Evaluating early warning indicators of banking crises: Satisfying policy requirements

Evaluating early warning indicators of banking crises: Satisfying policy requirements
By Mathias Drehmann and Mikael Juselius
BIS Working Papers No 421

Aug 2013

http://www.bis.org/publ/work421.htm
 

Early warning indicators (EWIs) of banking crises should ideally be evaluated on the basis of their performance relative to the macroprudential policy maker's decision problem. We translate several practical aspects of this problem - such as difficulties in assessing the costs and benefits of various policy measures as well as requirements for the timing and stability of EWIs - into statistical evaluation criteria. Applying the criteria to a set of potential EWIs, we find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures. The credit-to-GDP gap is the best indicator at longer horizons, whereas the DSR dominates at shorter horizons.

JEL classification: C40, G01
Keywords: EWIs, ROC, area under the curve, macroprudential policy


Excerpts:

In the empirical part of the paper, we apply our approach to assess the performance of 10 different EWIs. We mainly look at the EWIs individually, but at the end of the paper we also consider how to combine them. Our sample consists of 26 economies, covering quarterly time series starting in 1980. The set of potential EWIs includes more established indicators such as real credit growth, the credit-to- GDP gap, growth rates and gaps of property prices and equity prices (eg Drehmann et al (2011)) as well as the non-core liability ratio proposed by Hahm et al (2012).  We also test two new measures: a country’s history of financial crises and the debt service ratio (DSR). The DSR was first suggested in this context by Drehmann and Juselius (2012) and is defined as the proportion of interest payments and mandatory repayments of principal to income. An important data-related innovation of our analysis is that we use total credit to the private non-financial sector obtained from a new BIS database (Dembiermont et al (2013)).

We find that the credit-to-GDP gap and the DSR are the best performing EWIs in terms of our evaluation criteria. Their forecasting abilities dominate those of the other EWIs at all policy-relevant horizons. In addition, these two variables satisfy our criteria pertaining to the stability and interpretability of the signals. As the credit-to- GDP gap reflects the build-up of leverage of private sector borrowers and the DSR captures incipient liquidity constraints, their timing is somewhat different. While the credit-to-GDP gap performs consistently well, even over horizons of up to five years ahead of crises, the DSR becomes very precise two years ahead of crises. Using and combining the information of both indicators is therefore ideal from a policy perspective. Of the remaining indicators, only the non-core liability ratio fulfils our statistical criteria. But its AUC is always statistically smaller than the AUC of either the credit-to-GDP gap or the DSR. These results are robust with respect to different aspects of the estimation, such as the particular sample or the specific crisis classification used.

Recovery of financial market infrastructures - consultative report

Recovery of financial market infrastructures - consultative report
BIS, Aug 2013
www.bis.org/publ/cpss109.htm

The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have published for public comment a consultative report on the Recovery of financial market infrastructures.

The report provides guidance to financial market infrastructures such as CCPs on how to develop plans to enable them to recover from threats to their viability and financial strength that might prevent them from continuing to provide critical services to their participants and the markets they serve. It also provides guidance to relevant authorities in carrying out their responsibilities associated with the development and implementation of recovery plans and tools.

The report has been produced in response to comments received on the July 2012 CPSS-IOSCO report on Recovery and resolution of financial market infrastructures that requested more guidance on what recovery tools would be appropriate for FMIs.

The report supplements the CPSS-IOSCO Principles for financial market infrastructures (PFMI) , the international standards for financial market infrastructures (FMIs) published in April 2012. It provides guidance on how FMIs can observe the requirements in the PFMI that they have effective recovery plans. It does not itself create additional standards for FMIs. The report is also consistent with the Financial Stability Board's Key attributes of effective resolution regimes for financial institutions, published in October 2011 and which also covers the importance of recovery planning. Aspects of the consultation report concerning FMI resolution have been included in a new draft annex to the FSB Key attributes and will be included in a forthcoming assessment methodology for the Key attributes.

Financial market infrastructures (FMIs), which include payments systems, securities settlement systems, central securities depositories, central counterparties and trade repositories, play an essential role in the global financial system. The disorderly failure of an FMI could lead to severe systemic disruption if it caused markets to cease to operate effectively.

