Academic Research on Back Stops

• Fine-tuning the use of bail-in to promote a stronger EUfinancialsystem, Micossi, S., Bruzzone, G., & Cassella, M. (2016). Fine-tuning the use of bail-in to promote a stronger EU financial system.CEPS Special Report, (136). This paper discusses the application of the new European rules for burden-sharing and bail-in in the banking sector, in view of their ability to accommodate broader policy goals of aggregate financial stability. It finds that the Treaty principles and the new discipline of state aid and the restructuring of banks provide a solid framework for combating moral hazard and removing incentives that encourage excessive risk-taking by bankers. However, the application of the new rules may have become excessively attentive to the case-by-case evaluation of individual institutions, while perhaps losing sight of the aggregate policy needs of the banking system. Indeed, in this first phase of the banking union, while large segments of the EU banking sector still require a substantial restructuring and recapitalisation, the market may not be able to provide all the needed resources in the current environment of depressed profitability and low growth. Thus, a systemic market failure may be making the problem impossible to fix without resorting to temporary public support. But the risk of large write-offs of capital instruments due to burden-sharing and bail-in may represent an insurmountable obstacle to such public support as it may set in motion an investors flight. The paper concludes by showing that existing rules do contain the flexibility required to accommodate aggregate policy requirements in the general interest, and outlines a public support scheme for the precautionary recapitalisation of solvent banks that would be compliant with EU law.
• Shadow money and the public money supply: the impact of the 20072009financialcrisis on the monetary system, Murau, S. (2017). Shadow money and the public money supply: the impact of the 20072009 financial crisis on the monetary system.Review of International Political Economy,24(5), 802-838. This article explores the effects of the political reactions to the 20072009 financial crisis on the monetary system. It chimes in with the view that shadow banks create shadow money, i.e. private substitutes for bank deposits. The article analyses how the three main forms of shadow money money market fund shares, overnight repurchase agreements and asset-backed commercial papers were affected by the short-term government intervention and medium-term regulation during and after the 20072009 financial crisis in the United States. The analysis reveals that the measures taken between 2007 and 2014 integrated some shadow money forms in the public money supply. In the year after the Lehman collapse, the initially private shadow money supply was either publicly backstopped or de-monetised as it had broken par to bank deposits. The public backstops took on the form of emergency facilities established by the Federal Reserve and guarantees proclaimed by the Treasury. Those backstops imply that the public institutional framework to protect bank deposits was extended to some forms of shadow money during the crisis. This tendency has continued in post-crisis regulation. Accordingly, the 20072009 financial crisis has triggered a paradigmatic change in the monetary system, attributable to the political decisions of US authorities.
• The use and abuse of special-purpose entities in public finance, Schwarcz, S. L. (2012). The use and abuse of special-purpose entities in public finance.Minn. L. Rev.,97, 369.
• Financial risks in the low-growth, low-interest rate environment, Nassr, I. K., Wehinger, G., & Yokoi-Arai, M. (2015). Financial risks in the low-growth, low-interest rate environment.OECD Journal: Financial Market Trends,2, 63-90.
• Spotlight: Mexico Development Bank lending rises following financial reforms, Perez, M. (2015). Spotlight: Mexico Development Bank lending rises following financial reforms.Southwest Economy,11(Q4), 15-15.