I. Research Projects for OY 2010/11
(R1) Addressing Risks in Promoting Financial Stability
Supporting Reasons:
The level of financial globalisation and development underscore the importance of macro- and micro-prudential tools necessary to mitigate systemic risks on both dimensions. More importantly, the depth and breadth of the recent global financial crisis provided fresh impetus for policymakers around the world to rethink and introduce new approaches to the existing frameworks for financial stability among SEACEN countries. Given the varying degrees of financial system infrastructure, and levels of financial development among SEACEN countries, the availability of diverse sets of macro and micro-prudential indicators is indeed vital.
These economic indicators are key components that enable policy makers and bank supervisors to formulate and implement prudential regulation and regulatory forbearance. Moreover, they comprise strategic components in the design of crisis early warning signals. Accordingly, these macro and micro indicators form an integral part of the financial stability frameworks already established and espoused by participating SEACEN member banks.
Objectives:
- To survey sets of macro- and micro-prudential tools and indicators that have been used extensively by the SEACEN members, given their levels of financial system development and regulation; and,
- To provide critical assessments and evaluations on various distinctive features of central banks’ financial stability frameworks adopted by SEACEN countries with the view to identifying strengths and weaknesses of each member’s frameworks.
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Key Areas to be Covered:
- Macro- and micro-prudential tools and indicators to be used to signal early warning of impending economic shocks, and to mitigate the impact of systemic and idiosyncratic risks;
- Regulations set by member countries for financial institutions, such as the lender of last resort facility and deposit insurance mechanisms, that form the tools for resolution; and,
- Indices of bank distress, stress testing of financial soundness and financial conditions, and early warning indicators.
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(R2) Relative Effectiveness of Policy Choices during Financial Crisis
Supporting Reasons:
As a response to the global financial crisis, central banks have implemented monetary policy aggressively to mitigate the impact of the crisis by influencing financial conditions through the cost and availability of credit as well as asset prices. In many cases, SEACEN central banks have cut policy rates to a record low, even close to reaching the lower boundary in some countries. In addition, a number of direct and non-conventional monetary policies have also been implemented. Together with the Ministry of Finance for instance, central banks of a number of SEACEN countries opted to embark on coordinated policies to guarantee lending to small and medium enterprises. The urgency for the unprecedented aggressive push for expansionary monetary policy calls for concerns regarding the considerable risk and uncertainty associated with such monetary policy.
It is, therefore, imperative to evaluate the relative effectiveness of various policy options taken. Furthermore, it is vital for the authorities to be fully aware of the consequences of monetary policy conducted during the crisis period to optimise the channel of interaction between monetary and other macroeconomic policies, in particular fiscal policy. Understanding the effectiveness of the policies, in particular the ultimate bearing, should facilitate the formulation of timely and sequential exit strategy for monetary policy, while ensuring the preservation of price stability and economic growth.
Objectives:
- To list and assess the effectiveness of various conventional and non-conventional monetary policy measures pursued during the recent subprime crisis, and the overall transmissions;
- To suggest monetary policy recommendations for minimising the effects of the crisis and, speeding up the recovery process;
- To examine the potential risks arising from the timing and sequencing of exit strategy.
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Key Areas to be Covered:
- Monetary policy responses, implementation, and transmission during financial crisis;
- The designs of non-conventional monetary policies and the suitability; and,
- Possible interaction between monetary policy and other macroeconomic policies during crisis.
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(R3) Propagation of Real Shocks in the SEACEN Countries
Supporting Reasons:
Liberalisation and integration of the SEACEN economies with the rest of the world during the last few decades have led to greater interconnectedness of markets. This has resulted in increased contagion effects even for economies with strong economic fundamentals, where real and financial shock effects are spilled-over from one country to another. While there are various channels through which such shocks may spread from one economy to the entire region, the recent subprime crisis also highlights the prominent roles of trade and investment linkages in the spread of the crisis. Yet, limited studies have been carried out, especially on our SEACEN economies.
To understand trade contagion, one needs a greater understanding of trade interdependence that extends beyond bilateral trade ties. As the subprime crisis shows, one needs to analyse the degree of vertical integration of the production chain and the ultimate reliance on advanced economies for final demand. In addition, studies have shown that there is a close link between trade, direct investment activities, and international bank lending. The collapse of trade activities often led to slowdowns in bilateral investment and international bank lending. Consequently, the deterioration of the balance of payment position will follow, and lead to selling pressures on the local currency, and capital outflows. Therefore, understanding the nature of the mechanism driving the contagion effect will be useful for the SEACEN central banks to assess the magnitude of the real sector linkages and their potential shocks and adverse spillovers on the local economy.
Objectives:
- To better explain the links between financial crisis and the slowdowns in investment and trade activities; and,
- To recommend informed policy measures to reduce contagion and the instability that it entails.
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Key Areas to be Covered:
- Relative effect of trade, investment and financial contagion during crisis period, and which channel can better explain the crisis; and,
- Regional coordination and cooperation in dealing with contagion.
