-to-default (DTD) of a large sample of banks with the aim of shedding light on policy and regulatory issues. The determinants of the distance-to-default in a panel sample of 94 banks over the period 2004 to 2011, controlling for the market beta of each bank, includes house prices, relative size, simple leverage, derivatives gross market value of exposure, trading assets, wholesale funding and cross-border revenue. The Basel Tier 1 ratio finds no support as a predictor of default risk. The un-weighted leverage ratio, on the other hand, finds strong support. At the macro level house prices are a powerful predictor of the DTD. At the business model level, the results appear to be consistent with an approach to policy that focuses on the apparent importance of the “size-derivativesleverage- wholesale funding nexus” in influencing the DTD of banks. While these results are preliminary, it is encouraging that the out-of-sample predictive power of the model improves systematically as each year of new observations is added. The results are also consistent with some central bank involvement in the supervision process, given the importance of the asset price cycle, identified in this study. Journal: OECD Journal: Financial Market Trends Year: 2013 Pages: 7-34 Volume: 2012 Issue: 2 Handle: RePEc:oec:dafkad:5K4BXLXBD646 Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Byoung-Hwan Kim Title: Developments in the value of implicit guarantees for bank debt: The role of resolution regimes and practices Abstract: High values of implicit guarantees for bank debt can be taken as signalling the market’s expectation that public authorities will rescue the institution in question in times of severe financial distress. By the same token, declines in the measure would suggest a drop in the perceived likelihood of such a bailout, perhaps reflecting the availability of more effective failure resolution tools (although they could also reflect other factors such an improvement in the asset quality of banks). Journal: OECD Journal: Financial Market Trends Year: 2013 Pages: 35-65 Volume: 2012 Issue: 2 Handle: RePEc:oec:dafkad:5K4C7R8DVHVF Template-type: ReDIF-Article 1.0 Author-Name: Mats Isaksson Author-Name: Serdar Çelik Title: Equity markets, corporate governance and value creation Abstract: This article provides both an analytical framework for the role of public policy in corporate governance and a description of the empirical context that influences the conditions for that policy. It underlines the importance of focusing on the overall economic outcome and, in particular, how rules and regulations impact the conditions for companies to grow and create value by accessing public equity markets. In terms of the empirical context, we point to fundamental changes in the functioning of equity markets that may call for a fresh look at the economic effectiveness of corporate governance regulations. Among other things, we document a dramatic shift in listings from developed to emerging markets over the last decade, which means that concentrated ownership at company level has become the dominant form of ownership in listed companies worldwide.We also discuss whether the lack of new listings of smaller companies in developed markets is related to excessive regulatory burdens and unintended consequences of a decade of profound stock market deregulation. The discussion about listings illustrates that corporate governance rules and regulations do not only affect companies that are already listed. From a policy perspective, it is equally important to assess the implications for unlisted companies that may, in the future, require access to public equity markets for growth and job creation. We also document how the lengthened and ever more complex chain of intermediaries between savers and companies may influence the efficiency of capital allocation and the willingness of investors to take an active long-term interest in the companies that they own. It is shown that institutional investors are a highly heterogeneous group and that their willingness and ability to engage in corporate governance primarily depend on the economic incentives that follow from their different business models, investment strategies and trading practices.We provide examples of how regulatory initiatives to increase shareholder engagement may have unintended consequences, and note that the diversity and complexity of the investment chain can render general policies or regulation ineffective. JEL Classification: G30, G32, G34, G38 Keywords: capital and ownership structure, corporate governance, initial public offerings, institutional investors, shareholders Journal: OECD Journal: Financial Market Trends Year: 2013 Pages: 53-84 Volume: 2013 Issue: 1 Handle: RePEc:oec:dafkad:5K40M1NTMHZS Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Bank lending puzzles: Business models and the responsiveness to policy Abstract: Banks are still dealing with historic losses buried in their balance sheets. As a result, the US economy is picking up only modestly and Europe is sinking further into recession, despite unprecedented low interest rates and policies to compress the term premium. The aim of this study is to explore the business activities of banks, with a special focus on their lending behaviour, and its responsiveness to unconventional monetary policy. The paper shows that deleveraging has been mainly via mark-to-market assets falling in value, and policy is now serving to reflate these assets without a strong impact on lending. A panel regression study shows that GSIFI banks are least responsive to policy. Non-GSIFI banks respond to the lending rate spread to cash rates, the spread between lending rates and the alternative investment in government bonds, and the distance-to-default (the banks solvency). The paper shows that better lending in the USA is a result of safer banks and a better spread to government bonds – yields on the latter are too attractive relative to lending rates in Europe. Finally, the paper comments on the problem of using cyclical tools to address structural problems in