 Published with the report is a cover note that lists specific issues on which the committees seek comments during the public consultation period. Comments on the report are invited from all interested parties and should be sent by 11 October 2013 to both the CPSS secretariat (cpss@bis.org) and the IOSCO secretariat (fmirecovery@iosco.org). The comments will be published on the websites of the BIS and IOSCO unless commentators have requested otherwise.

• Full report (32 pages, 244 kb)
• Cover note (2 pages, 37 kb)

Views from Japan: Nuclear Weapons

Views from Japan: Nuclear Weapons

Questions sent to a Japanese citizen:

konnichiwa, dear [xxx]-san

I was reading the book "Strategy in the Second Nuclear Age: Power, Ambition, and the Ultimate Weapon" by Toshi Yoshihara and James R. Holmes (Editors), and there is a chapter on Thinking About the Unthinkable - Tokyo's Nuclear Option

We'd like to publish a post and would like:

1  to have arguments in favor and against (specially in favor, since we never see them published) such nuclear option, made by Japanese politicians;
2  to have your opinion on this.

[...]

Thank you very much, sir.

[signature removed]


---
Answer (edited):
konnichiwa,

how are you going? it's been incredibly hot these days... I almost start melting.

sorry, I haven't read the book. so i'm not very sure my opinions match to your point. anyway, I give you what I see and think. is it about nuclear weapons? (or total nuclear power?) i refer nuke weapons for this moment. please let me know if you need more about nuclear in japan.

1.it seems 3 big opinions among politicians (and citizens too) :

#1. it's better to have nu-bombs. because we are facing dangers of Chinese and North Korean nukes. it's the only way to be against nukes.

#2. let's talk and think about nuclear weapons to possess seriously now. it's actually been the biggest taboo in japan even only to talk about the option because of our experiences of Hiroshima, Nagasaki and recently Fukushima which are big trauma for us. I can call it "nuclear allergy". but we are indeed surrounded and threatened by nu-weapons of China and Korea now. it's the time to think about it... and even just the debates will be able to restrain China and Korea (they know our technology is good enough to make nu-weapons immediately if we try).

#3. nobody should even talk or think about it. all nuclear in the world just should be thrown away and banned. because we've learnt from the past



#2 seems the most major opinion, #1 is a sort of extreme... #3 is mainly supported by liberal people. extreme on the other side.


2. my opinion: I used to think like #3, but slightly have changed to #2. I'm sure #3 is right, but too much ideal. no matter how japan says this to the world, no countries will abandon them (at least near future).

japanese people's been used to live in peace by American forces, however people's started to realize no peace for free. i think we are on the way to "normal" country.

please don't understand me, I believe almost all of people don't want to have nu-weapons in real, people's just getting more serious to think about what our country is and what is the best for us.


I wish I got points you need. mail me if you have something not sure.

best regards(^_^)/

[signature removed]

HEAT! A Bank Health Assessment Tool. By Li L. Ong, Phakawa Jeasakul and Sarah Kwoh

HEAT! A Bank Health Assessment Tool. By Li L. Ong, Phakawa Jeasakul and Sarah Kwoh
IMF Working Paper No. 13/177
August 09, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40872.0

Summary: Developments during the global financial crisis have highlighted the importance of differentiating across financial systems and institutions. Assessments of financial stability have increasingly considered the characteristics of individual banks within a financial system, as well as those with significant international reach, to identify vulnerabilities and inform policy decisions. This paper proposes a simple measure of bank soundness, the Bank Health Index (BHI), to facilitate preliminary analyses of individual financial institutions relative to their peers. The evidence suggests that the BHI is useful for a first-pass identification of bank soundness conditions. Automated spreadsheet templates of the bank Health Assessment Tool (HEAT!) are provided for users with access to the BankScope, Bloomberg and/or SNL database(s).

Introduction

The impact of the global financial crisis on individual banking systems and banks has highlighted the importance of differentiating across countries and among financial institutions. Traditionally, macroprudential surveillance of the financial sector has complemented the microprudential oversight of individual financial institutions by supervisors (The World Bank/IMF, 2005). However, the growing systemic importance of these institutions, notably banks, and their potential impact on policy and the public purse have underscored the need to extend any macroprudential analysis to include individual systemic institutions as well.

