Central Banking and Financial Stability

A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Banking and Finance".

Deadline for manuscript submissions: closed (30 April 2023) | Viewed by 11876

Special Issue Editors

Research and Statistics Division, Federal Reserve Board, Washington, DC 20551, USA
Interests: banking and financial institutions; monetary economics; asset pricing; financial stability
International Finance Division, Federal Reserve Board, Washington, DC 20551, USA
Interests: banking and financial institutions; corporate finance; international finance

Special Issue Information

Dear Colleagues,

Safeguarding financial stability is a fundamental responsibility of modern central banks. Since the global financial crisis in 2008, researchers have considered the efficacy of traditional monetary policy tools (i.e., interest rates, market operations and communications), macroprudential tools, financial stability communications (e.g., through financial stability reports), and prudential regulatory tools working separately or in concert to preserve financial stability. While traditional monetary policy instruments are generally used in the pursuit of price stability, financial (in)stability is an additional consideration. The remaining tools, such as some macroprudential instruments, are sometimes not available to the central bank. 

While ascertaining whether an economy is facing financial instability is generally evident, it is not always easy to tell when threats to financial stability are on the horizon. Unlike price stability, where there is broad agreement on how to measure it, threats to financial stability are typically assessed using multiple measures, methodologies, and models. For example, some researchers and central banks distinguish between shocks to the financial system and economy and vulnerabilities. Other researchers and central banks have focused on the origins of financial cycles by focusing on transmission (e.g., risk-taking, bank lending, and asset price channels).

The goal of this Special Issue is to publish new empirical and theoretical research that will help central banks safeguard financial stability and respond when there is financial instability. Topics include: (1) the efficacy of central banks’ tools used separately or together under different macroprudential governance frameworks;  (2) trade-offs between price stability, other central bank objectives (e.g., maximum employment), and financial stability; and (3) frameworks or models that can be used to monitor financial stability risks or understand transmission mechanisms.

Dr. Diana Hancock
Dr. Ricardo Correa
Guest Editors

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Journal of Risk and Financial Management is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1400 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

  • financial stability
  • monetary policy implementation to ensure financial stability and to respond to financial crisis
  • macroprudential tools used to enhance financial stability
  • transmission mechanisms for understanding financial instability risks
  • monitoring financial stability risks
  • central bank financial stability communications
  • macroprudential governance

Published Papers (6 papers)