banks, and suggests which alternative policies would better facilitate a financial system more aligned with lending, trust and stability and less towards high-risk activities and leverage via complex products. JEL Classification: E50, E51, E52, E58, G20, G21, G24, G28. Keywords: Bank Lending, Bank business model, deleveraging, structural policy, unconventional monetary policy, distance to default, spreads, bank separation, GSIFI. Journal: OECD Journal: Financial Market Trends Year: 2013 Pages: 7-30 Volume: 2013 Issue: 1 Handle: RePEc:oec:dafkad:5K40M1NZ55WJ Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Long-term investment, the cost of capital and the dividend and buyback puzzle Abstract: The paper argues that interest rates are at extremely low levels to support banks, and the search for yield has pushed the liquidity driven speculative bubble from real estate, derivatives and structured products markets into the corporate debt market. Equities have rallied strongly too. This asset cycle is certainly helping banks reduce hidden losses on illiquid securities and could also help reduce the cost of equity. But for this to occur at current bond yields would require an unrealistic bubble in equities. Markets are assuming that this transition from low to higher rates (more in line with nominal GDP) can be handled smoothly by policy makers, when in fact this may not be so. Extreme volatility would risk new financial fragility problems. The paper presents a panel model using more than 4 000 global companies and shows that the Capex decision in general depend on the cost of equity, the accelerator and uncertainty, whereas buybacks are driven mainly by the gap between the cost of equity and debt. Right now the incentive structure implied by very low interest rates, which may be sustained for a long time, together with tax incentives, works directly against longterm investment. Debt finance is cheap, while the cost of equity capital needed for risky long-term investment is still high. This combination provides a direct incentive for borrowing to carry out buybacks (de-equitisation). Noting that weak investment reduces potential GDP, the paper makes some policy suggestions. JEL Classification: G15, G32, G28, E52. Keywords: Long-term investment, interest rates, de-equitisation, cost of capital, dividend and buybacks, monetary policy. Journal: OECD Journal: Financial Market Trends Year: 2013 Pages: 39-52 Volume: 2013 Issue: 1 Handle: RePEc:oec:dafkad:5K41Z8T05L8S Template-type: ReDIF-Article 1.0 Author-Name: Édouard Fernandez-Bollo Title: Structural reform and supervision of the banking sector in France Abstract: The crisis has shown that there is no such thing as an optimal banking structure or model. The Liikanen report highlighted excessive risk taking and excessive reliance on short-term funding not matched with adequate capital protection. The French reform of the banking sector builds on this insight as well as the agreement reached by the Basel Committee on Banking Supervision and the European CRD 4 to foster financial stability. Risky speculative activity will have to be separated from the rest of the banking sector while taking into account the assets of the universal banking model. Further, the reform introduces a strong resolution framework and new macro-prudential powers. JEL Classification: G18; G38; G33; G32. Keywords: Banking system; bank supervision; bankruptcy; liquidation; systemic risk; macro-prudential policy. Journal: OECD Journal: Financial Market Trends Year: 2013 Pages: 31-38 Volume: 2013 Issue: 1 Handle: RePEc:oec:dafkad:5K41Z8T3MRHG Template-type: ReDIF-Article 1.0 Author-Name: Gert Wehinger Title: SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature Abstract: After a brief overview of current financing difficulties for SMEs and policy measures to support SME lending during the crisis,this article presents a literature review related to difficulties in SME’s access to finance during the crisis, against a background of a sharp decline in bank profitability and an erosion of bank capital that negatively affected lending. The articles reviewed are classified according to four main issues of interest:the impairment of the bank-credit channel and its economic effects;factors potentially attenuating the effect of a financial squeeze;the role of global banking in mitigating but also transmitting financial shocks; and,looking ahead,issues related to so-called “credit-less recoveries” that should be relevant in guiding policy makers in the current environment of financial deleveraging. All the results hold important implications for policy making given the bail-outs and the large injections ofliquidity by central banks during the crisis.     Keywords: Financial crisis, SME finance, bank lending, credit crunch Journal: OECD Journal: Financial Market Trends Classification-JEL: G01; G21; G28 Year: 2014 Pages: 115-148 Volume: 2013 Issue: 2 Handle: RePEc:oec:dafkad:5JZ734P6B8JG Template-type: ReDIF-Article 1.0 Author-Name: Serdar Çelik Author-Name: Mats Isaksson Title: Institutional investors and ownership engagement Abstract: This article provides a framework for analysing the character and degree of ownership engagement by institutional investors.It argues that the general term “institutional investor” in itself doesn’t say very much about the quality or degree of ownership engagement. It is therefore an evasive “shorthand” for policy discussions about ownership engagement. The reason is that there are large differences in ownership engagement between different categories of institutional investors. There are also differences in ownership engagement within the same category of institutional investors such as hedge funds, investment funds,etc. These differences arise from the fact that the degree of ownership engagement is determined by a number of different features and choices that together make up the institutional investor’s “business model”. When ownership engagement is not a central part of the business model,public policies and voluntary standards aiming to improve the quality of ownership engagement