The depth and protracted nature of the current crisis have revealed vast divergences in the resilience of individual banks. This is, in large part, attributable to banks’ business models and management quality, sometimes mitigated by the various pre-emptive or supportive policy actions taken by country authorities. In many cases, specific knowledge of characteristics underpinning individual banks’ financial health has been crucial for identifying vulnerabilities and informing policy decisions for crisis prevention or management purposes. Looking ahead, lessons learned from this crisis suggest that more granular, bank-specific analysis will become increasingly more important in that it could:

• enable early identification of vulnerabilities in global systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs), which could help prevent widespread spillovers from any realization of tail risks if appropriate mitigation actions are put in place;

• inform system-wide reform strategies by differentiating the core, healthy banks from the very weak ones that require significant restructuring or even resolution, so that the strong banks are not burdened with a “one size fits all” solution for an entire system; and 

• inform restructuring decisions, such as mergers and acquisitions, recapitalization and/or liquidity support, by highlighting banks’ weaknesses or identifying the weak banks.

To this end, this paper proposes a simple, broadly-based measure of bank soundness that would allow preliminary, first-pass analysis of the health of individual financial institutions and, consequently, financial systems. We develop a Bank Health Index (BHI) and provide automated spreadsheet templates, the bank Health Assessment Tool (HEAT!), to facilitate the exercise. We show that the BHI, albeit simple, can be useful for initial identification of relative bank soundness and is also able to identify more specific areas of vulnerability.  However, we also note its limitations and acknowledge that such analyses would need to be complemented by more rigorous and robust quantitative (e.g., stress tests) and qualitative (e.g., supervisory and regulatory frameworks) assessments.


Concluding Remarks

The global financial crisis has underscored the importance of individual banks to the stability of their own or even the global financial system. Thus, analyses of the health of individual banks, especially the systemic ones, are becoming a matter of course for surveillance purposes and for crisis management decisions. We have developed the BHI to enable simple, preliminary analyses of individual banks in financial systems around the world and introduced an Excel-based spreadsheet tool (HEAT!) to facilitate its calculation and presentation. Our back-test, based on actual developments in the Spanish banking system, suggests that the BHI is able to accurately differentiate banks according to their financial soundness.

That said, there are strong caveats attached to the use of the BHI and its components. Any representation about the health of individual banks using this method should be made with care. Specifically, the Index is an aggregation of ratios, so the performance of the individual components should also be considered in any analysis. Moreover, the associated z-scores do not provide an absolute assessment of the health of banks, but rather, their relative health within a sample, which means that the selection of the sample itself matters. The differences in banks’ business models at any point in time and their changing nature over time, as well as the definitions used in calculating the constituent components of the BHI should also be taken into account when interpreting the results. Last but not least, it is also important for the user to be familiar with the peculiarities of any banking system being analyzed and to ensure that any assessment is supplemented with other quantitative and qualitative information.

Nearly 450 Innovative Medicines in Development for Neurological Disorders

Neurological Disorders
innovation.org
July 30, 2013
www.innovation.org/index.cfm/FutureofInnovation/NewMedicinesinDevelopment/Neurological_Disorders

Nearly 450 Innovative Medicines in Development for Neurological Disorders

Neurological disorders—such as epilepsy, multiple sclerosis, Alzheimer’s disease, and Parkinson’s disease—inflict great pain and suffering on patients and their families, and every year cost the U.S. economy billions of dollars. However, a growing understanding of how neurological disorders work at a genetic and molecular level has spurred improvements in treatment for many of these diseases.

America’s biopharmaceutical research companies are developing 444 medicines to prevent and treat neurological disorders, according to a new report released by the Pharmaceutical Research and Manufacturers of America (PhRMA). 

The report demonstrates the wide range of medicines in development for the more than 600 neurological disorders that affect millions of Americans each year. These medicines are all currently in clinical trials or awaiting Food & Drug Administration (FDA) review. They include 82 for Alzheimer’s disease, 82 for pain, 62 for brain tumors, 38 for multiple sclerosis, 28 for epilepsy and seizures, 27 for Parkinson’s disease, and 25 for headache.

