The Center for Financial Innovation and Stability's series, Notes from the Vault

Regulating Systemic Risk
Gerald P. Dwyer
December 2009

  • The financial crisis of 2008 is a clear example of systemic risk becoming real and affecting financial markets.
  • Differences in the regulatory environment from country to country appear to explain some but not all of the differences in how the crisis affected different countries.
  • Financial regulation that considers the international dimensions of financial markets and institutions is both desirable and feasible.
  • Two specific regulatory proposals to reduce the frequency and severity of financial crises are contingent capital—funds that convert to capital in bad times—and regulation of systemic risk by bank examiners.

Short Selling: Costs and Benefits
Gerald P. Dwyer
November 2009

  • Financial economists and practitioners generally have a positive view of short selling, a view on evidence at CenFIS's conference on short selling.
  • The ban on short sales in some firms did not increase trading in options, an effect that might have been expected.
  • Short sales might be made more efficient by a centralized listing of stock that can be borrowed and sold short.
  • Policy changes that are quick responses to financial difficulties can create uncertainty about future policies.

Interest on Reserves and the Current High Level of Excess Reserves
Gerald P. Dwyer
October 2009

  • Banks are holding substantially more excess reserves than in August 2008.
  • The Federal Reserve began paying interest on reserves in October 2008 and currently is paying an interest rate on reserves similar to rates on short-term Treasury securities.
  • Payment of interest on reserves accounts for much, though probably not all, of the increase in excess reserves.

Stock Prices in the Financial Crisis
Gerald P. Dwyer
September 2009

  • Stock prices fell roughly 50 percent from peak to trough from October 2007 to March 2009.
  • These drops in stock prices are large relative to those associated with earlier recessions since World War II.
  • This extraordinary plunge in stock prices may reflect effects of the financial crisis rather than lower earnings from an especially severe recession.

Credit Ratings and Derivatives
Gerald P. Dwyer
August 2009

  • Credit ratings are not complete summaries of securities' riskiness.
  • Structured securities change securities' cash flows and riskiness in nonobvious ways.
  • The old-fashioned advice "If you don't understand it, don't buy it" seems to apply quite well here.

Notes from the Vault was on hiatus after the March/April 2012 post; it restarted in March 2013.

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