among institutional investors are likely to have limited effect. Based on an empirical overview of the relative sise of different categories of institutional investors, the article identifies a set of 7 features and 19 choices that in different combinations define the institutional investor’s business model. These features and choices are then used to establish a taxonomy for identifying different degrees of ownership engagement ranging from “no engagement” to “inside engagement”. Keywords: Corporate governance, institutional investors, incentives, shareholder engagement, shareholder activism. Journal: OECD Journal: Financial Market Trends Classification-JEL: G30; G32; G34; G38 Year: 2014 Pages: 93-114 Volume: 2013 Issue: 2 Handle: RePEc:oec:dafkad:5JZ734PWTRKC Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Author-Name: Caroline Roulet Title: Bank business models and the separation issue Abstract: The main hallmarks of the global financial crisis were too-big-to-fail institutions taking on too much risk with other people’s money while gains were privatised and losses socialised. It is shown that banks need little capital in calm periods, but in a crisis they need too much – there is no reasonable ex-ante capital rule for large systemically important financial institutions that will make them safe. The bank regulators paradox is that large complex and interconnected banks need very little capital in the good times, but they can never have enough in an extreme crisis. Separation is required to deal with this problem, which derives mainly from counterparty risk. The study suggests banks should be considered for separation into a ring-fenced non-operating holding company (NOHC) structure with ring-fencing when they pass a key allowable threshold for the gross market value (GMV) of derivatives, a case which is reinforced if the bank has high wholesale funding and low levels of liquid trading assets. The pricing of derivatives and repos would become more commensurate with the risks if the NOHC proposal were to be pursued as a unifying strategy for the different national approaches. Most of the objections to this structure are summarised and rebutted. Other national proposals for separation in Switzerland, the Volcker rule, the Vickers rule, and the Liikanen proposal are argued to be inferior to the ring-fenced NOHC proposal, on the grounds that empirical evidence about what matters for a safe business model is not taken properly into account. JEL classification: G01, G15, G18, G20, G21, G24, G28 Keywords: Financial crisis, derivatives, bank business models, distance-to-default, structural bank separation, banking reform, GSIFI banks Journal: OECD Journal: Financial Market Trends Year: 2014 Pages: 69-91 Volume: 2013 Issue: 2 Handle: RePEc:oec:dafkad:5JZB2RHK9B6J Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Paul Atkinson Author-Name: Caroline Roulet Title: Bank business models and the Basel system: Complexity and interconnectedness Abstract: The main hallmarks of the global financial crisis were too-big-to-fail institutions taking on too much risk with other people’s money: excess leverage and default pressure resulting from contagion and counterparty risk. This paper looks at whether the Basel III agreement addresses these issues effectively. Basel III has some very useful elements, notably a (much too light “back-up”) leverage ratio, a capital buffer, a proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses and liquidity and stable funding ratios. However, the paper shows that Basel risk weighting and the use of internal bank models for determining them leads to systematic regulatory arbitrage that undermines its effectiveness. Empirical evidence about the determinants of the riskiness of a bank (measured in this study by the Distance-to-Default) shows that a simple leverage ratio vastly outperforms the Basel Tier 1 ratio. Furthermore, business model features (after controlling for macro factors) have a huge impact. Derivatives origination, prime broking, etc., carry vastly different risks to core deposit banking. Where such differences are present, it makes little sense to have a one-size-fits-all approach to capital rules. Capital rules make more sense when fundamentally different businesses are separated. JEL classification: G01, G15, G18, G20, G21, G24, G28 Keywords: Financial crisis, Basel III, derivatives, bank business models, distance-todefault, structural bank separation, banking reform, GSIFI banks Journal: OECD Journal: Financial Market Trends Year: 2014 Pages: 43-68 Volume: 2013 Issue: 2 Handle: RePEc:oec:dafkad:5JZB2RHKD65B Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Capital controls on inflows, the global financial crisis and economic growth: Evidence for emerging economies Abstract: The results of an IMF study on controls on capital inflows in emerging economies, using a probit regression approach, are first replicated and tested for stability. The IMF results, downplayed by the authors, have been used by others to suggest controls can be helpful in a crisis situation. However, the stability findings suggest the results are not sufficiently robust to make strong claims in this regard. The same 37 countries and the IMF capital control measures are then used in a panel regression study to examine the impact of capital inflows on annual real GDP growth around the Global Financial Crisis. The results between the pre-crisis and the crisis periods are inconsistent with the IMF study – finding that capital restrictions on inflows (particularly debt liabilities) are most useful in good times when inflows to emerging markets are strong and upward pressure on managed exchange rates and reserves accumulation is greatest. However, lower controls on bonds and on FDI inflows seem to be associated with better growth outcomes during the crisis period studied. These findings are more consistent with studies that see capital controls as part of exchange rate targeting policies and concerns about excess reserves accumulation. JEL Classification: C23, C25, F21, F43, G01 Keywords: Capital controls, economic