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(R4) International and Cross-Border Bank Lending and Implications in SEACEN Countries: Balance Sheet Perspectives
Supporting Reasons:
As banking has become more globalised, so too have the consequences of shocks originating in home and host markets. Global banks played a crucial role in the transmission of the recent sub-prime crisis to emerging markets. The economic slowdown in one corner of the world would immediately be transmitted via both sides of the global bank balance sheets, namely the asset and the liability sides. The deterioration of the investment return of a bank in the international market has been shown to have a severe consequence on its capital adequacy position. Similarly, a bank-run in one of the subsidiaries, branches, or affiliated institution may trigger a liquidity problem globally. Adverse consequences include contractions in lending and a breakdown in monetary policy transmission.
It is, therefore, imperative for the SEACEN central banks to comprehend the size and nature of the global bank’s presence in their economies. Given their global investment portfolio and sources of capital, some of the national commercial banks of the SEACEN countries have joined the ranks of multinational banks, and play increasing roles in the globalised banking system. Understanding the balance sheets of these banks, therefore, is critical for the conduct of monetary policy in particular, and for dealing with future global financial shocks and their implications on the local economy in general. The increasing role of the global banks as a contagion channel of financial crisis has also further underscored the urgency to strengthen financial regulation and supervision in the SEACEN countries, and the consideration of the establishment of cross-border supervision.
Objectives:
- To analyse the presence of the global banks in the SEACEN economies;
- To understand how shocks are being transmitted between economies via the balance sheets of global banks;
- To generate policy options, including areas of regulation and supervision, in addressing risks associated with the global banking system.
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Key Areas to be Covered:
- Survey of selected major banks’ balance sheets, both assets and liabilities;
- Mapping investment activities of these banks (local versus international markets);
- Relative portions of domestic and international sourced capitals – understanding size of internal funding and cross-border lending.
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(R5) New Financial Products and Challenges for Central Banks
Supporting Reasons:
The recent crisis shows that rapid innovation in financial market without adequate prudential regulation and supervision can lead to financial market collapse and enormous loss to the domestic and global economy. One crucial reason for the US subprime mortgage crisis becoming a global phenomenon was the proliferation of new and highly-complex derivative structured products. The amount of subprime mortgage was significantly increased through the securitisation process and the failure of the subprime borrowers to repay their debts ignited defaults tied to mortgage-related securities and structured products
As the current subprime crisis is transforming the landscape of financial products globally, it is imperative for SEACEN central bankers to be fully aware of these products being offered. Intimate in-house knowledge regarding complex-financial instruments is vital to enable the central bank to assess and issue guidelines and regulations regarding these complicated market products. This is to ensure that a balance is achieved between over-regulation which may stifle the market, and under-regulation which may result in greater risks and opacity of these financial products. Another important concern for central banks is the cross-border distribution of these assets and how to regulate them. In this aspect, this may require a coherent regional framework ranging from governance arrangements to supervisory cooperation and supervision.
Objectives:
- To understand the nature of structured products
- To survey the development of financial products and their implications for financial stability in SEACEN countries;
- To assess the effectiveness of regulations on these complex assets in preventing financial crisis/instability;
- To understand current practices with respect to cooperation/coordination arrangements between the central bank and other supervisory authorities, and between central banks in the region for cross-border supervision.
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Key Areas to be Covered:
- Development of financial products in SEACEN countries;
- Policy implications of regulations on complex financial instruments; and,
- Regional cooperation and supervision of these products.
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II. Planned Case Studies for OY 2010/11
The 4 case studies to be generated from the research projects for OY 2009/10 are expected to be completed and used in relevant learning events.
a) Being developed from research projects conducted in OY 2010/11
- Addressing Risks in Financial Stability
- Relative Effectiveness of Policy Choices during Financial Crisis
- Propagation of Real Shocks in the SEACEN Countries
- International and Cross-Border Bank Lending and Implications in SEACEN Countries: Balance Sheet Perspectives
- New Financial Products and Challenges for Central Banks
b) Being developed in collaboration with SMEs
4 case studies as required for the proposed training events for OY 2010/11
III. Proposed SEG Activities
The SEACEN Centre will continue to provide secretariat support for the SEACEN Expert Group (SEG) on Capital Flows. Specifically the following activities are proposed for OY 2010/11.
1. Technical Meeting
The SEG Technical Meeting will be held on 16-19 May 2010 in Kuala Lumpur, Malaysia to provide a forum for technical members of the SEACEN Expert Group on Capital Flows (SEG) to discuss issues relating to SEG data templates and data reporting, as well as technical issues to enhance the usefulness of the SEG database.
2. Exchange of Data on Capital Flows
The SEACEN Centre will continue to facilitate the exchange of data in the confidential SEG database system.
3. Capacity-building in SEACEN Member Banks
To promote capacity building and exchange of views and experiences, various training courses and workshops have been proposed as part of the training programme for OY 2010/11 to enhance expertise in the area of capital flows.
4. Assessment of Capital Flows
The SEG Secretariat is planning to prepare twice a year brief reports on capital flows to be circulated to members and develop forward looking indicators.
IV. Publications
1. 5 Research Books
2. 4 Staff Papers
3. 4 Occasional Papers
4. 2 SEG Reports
5. 2 Background Papers for High-level Meetings
6. Guide to SEACEN Bank Watch 2010
7. SEACEN Profile 2010
8. Annual Report 2010
9. SEACEN Programme 2010/11
10. SEACEN Newsletters (4 Quarters)
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