Towards a measure of financial fragility

2003

Cambridge Journal of Economics, 2011

The paper examines three aspects of a financial crisis of domestic origin. The first section studies the evolution of a debt-financed consumption boom supported by rising asset prices, leading to a credit crunch and fluctuations in the real economy, and, ultimately, to debt deflation. The next section extends the analysis to trace gradual evolution toward Ponzi finance and its consequences. The final section explains the link between the financial and the real sector of the economy, pointing to an inherent liquidity problem. The paper concludes with comments on the interactions between the three aspects.

Journal of Financial Stability, 2004

The purpose of our work is to explore contagious financial crises. To this end, we use simplified, thus numerically solvable, versions of our general model ]. The model incorporates heterogeneous agents, banks and endogenous default, thus allowing various feedback and contagion channels to operate in equilibrium.

IMF Working Papers, 1996

This is a Working Paper and the authors) would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund, mentioning the author(s), and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.

SSRN Electronic Journal, 2000

Frequent upheavals in international financial markets along with a deepening crisis in the deepening crisis in the real sectors have of late become rather common in the global economy. This make it important to get at the underlying connections between the financial and the real turmoils. A starting point as above clearly departs from what in orthodox economics is cited as "neutrality' of money. As contrasted to the latter, money and finance as viewed in this study are treated as active agents of change in the real economy, especially in an uncertain world.

International Journal of Social Economics, 2009

Purpose-The purpose of this study is to investigate why "financial fragility" carries different definitions in the economic literature. This is a useful task as the detection of "financial fragility" depends, in part, upon how one defines it. According to Post Keynesian economists, financial fragility is a process that can culminate in financial instability (an event). For mainstream or New Keynesian economists, financial fragility has been traditionally defined as a state in which a shock can trigger instability. More recently, however, mainstream economists have recast their definition as a particular form of financial instability-an event. Each definition of financial fragility is intimately linked to the theoretical foundation upon which it rests. This carries important implications for the ability of policymakers to assess and manage the health of an economy. Design/methodology/approach-The different approaches to the definition and detection of financial fragility are compared using corresponding sets of indicators. Indicators for the Post Keynesian approach are derived from a simple cash-flow accounting framework, in the spirit of Hyman Minsky. The economy selected for study is New Zealand. Findings-According to the Post Keynesian approach, New Zealand has been in a financially fragile state for over three years, a period during which policymakers could have been creating ways to make New Zealand more resilient to the onset of instability. According to the New Keynesian approach, New Zealand may just now be experiencing fragility, giving policymakers much less time to react. Originality/value-This study traces the definitions of financial fragility to their underlying theoretical frameworks and draws the implications for the methods of detecting financial fragility.

SSRN Electronic Journal, 2000

The paper argues that the European financial system in the years following the great financial crisis started in 2007 has become increasingly fragile. Minsky's notion of fragility, on which it is based, is related to history, policy and institutions. In the current European environment, fragility depends on the rise of shadow banks' assets, the expansion of derivatives and the changes in financial regulation. All these elements have jointly triggered several feedback loops. In Minsky's opinion, policies should have the scope of thwarting self-enforcing feedback loops. Yet the policies that have been implemented so far seem to have produced the opposite effects. They have created new feedback loops that nurture fragility again. This outcome, however, is not surprising for policies may change initial conditions and have unintended consequences, as Minsky has taught us since a long time.

2021

This paper conducts an Integrative Literature Review on the Financial Fragility Hypothesis presented by Minsky and on Financial Fragility Applied to the Public Sector. Twenty papers were chosen that addressed the proposed theme in both quantitative and qualitative procedures. The topics discussed ways of measuring financial fragility, effects on fiscal policy and need for regulation, relations between investment, cash flow expectations, the influence of interest rates and indebtedness on firms, and financial instability. The integration reinforced the conceptual aspects and propositions presented by Minsky, broadening in an integrated way the understanding of his theoretical assumptions regarding financial fragility, addressing the causes, observations, and economic and institutional consequences, in addition to signaling for insufficiencies of more empirical studies and the public sector.

The Arab Bank Review, 2003

SSRN Electronic Journal, 2003

Bank of England, FMG and University of Oxford. The views expressed are those of the author and do not necessarily reflect those of either the Bank of England or the FMG of the LSE or the University of Oxford.

SSRN Electronic Journal, 2020

This paper analyzes the financial fragility of Dutch households by examining their ability to raise 2,000 euro within a month in case of a financial emergency. Using data from a survey module fielded in 2016 in the CentERpanel, we document that one in seven Dutch households is financially fragile. Moreover, some demographic groups, specifically females, single person households, renters, low-income households, the lower educated and the unemployed are more likely to be financially fragile. While a majority of households would use their savings to cope with a financial emergency, a noticeable fraction of households would resort to other methods, such as relying on family and friends or borrowing using credit cards. Financial literacy, confidence in financially literacy skills and probability numeracy are all associated with financial fragility as well as with the methods people use to cope with an emergency. These results support previous findings on the importance of financial knowledge and numerical ability for financial decision making.

Journal of Banking & Finance, 2002

We explore for individual banks, active in the East Asian countries during the years 1996-1998, the performance of three sets of indicators of bank fragility that can be computed from publicly available information: accounting data, stock market prices, and credit ratings. We find significantly different patterns among the three groups of indicators in their ability of forecasting financial distress at a specific point in time and over time. More specifically, in the East Asia crisis episode the information based on stock prices or on judgmental assessments of credit rating agencies did not outpace backward looking information contained in balance sheet data. Stock market based information, though, has responded more quickly to changing financial conditions than ratings of credit risk agencies. Overall, the evidence supports the policy conclusion that, where the information processing is quite costly, as in most developing countries, it is important to use simultaneously a plurality of indicators to assess bank fragility.

2013

This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous...

SSRN Electronic Journal, 2015

This paper proposes a metric for a financial fragility index for the Chinese banking sector. This metric is a weighted average of two variables: bank profitability and multiple probability of undercapitalization. The weights of the two variables are assigned based on their effects on real output, estimated by a vector autoregressive model. The main contribution is twofold: incorporating a capital adequacy ratio into a quantitative measure and aggregating insolvency risk through a multiple probability measure. We confirm that our metric successfully identifies three periods of financial turmoil accompanied by economic downturns and rules out one minor perturbation caused by side effect of the policy between 2007 and 2014. In particular, this study provides an economic rationale for the relationship among financial instability, policy, and economic activity.

2004