growth, emerging economies, financial crisis Journal: OECD Journal: Financial Market Trends Year: 2014 Pages: 29-42 Volume: 2013 Issue: 2 Handle: RePEc:oec:dafkad:5JZB2RHKGTHC Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Macro-prudential policy, bank systemic risk and capital controls Abstract: The paper explores the issue of macro-prudential policies in the light of empirical evidence on the determinants of bank systemic risk, and the effectiveness of capital controls. In many ways this reflects a step back in time towards sector approaches to monetary policy that were so prevalent in the 1960s, 1970s and early 1980s. Complexity and interdependence is such that proposals on these issues should be treated with care until much more is understood about the issue. JEL Classification: C23, C25, F21, F43, G01. Keywords: Macro-prudential policies, capital controls, economic growth, emerging economies, financial crisis. Journal: OECD Journal: Financial Market Trends Year: 2014 Pages: 7-28 Volume: 2013 Issue: 2 Handle: RePEc:oec:dafkad:5JZB2RHKHKS4 Template-type: ReDIF-Article 1.0 Author-Name: Raffaele Della Croce Author-Name: Stefano Gatti Title: Financing infrastructure – International trends Abstract: The infrastructure financing market has gone through a process of radical transformation starting from the mid-2000s. Different reasons – including a changed macroeconomic environment, more stringent regulations on financial intermediaries, and a modified appetite for long-term asset investments – have led to a reallocation of flows from the banking sector to the institutional investors sector. This article provides an overview of international trends in infrastructure finance. It proposes a map of the different investment channels that private investors can use to access the infrastructure investment on the equity and debt side, highlighting the historical evolution of these segments in the past few years. Recently designed financial structures, such as different forms of partnership between banks and institutional investors, securitisation models and debt/credit fund vehicles, are also taken into consideration. JEL classification: E2, G1, G11, G2, G3, H44, H54, H81 Keywords: infrastructure financing, long-term investment, institutional investors, public-private partnerships, bank institutional investors partnerships, syndicated loans, project bonds, securitisation, debt/credit fund vehicles, financial market regulation Journal: OECD Journal: Financial Market Trends Classification-JEL: E2; G1; G11; G2; G3; H44; H54; H81 Year: 2014 Pages: 123-138 Volume: 2014 Issue: 1 Handle: RePEc:oec:dafkad:5JXVPB4JFRF1 Template-type: ReDIF-Article 1.0 Author-Name: Iota Kaousar Nassr Author-Name: Gert Wehinger Title: Non-bank debt financing for SMEs: The role of securitisation, private placements and bonds Abstract: Reducing bank dependence in financing small-and medium-sized enterprises (SMEs) that are key contributors to economic growth and job creation should help making them more resilient to financial shocks. Various non-bank debt financing alternatives are available and were the focus of a Roundtable discussion that this article draws on. Revitalising securitisation, tarnished during the crisis, is important, by making it safer, simpler and more transparent, and perhaps also by offering some (initial) government and regulatory support. Similarly, covered bonds can be attractive instruments for SME finance. For mid-sized companies, bond issuance and private placements may also provide useful alternatives. All these instruments can and should be tailored to fit the investors’ needs. There is no “silver bullet” for SME finance which is exceptionally complex due to the diversity of SMEs themselves. Data transparency, standardisation, regulatory support and raising awareness about available financing options should be among the issues to be addressed. JEL classification: G1, G2, G23, G28 Keywords: SME finance, non-bank finance, (high-quality) securitisation, asset-backed securities (ABS), SME CLO (collateralised loan obligation), (covered) bonds, private placements, European DataWarehouse, Prime Collateralised Securities (PCS) initiative. Journal: OECD Journal: Financial Market Trends Classification-JEL: G1; G2; G23; G28 Year: 2014 Pages: 139-162 Volume: 2014 Issue: 1 Handle: RePEc:oec:dafkad:5JXX05SVVW34 Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Yesim Aydin Title: Policy responses to the issue of implicit bank debt guarantees: OECD survey results Abstract: Bank regulatory reform is expected to limit the value of implicit bank debt guarantees, even if not plainly targeting such values. According to the responses from 35 countries to a survey on implicit bank debt guarantees, there is however no one specific policy capable of fully eliminating the market perception that bank debt is “special”. A mixture of several different and complementary policy measures is considered more helpful, with recurrent elements including the implementation of internationally agreed capital and liquidity standards, the tightening of micro- and macro-prudential supervision and making bank failure resolution more effective. As regards the overall thrust of bank regulatory reform efforts, most respondents suggest “strengthening banks” and “strengthening the capacity to withdraw the guarantee function” describes best their own efforts. By contrast, labelling certain policy measures as “effectively charging a user fee” is considered problematic as it might make explicit what currently is at most implicit. Keywords: Banks, banking regulation, bank regulatory reform, bank recovery and resolution, implicit guarantees for bank debt Journal: OECD Journal: Financial Market Trends Classification-JEL: G21; G28 Year: 2014 Pages: 69-98 Volume: 2014 Issue: 1 Handle: RePEc:oec:dafkad:5JXZBV3R1X9X Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Yesim Aydin Title: Measurement and analysis of implicit guarantees for bank debt: OECD survey results Abstract: Implicit guarantees of bank debt create economic costs and distortions, which is why policy makers have clearly