Many of the potential medicines use cutting-edge technologies and new scientific approaches. For example:

• A medicine that prompts the immune system to protect neurons affected by amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease
• A gene therapy for the treatment of Alzheimer’s disease
• A gene therapy to reverse the effects of Parkinson’s disease

These new medicines promise to continue the already remarkable progress against neurological disorders and to raise the quality of life for patients suffering from these diseases and their families. Read more about selected medicines in development for neurological disorders.

Alzheimer's Disease

Every 68 seconds someone in America develops Alzheimer’s disease, according to the Alzheimer’s Association, and by 2050 it could be every 33 seconds, or nearly a million new cases per year. Disease-modifying treatments currently in development could delay the onset of the disease by five years, and result in 50 percent fewer patients by 2050.

There are also potential cost savings offered by innovative disease-modifying treatments. As the 6th leading cause of death in the United States and one of the most common neurological disorders, Alzheimer’s disease currently costs society approximately $203 billion. This number could increase to $1.2 trillion by 2050; however, delaying the onset of the disease by five years could reduce the cost of care of Alzheimer’s patients in 2050 by nearly $450 billion.

Additional Resources

• New Medicines in Development for Neurological Disorders Report
• Selected Medicines in Development for Neurological Disorders
• Alzheimer’s disease overview page

Comments on "Why does intelligence analysis sometimes fail?" (Science Daily)

Comments on "Why does intelligence analysis sometimes fail?" (Science Daily)

1  There are several things that are objectionable about this Science Daily piece [1] and other jobs...

First of all, the author seems not to have read the article in full. It says that Wirtz "focuses in particular on the contribution of the scholar Robert Jervis," as if this happened by no special reason.

Not so, Wirtz's article [2] is, as said in the acknowledgements, a contribution to a book [3] __in honor__ of R Jervis:

This article was previously published in a collection of essays in honor of Robert Jervis.

And second, it loads too much the conclusions. Science Daily's writer says that "The way to reduce failures Jervis believed [...] was to improve agents' analytical skills rather than endlessly reorganising the bureaucracy."

Wirt'z essay says that "Jervis focuses on analytic tradecraft, not bureaucratic reorganization, as the best way to improve intelligence. In that sense, he agrees with intelligence analysts, who often identify the quest for better tradecraft as the best guarantee against intelligence failure," which is a bit different of that statement by SD's writer. Maybe Jervis believed what SD published, but Wirtz goes not so far, he only says that Jervis focuses on analysis improvements.

To me, it is not in Wirt'z paper that Jervis is in some way against all reorganizations after intel failures or that he was skeptical of reorganization, generally speaking, as SD suggests with "rather than endlessly." Maybe both things, reorganization and analytic improvements, are needed in many occasions: First, make heads roll and dissolve some directorates or units after intel failures, and second, improve the craft.


2  Going now to Wirtz's job, maybe Jervis did focus "on analytic tradecraft, not bureaucratic reorganization, as the best way to improve intelligence" [2] because, one, he wasn't a manager and didn't have to focus in reorganizations, and was not contracted to give opinions of that field of reorganization, but in the one of analytic craft; and two, because he "is best known for his scholarship on international relations; especially the way human cognition shapes foreign and defence policies". [1] As Jervis said, as described in the presentation of his book, [4] "Give someone a hammer, everything is a nail."

This is applicable to Prof Jervis, isn't it? Like to everyone of us.


3  More generally, many scholars and professionals think like Prof Jervis: "In light of these critical intelligence failures, Jervis says, “We can do better.”" [4]

I doubt we can. And not only me. Jeffrey Cooper suggests, in a work he did for the CIA, [5] several, many ways to improve the analyst's job, but after those, he reminds us of Kahneman's suggestion of using methodologists in the teams to watch over the analysts' work, to prevent our falling in some trap of our sad, human nature, which is a way of saying there is no training or changes in our way of thinking/working that can compensate for our analytical pathologies:

Finally, the introduction of a "process watcher," as suggested by Kahneman, is intended to bring a clear and unbiased, outside expert’s eye to analytic teams. The process watcher function, unlike that of a Red Team, is intended to focus exclusively on identifying errors in the analytic process, not on alternative interpretations of the evidence or different logic chains.

