Before I embark on my assigned topic, permit me to extend my congratulations to the RBA. This is a central bank with a consistently strong voice in international forums.

The Bank for International Settlements has benefited from the Reserve Bank's presence as a shareholder since , and has profited immensely from the contribution of a succession of Reserve Bank visiting economists, both in Basel and in the Representative Office for Asia and the Pacific.

Let me take this opportunity to express my appreciation of the strong record of collaboration between our two institutions and my hope for an ever stronger relationship.

I have turned my assignment into 10 questions about financial stability. Let me admit at the outset that I have answers, of varying certainty and clarity, for only about seven of them. I owe this format to Alan Blinder, who set out 16 questions and 12 answers on monetary policy at the Bank of Spain in Unfortunately, the answer is yes.

Financial markets are not intrinsically stable. However, I would like to add a nuance to this answer. Before this crisis, many might have imagined that only emerging markets suffered from financial instability.

After the Nordic banking crises, some clung to the hope that financial instability in advanced economies was just a transitional problem associated with financial deregulation.

Now we have learned that financial markets are not self-stabilising under certain conditions, or that they do not self-stabilise at any socially acceptable cost. We should recognise with Charles Kindleberger, 2 once a BIS economist, that manias, panics and crashes are not unusual.

Indeed, a once-in-a-lifetime event seems to happen every five to 10 years. On one count, 93 countries experienced systemic and 51 lesser disruptions of their financial systems in the quarter-century before the latest global financial crisis.

That is six a year! Name the country that has not been hit! The answer is not to repress financial markets. Rather, it is to recognise that markets need rules, constraints and careful monitoring so that market failures are less frequent and less costly.

And that the rules, constraints and monitoring exercises need a macroprudential approach - that is, one that tries to capture not only individual risks but system-wide risks. Can that be done? Before the crisis, people who expressed concern about imbalances and risk mispricing were frequently asked: why do you think you know better than market participants?

The question is important because many official bodies are now seeking to monitor financial risks better so that early action can be taken to prevent a crisis or lessen its potential costs.

The IMF and the Financial Stability Board are engaged in such an early warning exercise and have the daunting task of spotting financial market problems before they crash around our ears. I think the crisis has suggested, not that we are smarter or know better than market participants, but rather that we have the luxury of longer horizons, different incentives and a public policy objective.

However, these are early days and we should be cautious about raising expectations too high. Indeed, one of the lessons of the crisis is that it was easier to recognise vulnerabilities than to do anything about them.

It will never be easy to take unpopular preventive action to avert events that are perceived as low in probability and uncertain of timing. Not alone. Let us consider this question with reference to both risk management within financial firms and the broader process by which market participants impose discipline on each other's risk-taking.

Regarding risk management within firms, it would be wrong to deny the very real progress that has been made. Conceptual and quantitative approaches have developed in many illuminating ways.

However, it would be even more wrong to deny that risk management has proven less reliable than we hoped. Because, the capacity and the incentives to take risks have clearly overwhelmed any improvements in risk management.

Risk management is about quantifying the infrequent, that is, assessing tail risks, where by definition experience is sparse. Even stress testing has been caught out, failing to consider those seemingly remote possibilities that have, in fact, come to haunt us over the last two years.

Reform in this area will require that potential losses are assessed in relation to longer runs of data. In addition, assessments will need to take into account stressed market conditions, so that we keep our guard up even after the recent turmoil recedes from memory. Most importantly, beyond the input and the models, we have seen weaknesses in governance and incentives within firms.

After risk management had apparently tamed risk, management leveraged up in response to incentives to "increase shareholder value" on the basis of short-term results.

Building wider shoulders for a road can save lives, but not if drivers simply speed up. Capital requirements are the speed limits of banking. Regarding the larger-scale process of market discipline, the record here can only be described as disappointing. That individual financial firms failed to manage their risks is bad enough; that their counterparties allowed them to is worse.