announced their intention to rein in the value of implicit guarantees. This report identifies key findings from the responses from 35 countries to a survey on implicit guarantees. The survey shows that while authorities have not settled on the best way of measuring such guarantees, it is important to produce estimates of the value of these guarantees to facilitate the task of assessing progress in bank regulatory reform and in reducing the value of these guarantees. Whatever method is used, the value of implicit bank debt guarantees is substantial. In absolute terms, the estimated funding cost advantages can amount to about USD 10 billion on an annual basis for banking sectors in some jurisdictions and, in many cases, they are estimated to represent the equivalent of 1% of domestic GDP; in crisis situations, this value could rise to close to 3% of domestic GDP. Keywords: Bank regulatory reform, bank debt, bank funding costs, implicit guarantees of bank debt, debt versus equity funding Journal: OECD Journal: Financial Market Trends Classification-JEL: E43; G12; G21; G28 Year: 2014 Pages: 39-67 Volume: 2014 Issue: 1 Handle: RePEc:oec:dafkad:5JXZBV3R9RF4 Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Problems in the international financial system Abstract: Since the 1980s OECD investment-saving correlations – as an inverse measure of economic openness – indicate a very wide disparity of openness between the OECD and emerging market economies (EMEs) with an absence of open markets in the latter. Given the increasing weight of EMEs in the world economy this pattern of growth with disparity of openness is ultimately unsustainable. This approach to development is not in the interests of EMEs in the post-crisis global environment. Various studies show how the absence of capital mobility inhibits development though private sector capital expenditure at the firm level. This paper generalises those findings in a panel study, showing that in the period since 2008 the increased presence of capital controls is associated with highly significant negative effects on business investment. It suggests that the world economy could be entering a more dangerous phase of potential instability that is not in the interests of either the advanced or the emerging world. There is scope for better policies to encourage more openness; the OECD Codes of Liberalisation could be an effective tool for managing the reform process. Keywords: Capital controls, capital flows, exchange rate management, savings and investment, corporate capital expenditure, emerging market economies (EMEs) Journal: OECD Journal: Financial Market Trends Classification-JEL: C23; D22; E20; F21; F31; F43; G01 Year: 2014 Pages: 99-121 Volume: 2014 Issue: 1 Handle: RePEc:oec:dafkad:5JXZMKG91S0T Template-type: ReDIF-Article 1.0 Author-Name: Sebastian Schich Author-Name: Michiel Bijlsma Author-Name: Remco Mocking Title: Improving the monitoring of the value of implicit guarantees for bank debt Abstract: The value of implicit guarantees has declined from its peak at the height of the financial crisis, which is consistent with progress made regarding the bank regulatory reform agenda, as one would expect that many of the reform measures imply a more limited value of implicit guarantees for bank debt. Implicit guarantees persist however and their value continues to be significant, estimated here to be equivalent to EUR 50 billion of annual funding costs savings for a sample of more than 100 large European banks. This estimated funding cost advantage is a conservative estimate as it only focuses on one type of debt that can be measured in “real-time”, that is as data on credit ratings, debt issuance and prices of debt become available. In any case, bank debt continues to be considered “special” by market participants and this observation implies that the substantial economic distortions, including distortions to risk-taking incentives and competition, arising from this situation also persist. Keywords: Bank regulatory reform, bank funding costs, implicit guarantees for bank debt, debt versus equity funding, quantitative policy Journal: OECD Journal: Financial Market Trends Classification-JEL: E43; G12; G21; G28 Year: 2014 Pages: 7-37 Volume: 2014 Issue: 1 Handle: RePEc:oec:dafkad:5JXZMKGJNT9X Template-type: ReDIF-Article 1.0 Author-Name: Oliver Denk Author-Name: Sebastian Schich Author-Name: Boris Cournède Title: Why implicit bank debt guarantees matter: Some empirical evidence Abstract: What are the economic effects of implicit bank debt guarantees and who ultimately benefits from them? This paper finds that “financial excesses” – situations where bank credit reaches levels that reduce economic growth – have been stronger in OECD countries characterised by larger values of implicit guarantees and where bank creditors have not incurred losses in bank failure resolution cases. Also, implicit bank debt guarantees benefit financial sector employees and other high-income earners in two ways, increasing income inequality. First, implicit guarantees are likely to raise financial sector pay. This is consistent with the observation of “financial sector wage premia”, or financial sector employees earning in excess of their profile in terms of age, education and other characteristics. Second, implicit guarantees are likely to result in more and cheaper bank lending. If so, well-off people tend to benefit relatively more since household credit is more unequally distributed than income. JEL classification: D63, E43, G21, G28, O47 Keywords: Bank funding costs, implicit guarantees for bank debt, bank failure resolution, finance and growth, finance and income inequality Journal: OECD Journal: Financial Market Trends Classification-JEL: D63; E43; G21; G28; O47 Year: 2015 Pages: 63-88 Volume: 2014 Issue: 2 Handle: RePEc:oec:dafkad:5JS3BFZNX6VJ Template-type: ReDIF-Article 1.0 Author-Name: Iota Kaousar Nassr Author-Name: Gert Wehinger Title: Unlocking SME finance through market-based debt: Securitisation, private placements and bonds Abstract: Small and medium-sized enterprises (SMEs) are key contributors