Also, I infer from this recommendation that our bosses and organizations are also let's say less than capable of guaranteeing quality for the taxpayer's bucks.

Aside of the need of experts not in the contents, but in the methods, since we are not capable of working/reasoning/computing well [6 and references therein], can anyone compute the costs of adding to the intelligence units more personnel to improve the quality of our analysis?



References

[1]  Why does intelligence analysis sometimes fail?. ScienceDaily. Retrieved July 28, 2013, from http://www.sciencedaily.com­ /releases/2013/07/130723073955.htm?goback=%2Egde_2216219_member_260803925

[2]  James J. Wirtz. The Art of the Intelligence Autopsy. Intelligence and National Security, Mar 2013; DOI: 10.1080/02684527.2012.748371

[3]  James W. Davis (ed.), Psychology, Strategy and Conflict: Perceptions of Insecurity in International Relations (Oxford: Routledge 2012).

[4] Saltzman Lecture Report. Why Intelligence Fails: Lessons from the Iranian Revolution and the Iraq War New York, New York – March 9, 2010. Retrieved July 28, 2013, from http://www.siwps.com/events/professor-robert-jervis-why-intelligence-fails.attachment/jervis/Jervis%203-9-10.pdf

[5]  Jeffrey R Cooper: Curing Analytic Pathologies - Pathways to Improved Intelligence Analysis. Langley, VA: CIA, December 2005

[6]  Biased Policy Professionals. Sheheryar Banuri, Stefan Dercon, and Varun Gauri. World Bank Policy Research Working Paper 8113. https://www.bipartisanalliance.com/2017/08/biased-policy-professionals-world-bank.html

Liquidity coverage ratio disclosure standards - consultative document

Liquidity coverage ratio disclosure standards - consultative document
BCBS, July 19, 2013
http://www.bis.org/publ/bcbs259.htm

The Basel Committee on Banking Supervision has today issued for consultation Liquidity coverage ratio disclosure standards.

Following the publication of the LCR standard in January 2013, the Basel Committee indicated its intention to develop associated disclosure standards. Public disclosure improves transparency, reduces uncertainty in the markets and strengthens market discipline. To promote the benefits of disclosure the Committee believes that it is important that banks adopt a common disclosure framework to help market participants consistently assess the liquidity risk position of banks. Moreover, to promote consistency and ease of use of disclosures related to the LCR, the Basel Committee has agreed that internationally-active banks across Basel member jurisdictions will be required to publish their LCR according to a common template.

In designing the disclosure standards for the LCR, the Basel Committee has balanced the benefits of promoting market discipline against the challenges associated with disclosure of liquidity positions under certain circumstances, including the potential for undesirable dynamics during periods of stress.

Bank Resolution Costs, Depositor Preference, and Asset Encumbrance

Bank Resolution Costs, Depositor Preference, and Asset Encumbrance. By Daniel C. Hardy
IMF Working Paper No. 13/172
July 18, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40799.0

Summary: Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.


Conclusions and next steps (edited)


Bank resolution, like bankruptcy and debt restructuring generally, inherently involves a great deal of negotiation and uncertainty; these are situations in which contracts are far from complete. Experience from many sectors, most notably the financial sector, suggest that the attendant conflicts among claimants can add substantially to costs and delays in resolution.

The prospective costs attached to such conflicts, which should depend on the magnitude of residual assets, can influence the optimal composition and conditions of financing, and, in particular, motivate the introduction of provisions that make some claims “bankruptcy remote.” Bankruptcy remoteness can be achieved through statute and policy, as when depositors enjoy preferred status as a matter of law, or through private agreements, as when banks issue covered bonds backed by a pool of high-quality assets. The asset encumbrance that results from either mechanism can be desirable insofar as it reduces bankruptcy costs, and, through lower overall funding costs, lowers the probability of distress. This substantive effect from the composition of financing is not due to asymmetric information or related mechanisms, but to the gain from containing conflict resolution costs.