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Research

22 pages, 3315 KiB  
Article
The Perceived Relationship between Risk Culture and Operational Risk Management Practices of Ghanaian Banks
by Gerhard Philip Maree Grebe and Johan Marx
J. Risk Financial Manag. 2023, 16(9), 407; https://doi.org/10.3390/jrfm16090407 - 12 Sep 2023
Viewed by 1340
Abstract
The Bank of Ghana (BoG) joined the Basel Consultative Group (BCG) of the Basel Committee on Banking Supervision (BCBS) in 2021 and is proceeding with the implementation of the Basel III international regulatory framework for Ghanaian banks. The purpose of this study was [...] Read more.
The Bank of Ghana (BoG) joined the Basel Consultative Group (BCG) of the Basel Committee on Banking Supervision (BCBS) in 2021 and is proceeding with the implementation of the Basel III international regulatory framework for Ghanaian banks. The purpose of this study was to assess the perceived relationship between risk culture and aspects of operational risk management among Ghanaian banks. This study followed a positivist paradigm and made use of a survey among the risk management staff members of Ghanaian banks. The data were analysed using both descriptive and inferential statistics, such as the Mann–Whitney U test and a multiple regression model. This study found significant perceived relationships (at the 5% level of significance) between risk culture and monitoring and reporting procedures, the three lines of defence (3LOD), compliance, internal auditing, disclosure of operational risk information, and guidance from the banking regulator. The respondents reported the following challenges with their banks’ risk culture (in order of priority): training and development, communication, reporting and disclosure, roles and responsibilities, performance appraisal, and technological and environmental barriers. Recommendations for addressing these challenges are provided. Full article
(This article belongs to the Special Issue Central Banking and Financial Stability)
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18 pages, 1193 KiB  
Article
Emerging Market Default Risk Charge Model
by Angelo D. Joseph
J. Risk Financial Manag. 2023, 16(3), 194; https://doi.org/10.3390/jrfm16030194 - 13 Mar 2023
Cited by 1 | Viewed by 1388
Abstract
In a default event, several obligors simultaneously experience financial difficulty in servicing their debt to the point where the entire market can experience a sudden yet significant jump to a credit default. To help protect lenders against a jump-to-default event, regulators require banks [...] Read more.
In a default event, several obligors simultaneously experience financial difficulty in servicing their debt to the point where the entire market can experience a sudden yet significant jump to a credit default. To help protect lenders against a jump-to-default event, regulators require banks to hold capital equivalent to the default risk charge as a buffer against the losses they may incur. The Basel regulatory committee has articulated and set default risk modelling guidelines to improve comparability amongst banks and enable a consistent bank-wide default risk charge estimation. Emerging markets are unique because they usually have illiquid markets and sparse data. Thus, implementing an emerging market default risk model and, at the same time, complying with the regulatory guidelines can be non-trivial. This research presents a framework for modelling the default risk charge in emerging markets in line with the regulatory requirements. The default correlation model inputs are derived and empirically calibrated using emerging market data. The paper ends with some considerations that regulators, supervisors, and banks can use to get financial institutions to adopt an emerging markets default risk charge model. Full article
(This article belongs to the Special Issue Central Banking and Financial Stability)
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28 pages, 1593 KiB  
Article
Identifying Financial Crises Using Machine Learning on Textual Data
by Mary Chen, Matthew DeHaven, Isabel Kitschelt, Seung Jung Lee and Martin J. Sicilian
J. Risk Financial Manag. 2023, 16(3), 161; https://doi.org/10.3390/jrfm16030161 - 01 Mar 2023
Cited by 2 | Viewed by 2261
Abstract
We use machine learning techniques on textual data to identify financial crises. The onset of a crisis and its duration have implications for real economic activity, and as such can be valuable inputs into macroprudential, monetary, and fiscal policy. The academic literature and [...] Read more.
We use machine learning techniques on textual data to identify financial crises. The onset of a crisis and its duration have implications for real economic activity, and as such can be valuable inputs into macroprudential, monetary, and fiscal policy. The academic literature and the policy realm rely mostly on expert judgment to determine crises, often with a lag. Consequently, crisis durations and the buildup phases of vulnerabilities are usually determined only with the benefit of hindsight. Although we can identify and forecast a portion of crises worldwide to various degrees with traditional econometric techniques and using readily available market data, we find that textual data helps in reducing false positives and false negatives in out-of-sample testing of such models, especially when the crises are considered more severe. Building a framework that is consistent across countries and in real time can benefit policymakers around the world, especially when international coordination is required across different government policies. Full article
(This article belongs to the Special Issue Central Banking and Financial Stability)
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18 pages, 554 KiB  
Article
Balance of Risks and the Anchoring of Consumer Expectations
by Jane M. Ryngaert
J. Risk Financial Manag. 2023, 16(2), 79; https://doi.org/10.3390/jrfm16020079 - 28 Jan 2023
Viewed by 1243
Abstract
This paper shows that expected inflation risks pose threats to the anchoring of expectations. I propose a new method for fitting subjective probability distributions to density forecasts that allows for asymmetric beliefs over inflation outcomes. Using data from the Federal Reserve Bank of [...] Read more.
This paper shows that expected inflation risks pose threats to the anchoring of expectations. I propose a new method for fitting subjective probability distributions to density forecasts that allows for asymmetric beliefs over inflation outcomes. Using data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations, I show that medium run expectations move in the direction of perceived short run risks. A diffusion index of consumers’ perceived balance of risks to inflation shows that high short run inflation expectations coincide with the balance of medium risks being weighted to the upside. Full article
(This article belongs to the Special Issue Central Banking and Financial Stability)
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14 pages, 871 KiB  
Article
Money Market Fund Reform: Dealing with the Fundamental Problem
by Huberto M. Ennis, Jeffrey M. Lacker and John A. Weinberg
J. Risk Financial Manag. 2023, 16(1), 42; https://doi.org/10.3390/jrfm16010042 - 09 Jan 2023
Cited by 1 | Viewed by 2457
Abstract
After the events in March 2020, it became clear to U.S. policymakers that the 2014 reform of the money market funds (MMFs) industry had not successfully addressed the stability concerns associated with surges in withdrawals. In December 2021, the SEC proposed a new [...] Read more.
After the events in March 2020, it became clear to U.S. policymakers that the 2014 reform of the money market funds (MMFs) industry had not successfully addressed the stability concerns associated with surges in withdrawals. In December 2021, the SEC proposed a new set of rules governing how money market funds can operate. A fundamental problem behind the instability of money market funds is the expectation that backstop liquidity support will be provided by the government in the event of financial distress, along with the government’s inability to credibly commit to not provide such support. This expectation dampens funds’ incentives to take steps ahead of time to mitigate the risk of sudden withdrawals. The newly proposed reforms are aimed at constraining withdrawals or penalizing them with “swing pricing”. We argue that if the commitment problem is the fundamental issue, it would be more useful to reduce expectations of ex-post support by requiring MMFs to have contractual commitments in place, ex-ante, for liquidity support from private parties. Full article
(This article belongs to the Special Issue Central Banking and Financial Stability)
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23 pages, 1953 KiB  
Article
Global Spillovers of a Chinese Growth Slowdown
by Shaghil Ahmed, Ricardo Correa, Daniel A. Dias, Nils Gornemann, Jasper Hoek, Anil Jain, Edith Liu and Anna Wong
J. Risk Financial Manag. 2022, 15(12), 596; https://doi.org/10.3390/jrfm15120596 - 12 Dec 2022
Cited by 1 | Viewed by 1718
Abstract
This paper analyzes the potential spillovers of a slowdown in Chinese growth to the United States and the rest of the world. Through a combination of structural VAR and DSGE analyses, we find that (1) spillovers from China to the rest of the [...] Read more.
This paper analyzes the potential spillovers of a slowdown in Chinese growth to the United States and the rest of the world. Through a combination of structural VAR and DSGE analyses, we find that (1) spillovers from China to the rest of the world have grown significantly in the past decade; (2) the negative growth spillovers to the United States are more modest than to emerging market economies—particularly for commodity exporters—or other advanced economies, primarily because the latter group has larger direct exposure in trade to China; and (3) although the United States has limited direct financial exposure to China, the negative spillovers to the U.S. economy are amplified significantly if the negative Chinese growth shock leads to adverse global risk sentiment and monetary policy in the United States is constrained in its reaction. Full article
(This article belongs to the Special Issue Central Banking and Financial Stability)
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