to economic growth and job creation. The current economic and financial crisis has reduced bank lending and has affected SMEs in particular. Capital markets will have to play a bigger role in financing SMEs in order to make them more resilient to financial shocks. This article reviews the spectrum of alternative market-based debt instruments for SME financing. It focuses on securitisation and covered bonds and also addresses issues regarding small/mid-cap bonds and private placements. It reviews the current state of the market for these instruments and identifies associated risks; analyses the barriers for issuers and investors alike; and provides best practices and high level recommendations to help alleviate barriers without hampering the overall stability of the system. JEL classification: G1, G2, G23, G28 Keywords: SME finance, SME securitisation, non-bank finance, (high-quality) securitisation, asset-backed securities (ABS), SME CLO (collateralised loan obligation), (covered) bonds, private placements, financial regulation, European DataWarehouse, Prime Collateralised Securities (PCS) initiative Journal: OECD Journal: Financial Market Trends Classification-JEL: G1; G2; G23; G28 Year: 2015 Pages: 89-190 Volume: 2014 Issue: 2 Handle: RePEc:oec:dafkad:5JS3BG1G53LN Template-type: ReDIF-Article 1.0 Author-Name: Paul Ramskogler Title: Tracing the origins of the financial crisis Abstract: More than half a decade has passed since the most significant economic crisis of our lifetimes and a plethora of different interpretations has been offered about its origins. This paper consolidates the stylised facts put forward so far into a concise and coherent meta-narrative. The paper connects the dots between the arguments developed in the literature on macroeconomics and those laid out in the literature on financial economics. It focuses, in particular, on the interaction of monetary policy, international capital flows and the decisive impact of the rise of the shadow banking industry. JEL classification: A10, F30, G01 Keywords: Financial crisis, international capital flows, shadow banking Journal: OECD Journal: Financial Market Trends Classification-JEL: A10; F30; G01 Year: 2015 Pages: 47-61 Volume: 2014 Issue: 2 Handle: RePEc:oec:dafkad:5JS3DQMSL4BR Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Infrastructure versus other investments in the global economy and stagnation hypotheses: What do company data tell us? Abstract: This paper uses data drawn from 10 000 global companies in 75 advanced and emerging countries to look at trends in infrastructure and other non-financial industries in light of the talk of stagnation. There appears to be a twin paradox in the global economy: some companies and industries are possibly over-investing, driving down returns on equity (ROEs) versus the cost of capital and creating margin pressure globally, while others carry out too little long-term investment in favour of buybacks and the accumulation of cash. This pattern is associated with a shift in the centre of gravity of world economic activity towards emerging markets. Most of the over-investment appears to be occurring in the extremely strong growth of emerging market sales and investment in non-infrastructure companies, much of which is being financed from rapidly growing debt since the financial crisis. Global value chains, emerging market policies of financial repression, low interest rates, taxation incentives, natural resource endowments and other factors determine where investment is stronger and where it is restrained. Potential problems of debt-financed over-investment in non-infrastructure industries in emerging markets and the incentives for buybacks are identified as major policy issues that need to be addressed if sustainable growth is to be achieved. Evidence on the role of causal factors (sales, GDP, the return on equity, the cost of equity and debt and a measure of financial openness) on corporate capital spending is presented. Finally some policy recommendations are made. JEL classification: F21, G15, G18, G23 Keywords: Global economy, infrastructure, investment, listed companies Journal: OECD Journal: Financial Market Trends Year: 2015 Pages: 7-45 Volume: 2014 Issue: 2 Handle: RePEc:oec:dafkad:5JS4SBD025D6 Template-type: ReDIF-Article 1.0 Author-Name: Leigh Wolfrom Author-Name: Mamiko Yokoi-Arai Title: Financial instruments for managing disaster risks related to climate change Abstract: This article provides an overview of the potential implications of climate change for the financial management of disaster risks. It outlines the contribution of insurance to reducing the economic disruption of disaster events and policy approaches to supporting the penetration of disaster insurance coverage and the capacity of insurance markets to absorb disaster risks, including through the use of capital markets instruments and international co-operation in risk pooling. It concludes with a number of recommendations for improving the financial management of disaster risks in the context of climate change and some areas of further work. JEL classification: G22, G23, H84, Q54 Keywords: Climate change, natural disasters, extreme events, insurance, reinsurance, catastrophe bonds Journal: OECD Journal: Financial Market Trends Classification-JEL: G22; G23; H84; Q54 Year: 2016 Pages: 25-47 Volume: 2015 Issue: 1 Handle: RePEc:oec:dafkad:5JRQDKPXK5D5 Template-type: ReDIF-Article 1.0 Author-Name: Jean Boissinot Author-Name: Doryane Huber Author-Name: Gildas Lame Title: Finance and climate: The transition to a low-carbon and climate-resilient economy from a financial sector perspective Abstract: Climate change is a major political and economic challenge. This paper sketches out its relevance for the financial sector. Necessary low-carbon investments imply a significant yet manageable financing gap. However, we argue that beyond capital mobilisation that has attracted most attention until now, the main challenge is ensuring a transition-consistent capital reallocation. The financial sector has a key role to play in that respect, complementary