In the first instance, the gain should be capitalized into the value of the bank, which enjoys an overall reduction in funding costs. The extension of preferred status to some creditors (including a DGS) need not make them better off. Nor need non-secured borrowers be disadvantaged in expectational terms: they earn more when the bank survives but bear larger net losses in case of resolution (though they spend less contending for their claims). Granting preferred status to (some) depositors need not provoke increased collateralization of other credits: from the point of view of the borrowing bank, collateralization and statutory depositor preference are near substitutes, with the difference that collateralization can be increased at the bank’s initiative, albeit at an increasing marginal cost. However, the achievement of full benefits and their distribution will depend on pricing being risk-sensitive; the probability of distress might not be reduced if those that benefit from collateralization demand an interest rate that ignores the reduction in LGD that collateralization should achieve.

For these measures to be valuable, a high degree of legal certainty of their implementation must be achieved, and it is important that the resolution process starts when the borrowing bank still has enough residual assets that preferred or collateralized claims can be met. If, ex post, these conditions are not met, conflict may be intensified. Hence, bank stability might be enhanced by limiting total asset encumbrance (preferred deposits plus collateralized borrowing) to below the likely minimum level of residual assets. Authorities that are willing and able to take early corrective action, and therefore rarely have to deal with banks left with scant residual assets, can be more sanguine about asset encumbrance.

The analysis presented here lead on to other questions of practical relevance, which may be addressed in further research using an extension of the framework. Some of these questions include the following:

• What systematic evidence might be examined to determine whether and how bankruptcy costs depend on the intensity of conflict over residual assets? Some anecdotal evidence indicates that bankruptcy proceedings and bank resolutions are characterized by intensive lobbying in various forms, which considerably inflate the costs to all concerned. There is also some statistical evidence that bankruptcy costs and delays are related to the complexity of the affected corporation, and complexity is plausibly connected to the number of interest groups and thus expenditure on lobbying. But it would be worthwhile to investigate also who bears costs and receives benefits ex ante, as measured, for example, by the reaction of market prices to relevant regulatory innovations.

• Why is information on bank asset encumbrance not more readily available? Appropriate pricing of both collateralized and non-collateralized borrowing depends on making good estimates of probability of failure and of loss given default facing different creditors, and thus of the degree of outstanding asset encumbrance. Yet it is difficult to obtain current or detailed, bank-by-bank information: one may use published accounts to quantify a bank’s deposit base—if deposits enjoy preferential status—and the volume of covered bonds that it has issued, but typically one cannot know the volume of assets pledged in the interbank market, to the central bank, in liquidity swap and derivative deals, etc. Presumably a bank in a weak position is afraid to reveal that fact and face a “squeeze” on its position. However, there seem to be incentives for strong banks to disclose information, and thus to force others to reveal more. To some extent this occurs: many banks repaid as early as possible financing from the ECB’s Long-Term Refinancing Operation, presumably to demonstrate their strength. If banks do not volunteer much information on encumbrance, there could be grounds for imposing greater transparency through regulation, but national authorities have traditionally reserved the right to provide central bank refinancing on a confidential basis. [The European Systemic Risk Board recently issued recommendations to enhance prudential oversight of asset encumbrance and related market transparency, but explicitly prohibits the revelation of data on assets encumbered to central banks (see "Recommendations of European Systemic Risk Board of 20 December 2012 on funding of credit institutions" (ESRB/2012/2), available at http://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2011_2.en.pdf?e622821b9c3171124f1d85f3a1b4d40e ).]

• What are the implications for funding behavior and stability of heterogeneity among creditors in their litigating/lobbying ability and incentives? Welch (1997) has initiated a discussion of the question, with a focus on a non-financial corporate facing a dominant bank creditor, but the situation of banks, with many retail and wholesale counterparties, may be rather different. The interests of those most effective in lobbying may not coincide with those of society or the prudential regulator. One advantage of depositor preference is that it protects the interests of a large number of creditors with a substantial portion of claims for whom, however, it is individually relatively expensive to defend those claims in case of resolution; the weak atomistic depositors are molded into one dominant creditor. In this connection, differences in lobbying ability could account for aspects of market segmentation: those with low costs might specialize in the holding of certain instruments, and those with high costs (or funding constraints) might want to concentrate on holding secured, bankruptcy-remote assets.