For instance, why did rating agencies and ultimate investors fail to insist that mortgage originators retain an interest in the mortgage so as to prevent moral hazard?

There is one final respect in which private risk management will not suffice to control risk. Each private firm takes the underlying risk in the financial system as a given. But even if every individual firm keeps its own risks in check, this does not preclude an accumulation of system-wide risk.

The control of system-wide risk requires some contribution from the regulatory side. Are capital requirements necessary and sufficient to achieve financial stability?

Yes, capital requirements are necessary; but, no, they are not sufficient. Indeed, I would argue that regulation was only part of the problem and it is only part of the answer. Capital is not enough; regulation is not enough.

As was said of the Bank of England, a bank has "a duty to be rich". Lessons have been drawn by the Basel Committee on Banking Supervision concerning the need to improve the quality of capital, to raise the level of capital and to improve the framework's capture of risk, especially as regards the trading book.

And agreement has been reached that both belt and braces are needed, so that one's trousers are held up by a simpler leverage ratio even if the risk-weighted ratio is distorted by an inadequate risk assessment of the assets. One of the most fundamental improvements introduced by the Basel Committee in its reform package is the macroprudential focus to address both system-wide risks and the procyclical amplification of risks over time.

We have learned that those deep pockets I just mentioned need to be made even deeper in good times so that more can be taken from them in bad times. Capital is a central part of the financial reform, but the crisis highlighted the importance of liquidity management.

A well capitalised bank is less likely to face a run. And a liquid entity has time to raise more equity. Maturity transformation is the job of banks, but so is maintaining adequate liquidity.

The Basel Committee on Banking Supervision has addressed the shortcomings in the liquidity regulatory framework highlighted by the crisis by defining the liquidity buffers needed to promote resilience.

This test is an extension of the one that has been applied in Australia. Banks also need to have a sound funding model that fits their business model. Capital and liquidity are part of the core financial reforms, but dealing with systemic risk is a multifaceted task, and more measures are on the table.

My next question will address this. Even though the official response to the crisis was necessary to avoid the collapse of the financial system, it has created new challenges.

Weak, large institutions have been kept alive and mergers have even made some institutions larger. Furthermore, the various support and rescue measures raise immense moral hazard issues if market participants count on their repetition at times of difficulty.

The global financial crisis underscored once again that systemic risk is not external to the functioning of financial markets. Systemic risk is not only about the knock-on effects of some external event like a meteor strike.

In fact, the distress in financial markets during this crisis preceded any broad-based downturn in gross domestic product. They were not just side effects of a tamer business cycle, just-in-time inventories or economic globalisation. Just when risk seemed most remote on the basis of market indicators and complacency was at its highest, the system was most fragile.

I already mentioned that capital buffers and provisions need to be built up in good times so that they can be drawn down in bad times. The systemic risk that a given firm poses is hard to measure, but it surely exists.

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Financial Innovation and Structural Change. Vulnerabilities Assessment. A well-developing financial sector is likely to grow. But very rapid growth in credit is one of the most robust common factors associated with banking crises Demirgüc-Kunt and Detragiache , Kaminsky and Reinhart Indeed, about 75 percent of credit booms in emerging markets end in banking crises.

The credit growth measure also has pros and cons: Although it is easy to measure credit growth, it is difficult to assess ex-ante whether the growth is excessive. For financial markets, the most commonly used proxy variable for stability is market volatility.

Another proxy is the skewness of stock returns, because a market with a more negative skewed distribution of stock returns is likely to deliver large negative returns, and likely to be prone to less stability.

Another variable is vulnerability to earnings manipulation, which is derived from certain characteristics of information reported in the financial statements of companies that can be indicative of manipulation.

It is defined as the percentage of firms listed on the stock exchange that are susceptible to such manipulation. In the United States, France, and most other high-income economies, less than 10 percent of firms have issues concerning earnings manipulation; in Zimbabwe, in contrast, almost all firms may experience manipulation of their accounting statements.