to appropriately designed climate policies. To help the financial system fulfil its role, the understanding of the economics of climate change should be deepened and a sector-wide businessoriented appropriation of these issues should be promoted. JEL classification: Q54, E10, E44, G12, G14, G21, G22, G23, G28. Keywords: Climate change, low carbon, climate finance, green finance, investment, capital allocation, financial system, risks Journal: OECD Journal: Financial Market Trends Classification-JEL: E10; E44; G12; G14; G21; G22; G23; G28; Q54 Year: 2016 Pages: 7-23 Volume: 2015 Issue: 1 Handle: RePEc:oec:dafkad:5JRRZ76D5TD5 Template-type: ReDIF-Article 1.0 Author-Name: Iota Kaousar Nassr Author-Name: Gert Wehinger Title: Opportunities and limitations of public equity markets for SMEs Abstract: This article on public equity financing for small and medium-sized enterprises (SMEs) complements earlier OECD work on market-based finance for SMEs. The development of this market segment could promote investment in SMEs and, together with securitisation and other non-bank debt financing instruments, encourage an enhanced allocation of risk and risk taking, and thus support growth. Despite the benefits of public SME equity, its share is small and an equity gap exists for risk financing more generally. A number of important impediments to the wider use of public equities for SMEs are identified, such as admission cost and listing requirements, lack of liquidity, educational gaps, limited ecosystems, and tax treatment, all of which require attention by regulators and policy makers alike. Keywords: SME finance, market-based finance, SME public equity markets, growth markets, small caps, initial public offering (IPO), exchanges, risk capital, small equity offering Journal: OECD Journal: Financial Market Trends Classification-JEL: G1; G2; G23; G28 Year: 2016 Pages: 49-84 Volume: 2015 Issue: 1 Handle: RePEc:oec:dafkad:5JRS051FVNJK Template-type: ReDIF-Article 1.0 Author-Name: Jessica Cariboni Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Alessandro Fontana Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Sven Langedijk Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Sara Maccaferri Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Andrea Pagano Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Marco Petracco Giudici Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Michela Rancan Author-Workplace-Name: European Commission, Joint Research Centre Author-Name: Sebastian Schich Title: Reducing and sharing the burden of bank failures Abstract: This report demonstrates that the contingent liabilities associated with efforts to limit the adverse externalities stemming from failures in the European banking sector are substantially decreasing as a result of new regulation. Noting that the implied shifting of losses from taxpayers to bank creditors is desirable, the report recognises that losses do not disappear. It discusses the issue of where bank recovery or resolution bail-in losses may go. It underlines that the sectoral allocation of losses matters, but concludes that our understanding needs to be further developed and that more transparency about the structure of bank creditors would be desirable. Increasing transparency in this regard would, among other things, help assure policy makers that the new tools available can be used effectively and smoothly in actual practice. Also, raising awareness of investors in bail-inable bank debt about the associated risks should enhance the credibility of the bail-in framework. Journal: OECD Journal: Financial Market Trends Year: 2016 Pages: 29-61 Volume: 2015 Issue: 2 Handle: RePEc:oec:dafkad:5JM0P43LDL30 Template-type: ReDIF-Article 1.0 Author-Name: OECD Title: Financial risks in the low-growth, low-interest rate environment Abstract: The current post-crisis economic and financial landscape has been characterised by rising asset prices – driven by record low interest rates and easy monetary policy – and low productive investment by firms in advanced countries. The OECD Business and Finance Outlook 2015 examines this situation and looks at the way in which companies, banks, institutional investors and shadow banking entities are operating in the low-growth and low-interest rate environment and explores the build-up of risks in the financial system. The “promises” of growth, employment, and adequate retirement income are seen to be at risk in the absence of policy actions. These issues were also discussed at a launch event of that publication, a summary of which is presented in this article. JEL classification: E2, E4, E5, F21, F23, G1, G2. Keywords: financial system, financial crisis, asset prices, financial institutions, institutional investors, shadow banking, pension systems, retirement income, financial education. Journal: OECD Journal: Financial Market Trends Classification-JEL: E2; E4; E5; F21; F23; G1; G2 Year: 2016 Pages: 63-90 Volume: 2015 Issue: 2 Handle: RePEc:oec:dafkad:5JM0P43NDT45 Template-type: ReDIF-Article 1.0 Author-Name: Adrian Blundell-Wignall Author-Name: Caroline Roulet Title: Evaluating capital flow management measures used as macro-prudential tools Abstract: Earlier OECD research has shown that capital flow management measures (CFMs) that are used as macro-prudential measures (MPMs), including currency-based restrictions applied to banks’ operations also with non-residents, have the intended negative impact on capital account openness as measured by covered interest parity indicators. But what is their impact as macro-prudential tools to improve resilience to financial stability risks? This paper refers to the Bruno and Shin (2013) study that suggests that currency-based restrictions act as an effective macro-prudential buffer by reducing the sensitivity in emerging economies of cross-border bank lending to global credit cycles as measured by the volatility index VIX. The specific restrictions considered by the Bruno and Shin study are defined as CFMs and MPMs by both the IMF and the OECD. The paper shows that this result is mitigated when using updated data and