• In what ways would statutory bail-in of unsecured creditors be symmetric to the granting depositors preferred status, and in what ways would contingent capital (“CoCos”) be symmetric to collateralized credit?

The framework would need to be extended to analyze how different forms of asset encumbrance might affect bank liquidity risk, taking into account the availability of other liquidity buffers and interaction with solvency risk. Indeed, liquidity and solvency risk are deeply connected, especially for banks. Furthermore, illiquidity, like bankruptcy, is “a situation in which existing claims are inconsistent,” and so suited to an analysis based on costly resolution of conflict, rather than the application of predetermined rules and contracts. In all cases, one category of claimant is assigned a special status in case of bankruptcy or resolution—some are assigned an especially weak position, others an especially strong one. The incentives for, and ability of the different claimants to lobby for larger compensation is therefore affected. For example, those clearly subject to a statutory bail-in would not devote resources to contesting claims with those in a clearly superior position, and thus bankruptcy costs could be reduced. Holders of bail-in-able securities or CoCos would presumably demand higher yields to compensate for this risk, which in itself may increase risk of distress, but there could be some net benefit.

Conspiracy Theories Permeate Pakistani Society

Pakistan Taliban Lambastes Schoolgirl for U.N. Speech. By Saeed Shah
Anti-Western View Shown in Verbal Attack Permeates Pakistani Society
The Wall Street Journal, July 18, 2013, on page A7
For full article: http://online.wsj.com/article/SB10001424127887323309404578612173917367976.html

ISLAMABAD—Malala Yousafzai, a teenage campaigner for girls' education who was nearly killed by Pakistani militants, was feted at the United Nations last week. Here at home, however, she has been widely portrayed as part of a Western conspiracy against Islam and the developing world.

A 1,800-word open letter in imperfect English by Adnan Rasheed, one of the most feared Taliban leaders in Pakistan, outlined these conspiracy theories Wednesday, describing the type of secular education that Ms. Yousafzai championed as "satanic" and arguing that the U.N. wanted to "enslave the world."

Even as the 16-year-old girl is celebrated abroad as a hero, such radical views are becoming mainstream in Pakistani society, where even commentators hostile to the Taliban widely portray Ms. Yousafzai as a pawn of the West or even a CIA agent.

While Pakistanis usually condemn the violence of the Taliban, the paranoid worldview of the group has soaked deep into society, making the fight against extremism much more difficult. Many in the country, for example, still refuse to believe that Osama bin Laden was found living here in 2011.

"Public opinion is confused about the Malala issue. Many people hate Malala," said Zubair Torwali, a newspaper columnist from her home valley of Swat. "Anything here in Pakistan related to the West or America becomes a thing of conspiracy. The Taliban's ideology is flourishing in Pakistan. It is victorious."

Pakistani society is also influenced by the support that the military has long given to jihadist groups. More recently, the backlash over nearly a decade of U.S. drone strikes, and over the unilateral American raid to kill bin Laden deep inside Pakistan, has created a virulently anti-Western culture that sees spies everywhere.

Ms. Yousafzai narrowly survived an assassination attempt by the Pakistani Taliban in October last year, when she was shot in the head from point-blank range.

When aged just 11, Ms. Yousafzai became a powerful voice against the Taliban through a diary she kept of the extremists' takeover of Swat Valley, in northwest Pakistan. The diary was broadcast by BBC radio in 2009. Following the shooting in Swat, she was airlifted for treatment in England, where she now lives with her family.

Ms. Yousafzai, brought to the U.N. headquarters in New York to mark her 16th birthday, said in a speech Friday that "extremists are afraid of books and pens."

Mr. Rasheed's open letter to Ms. Yousafzai was the first reaction to these remarks by the Taliban leadership.

Mr. Rasheed began the letter by saying that he wishes that the attack on her had "never happened." Then, however, he went on to justify it with detailed arguments, showing, if there were any doubt, the dangers that Ms. Yousafzai would face if she returned home.