In Turkey, the number is close to 40 percent. Other variables approximating volatility in the stock market are the price-to-earnings ratio and duration, which is a refined version of the price-to-earnings ratio that takes into account factors such as long-term growth and interest rates.

Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. Boyd, John, and David Runkle. Čihák, Martin. Čihák, Martin, and Heiko Hesse. Čihák, Martin, Asli Demirgüç-Kunt, Erik Feyen, and Ross Levine. Cihák, Martin and Schaeck, Klaus, Demirgüç-Kunt, Asli and Enrica Detragiache, , "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers , 81— Demirgüç-Kunt, Asli, Enrica Detragiache, and Thierry Tressel.

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The Finanvial Bank Financial Stability Issues in Emerging Market Effortless fund transfers Developing Economies Benin Finxncial Sector Review: Stability for solktions Better Sstability. The theoretical banking literature includes some work on this, but none could be found applicable to the financial-system level. Official Reports and Documents. Browse All Publications Policy Documents Progress Reports Evaluation Reports Reports to the G20 Peer Review Reports Key regular publications Regional Consultative Group Reports. Two upcoming questions address these themes.	Data Transmission Systems. The final section explains why it is more productive to anchor the analysis in a definition of financial stability rather than financial instability. To illustrate the multidimensional nature of the definition and the continuum, consider a simple two-dimensional example. Meanwhile, seven out of 10 are worried about effectively managing their cash flow. What is financial stability? In stability, the system will absorb the shocks primarily via self-corrective mechanisms, preventing adverse events from having a disruptive effect on the real economy or on other financial systems. Personal Finance -Taxation.	7 steps to financial stability · Invest in yourself · Make money from what you like · Set saving and expense budgets · Spend wisely · Set emergency fund · Pay off A financial system is considered stable when banks, other lenders, and financial markets are able to provide households, communities The Financial Stability team has delivered technical assistance programs that develop safety net mechanisms for lasting financial resilience, including risk	movieflixhub.xyz › blogs › ask-experian › how-to-create-financial-stability A stable financial system is one that can provide essential services to households and businesses in good times and bad. Browse content A stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and	You can create financial stability by implementing strong money habits such as movieflixhub.xyz › blogs › ask-experian › how-to-create-financial-stability A stable financial system is capable of efficiently allocating resources, assessing and managing financial risks, maintaining employment levels close to the
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A stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and investors and, by doing so, help promote growth in economic activity.

Conversely, financial instability is a material disruption to this intermediation process with potentially damaging implications for the real economy. From this perspective, the safeguarding of financial stability can be seen to be a forward-looking task — one that seeks to identify vulnerabilities within the financial system and, where possible, take mitigating action.

Some of these vulnerabilities have a macroeconomic dimension, such as changes in the condition of household and corporate sector balance sheets, and developments in credit and asset markets, all of which have the potential to affect the level and distribution of financial risk within the economy.

Other vulnerabilities relate to the way in which financial intermediaries and financial market participants price and manage their various risks.

A leverage ratio is a tool that is used by regulators in a country, to ensure that banks are well-capitalized. This ratio is used to place restraint on the degree to which a bank can leverage its capital base.

Further, the leverage ratio is highly useful for investors and regulators to assess whether a bank or banks will be able to repay their financial obligations, in the eventuality of a financial crisis or a deep recession — which makes banks vulnerable to significant losses.

The leverage ratio is defined as the capital measure which is Tier 1 capital divided by the exposure measure which includes both on-balance sheet exposure and off-balance sheet items , expressed as a percentage. This ratio measures the core capital of a bank to its total assets.

This indicates that this bank is in a financially sound condition, and its ability to withstand a negative shock to its balance sheet is good. The higher this ratio is, the greater is the likelihood that a bank will be able to withstand such a shock.

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