testing the same hypotheses for more countries. Therefore further research is needed before concluding on the effectiveness of CFMs used as MPMs. On the other hand, the paper does find that CFMs, including currency-based measures, play a role in managing the domestic credit implications of those central banks engaged in foreign exchange interventions. The paper suggests that countries concerned with financial stability risks that may arise from global credit push factors, while wishing to avoid price distortions caused by CFMs, could use Basel III-consistent liquidity coverage ratios and net stable funding ratios as alternatives to CFMs; they also have the advantage of not having raised objections between governments so far regarding international commitments to exchange rate flexibility and cross-border openness, including the OECD Code of Liberalisation of Capital Movements. Journal: OECD Journal: Financial Market Trends Year: 2016 Pages: 7-27 Volume: 2015 Issue: 2 Handle: RePEc:oec:dafkad:5JM0P44DLQ6F Template-type: ReDIF-Article 1.0 Author-Name: W. Jean Kwon Author-Name: Leigh Wolfrom Title: Analytical tools for the insurance market and macro-prudential surveillance Keywords: Insurance market surveillance, insurance supervision, insurance regulation, insurance statistics Journal: OECD Journal: Financial Market Trends Classification-JEL: G22; G28; G32; G38 Year: 2016 Pages: 1-47 Volume: 2016 Issue: 1 Handle: RePEc:oec:dafkad:5JLN6HNVWDZN Template-type: ReDIF-Article 1.0 Author-Name: Marianna Blix Grimaldi Author-Workplace-Name: Swedish National Debt Office Author-Name: Jörg Hofmeister Author-Workplace-Name: Swedish National Debt Office Author-Name: Sebastian Schich Author-Name: Daniel Snethlage Author-Workplace-Name: The Treasury, New Zealand Title: Estimating the size and incidence of bank resolution costs for selected banks in OECD countries Abstract: This report provides estimates of the costs associated with bank resolution both in terms of the expected costs that might arise should a bank fail (i.e. as “ex-post” costs), as well as the cost associated with the likelihood that a solvent bank might fail (i.e. as “ex-ante” costs) over the next year. It finds that expected resolution costs (ex-post costs) have dropped recently due to higher average capital ratios and a lower level of bank liabilities as a percentage of GDP. The annualised value of these expected resolution costs (ex-ante costs), which increased sharply after 2008, has since subsided, but remains well above its 2008 level. Overall, the estimates produced in this report support the notion that recent financial sector reforms have had an impact on reducing the costs associated with bank failure, including the expected costs to taxpayers. However, estimates are in most cases yet to return to pre-crisis levels. Journal: OECD Journal: Financial Market Trends Year: 2016 Pages: 1-36 Volume: 2016 Issue: 1 Handle: RePEc:oec:dafkad:5JLVBSLKTW7J Template-type: ReDIF-Article 1.0 Author-Name: OECD Title: Green financing: Challenges and opportunities in the transition to a clean and climate-resilient economy Abstract: Greening the economy involves improving the quality of the environment and tackling climate change, and is a major policy, economic and financial challenge. Key issues that have emerged in this context relate to financing climate change mitigation and adaptation and how to close the financing gap to fund the needed low-carbon investments. Beyond such capital mobilisation there is the more general challenge of whether and how the financial system can enable capital reallocation consistent with the “green” transition and for the long run, and what risks, opportunities and incentives are involved. This article provides a brief overview and summarises an OECD roundtable discussion on these issues. JEL classification: Q54, E10, E44, G12, G14, G21, G22, G23, G28. Keywords: Climate change, low carbon, climate finance, green finance, investment, capital allocation, financial system, disclosure, stranded assets, risks, COP21.                                                       Journal: OECD Journal: Financial Market Trends Classification-JEL: E10; E44; G12; G14; G21; G22; G23; G28; Q54 Year: 2017 Pages: 63-78 Volume: 2016 Issue: 2 Handle: RePEc:oec:dafkad:5JG0097L3QHL Template-type: ReDIF-Article 1.0 Author-Name: Helmut Gründl Author-Name: Ming (Ivy) Dong Author-Name: Jens Gal Title: The evolution of insurer portfolio investment strategies for long-term investing Abstract: The recent global financial crisis, combined with regulatory changes in financial industries, has altered the financial landscape in terms of how financing can be achieved and the potential role of institutional investors. The potential role that insurers, particularly life insurers and pension funds, can play as long-term institutional investors has become a central topic of discussion in various fora. How this role develops will, in the long run, affect how firms obtain financing for their investments and ultimately lead to growth of the real economy. This article provides an overview of the evolving investment strategies of insurers and identifies the opportunities and constraints they may face with respect to long-term investment activity. The report investigates the extent to which changes in macroeconomic conditions, market developments and insurance regulation may affect the role of insurers in long-term investment financing. It concludes that regulation should neither unduly favour nor hinder long-term investment as such but place priority on incentivising prudent assetand- liability management with mechanisms that allow for a “true and fair view” of insurers’ risk exposures. In risk-based solvency regulation, an asset’s risk relative to liabilities is reflected in the capital requirements. JEL classification: G22, E22, F21, O16, Keywords: insurance, long-term investment, asset-liability management, risk-based capital Journal: OECD Journal: Financial Market Trends Classification-JEL: E22; F21; G22; O16 Year: 2016 Pages: 1-55 Volume: 2016 Issue: 2 Handle: RePEc:oec:dafkad:5JLN3RH7QF46