"Taliban believe that you were intentionally writing against them and running a smearing campaign to malign their efforts to establish Islamic system in Swat and your writings were provocative," he wrote.

Mr. Rasheed denied that the Taliban were against education—though he went on to spell out the movement's opposition to the "satanic or secular curriculum," which is a "conspiracy of tiny elite who want to enslave the whole humanity for their evil agendas in the name of new world order."

He advised Ms. Yousafzai to return to Pakistan and enroll in a madrassah, or Islamic seminary.

"Your propaganda was the issue and what you are doing now, you are using your tongue on the behest of the others and you must know that if the pen is mightier than the sword then tongue is sharper…In the wars tongue is more destructive than any weapon," the letter said.

When the shooting happened, there was an unprecedented outpouring of public sympathy for Ms. Yousafzai, and anger against the Taliban, inside Pakistan.

However, since then, opinion has hardened against the girl. Last week, on the local Pakistani language versions of the BBC website, in the national language Urdu and the Pashto spoken in her native Swat, the majority of comments were venomously against the schoolgirl. Some even described her as a "prostitute."

Detractors seized on the assistance and attention Ms. Yousafzai received from Western governments and media after the attack. Her appearance at the United Nations seemed to confirm the view that she was somehow working on a Western agenda.

Even Shahbaz Sharif, chief minister of the largest Punjab province and brother of Prime Minister Nawaz Sharif, issued an oblique criticism of Ms. Yousafzai's speech, posting on his Twitter account that it "seemed to be written for global consumption."

IMF Papers on Macroprudential Policies and Systemic Risk Monitoring

1  The Macroprudential Framework: Policy Responsiveness and Institutional Arrangements

Author/Editor:     Cheng Hoon Lim ; Ivo Krznar ; Fabian Lipinsky ; Akira Otani ; Xiaoyong Wu

IMF Working Paper No. 13/166, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40789.0

Summary: This paper gauges if, and how, institutional arrangements are correlated with the use of macroprudential policy instruments. Using data from 39 countries, the paper evaluates policy response time in various types of institutional arrangements for macroprudential policy and finds that the macroprudential framework that gives the central bank an important role is associated with more timely use of macroprudential policy instruments. Policymakers may also tend to use macroprudential instruments more quickly if the ability to conduct monetary policy is somehow constrained. This finding points to the importance of coordination between macroprudential and monetary policy.




2  Evaluating the Net Benefits of Macroprudential Policy: A Cookbook

Author/Editor:     Nicolas Arregui ; Jaromir Benes ; Ivo Krznar ; Srobona Mitra ; Andre Santos

IMF Working Paper No. 13/167, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40790.0

Summary: The paper proposes a simple, new, analytical framework for assessing the cost and benefits of macroprudential policies. It proposes a measure of net benefits in terms of parameters that can be estimated: the probability of crisis, the loss in output given crisis, policy effectiveness in bringing down both the probability and damage during crisis, and the output-cost of a policy decision. It discusses three types of policy leakages and identifies instruments that could best minimize the leakages. Some rules of thumb for policymakers are provided.



3   Systemic Risk Monitoring ("SysMo") Toolkit—A User Guide

Author/Editor:     Nicolas R. Blancher ; Srobona Mitra ; Hanan Morsy ; Akira Otani ; Tiago Severo ; Laura Valderrama

IMF Working Paper No. 13/168, July 17, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40791.0

Summary: There has recently been a proliferation of new quantitative tools as part of various initiatives to improve the monitoring of systemic risk. The "SysMo" project takes stock of the current toolkit used at the IMF for this purpose. It offers detailed and practical guidance on the use of current systemic risk monitoring tools on the basis of six key questions policymakers are likely to ask. It provides "how-to" guidance to select and interpret monitoring tools; a continuously updated inventory of key categories of tools ("Tools Binder"); and suggestions on how to operationalize systemic risk monitoring, including through a systemic risk "Dashboard." In doing so, the project cuts across various country-specific circumstances and makes a preliminary assessment of the adequacy and limitations of the current toolkit.