When terrorists attacked the World Trade Center on September 11, 2001, they also attacked the U.S. financial system. In addition to destroying critical financial infrastructure, the collapse of the twin towers closed the New York Stock Exchange and disrupted the payments system that links U.S. intermediaries, threatening to shut down banks, ATM machines and credit card operations across the country. Only extraordinary intervention by the Federal Reserve kept the system afloat (see, for example, Rosengren).
We have long argued that financial stability is a vital common resource (see here). As ECB Board member Cœuré suggests in the opening quote, the same applies to financial cybersecurity—the protection of financial information and communications technologies (ICT) and their associated networks from failures and attacks. The events of 9/11 and their aftermath dramatically highlighted the link between stability and cybersecurity. Moreover, because our financial system is so deeply reliant on ICT and on large, global networks, these two objectives are more closely linked than ever before: ensuring one means guarding the other.
In this post, we highlight the pervasiveness of cyberthreats as a source of operational risk in finance. Consistent with the Presidential Policy Directive 21 and a recent Presidential Executive Order aimed at strengthening cybersecurity, the U.S. government has designated financial services infrastructure as critical to national and economic security (see here). Nevertheless, numerous challenges—ranging from the availability of reliable data to the ever-changing nature of the attacks themselves—make the goal of safeguarding financial ICT networks very difficult. To be effective, cybersecurity efforts require mechanisms for preventing successful attacks, limiting their impact, and promoting quick, reliable recovery. Reducing vulnerability and contagion while boosting cyberresilience is a very tall order…. Read More
After years of relative calm, in recent months several emerging economies have found the cost of attracting foreign funding is going up. Faced with a halt of external financing, Argentina obtained a three-year financing deal worth $50 billion from the IMF, while funds also appear to be flowing out of Brazil, Turkey, and elsewhere. And, recent bond market turbulence in Italy suggests the possibility that political risks are triggering outflows there.
In this post, we explain balance-of-payments (BoP) crises—the sudden stops or capital flow reversals—that compel countries to restore their external balance between exports and imports or, in the case of capital flight, shift to export surpluses. In addition to describing common features of BoP crises, and characterizing sources of vulnerability that make them more likely, we examine one emerging-market example—the Asian crisis of 1997-98—and one advanced-economy episode—the crisis of the euro-area periphery from 2010 to 2012…. Read More
Along with enormous misery, the financial crisis brought an opportunity for long-needed reform. At the top of the list was the clear need for more bank capital. To ensure resilience of the financial system, and protect the public purse, banks’ owners had to have much more skin in the game. That is, potential losses to equity holders had to go way up.
Unfortunately, the 2010 Basel III agreement missed this rare opportunity to make the financial system safe. And now, with the publication of the standards for what has come to be known as total loss-absorbing capacity (TLAC), the disappointment continues to grow. To understand why, we need to step back and address the big question for bank capital: how much is enough...? Read More
Equities are the stars, they are the financial instruments in the headlines. But it is bonds that are the cast and crew. They do the day-to-day work behind the scenes. And, as with any tradable asset, the confidence that prices are fair and that you can sell what you buy is essential.
So, when knowledgeable people express concerns that regulatory changes are causing bond markets to malfunction (see, for example, here), it leads us to ask some tough questions. Are these markets somehow impaired? Is enhanced financial regulation to blame? Is this creating risks to the financial system as a whole...? Read More