Financial Stability Review
Risk Assessment Articles
2001
2005 2004 2003 2002 2001 2000 1999 1998 1997
Assessing
the Stability of Emerging Market Economies' Banking Systems
(82k)
(Issue 11, December 2001)
Weak banking systems may generate or amplify instabilities elsewhere in the economy, while a robust banking sector may ameliorate the impact of shocks. An assessment of banking system health is therefore central to an understanding of a country’s macro-financial prospects. This short article describes some of the tools available to help make this assessment for emerging market economies (EMEs).
Analysing
Yield Spreads on Emerging Market Sovereign Bonds
(183k)
(Issue 11, December 2001)
Yield spreads on emerging market economy sovereign bonds reflect market perceptions of the risks of default. But the information content of yield spreads is multi-faceted. This article describes some analytical tools used by the Bank of England in its financial stability assessment. Specifically, measures of dispersion and co-movement of yield spreads can shed light on the extent to which shocks are common, or not, across emerging markets; and analysis of the term structure of yield spreads can provide an indication of the time profile of risks. But care is needed in interpreting yield spreads, since they are influenced by a variety of factors other than the perceived creditworthiness of the borrower, including investors’ appetite for risk and the liquidity of particular instruments. The relative importance of each of these factors is discussed.
Risk
Transfer Between Banks, Insurance Companies and Capital Markets:
An Overview
(188k)
(Issue 11, December 2001)
Interlinkages between the banking and insurance industries are increasing. The most visible sign is the merger of banks and (in most cases, life) insurance companies to form bancassurance groups. But at least as important for the efficiency and robustness of the international financial system are linkages through the growing markets for risk transfer. Banks are shedding credit risk to insurance companies, amongst others; and life insurance companies are using capital markets and banks to hedge some of the significant market risks arising from their portfolios of retail savings products. This article describes these interactions, which are effected primarily through securitisations and derivatives. In principle, firms can use risk-transfer markets to disperse risks, making them less vulnerable to particular regional, sectoral or market shocks. Greater inter-dependence, however, raises challenges for market participants and the authorities: in tracking the distribution of risks in the economy, managing associated counterparty exposures, and ensuring that regulatory, accounting and tax differences do not distort behaviour in undesirable ways.
The
Credit Derivatives Market: Its Development and Possible Implications
for Financial Stability
(266k)
(Issue 10, June 2001)
Bank failures have often arisen from excessive credit exposure to particular borrowers or groups of borrowers that were vulnerable to the same shocks. The further development of markets for transferring credit risk could, therefore, improve the stability and efficiency of the financial system. The credit derivatives market, in particular, has recently been growing rapidly but it is by no means fully mature; and has not been tested during an economic slowdown, when credit events tend to be bunched, in the US and Europe.
Costs
of Banking System Instability: Some Empirical Evidence
(206k)
(Issue 10, June 2001)
Financial
Flows via Offshore Financial Centres as part of the International
Financial System
(338k)
(Issue 10, June 2001)
Key Resources
|
Memorandum of Understanding between HM Treasury,
the Bank of England and the Financial Services Authority
Download PDF (50k) |
