In 1907 the stress United States had no central bank, so the availability of liquidity depended on the discretion of firms and private individuals, like Morgan.
Then, I discuss the tradeoffs involved in reflections setting the level of disclosure, emphasizing some of the disadvantages of a policy of greater disclosure, which are often not well understood.
Second, through the use of appropriate carrots crises and sticks, regulators can enlist the private sector in test monitoring risk-taking.
Interestingly, a steep decline in interbank lending, a form of wholesale funding, was important in both episodes.
Broadly speaking, the disadvantages of disclosure can be classified into three groups:.
At least to some extent, Morgan and serial the New York Clearinghouse used these tools in 1907, giving assistance to troubled firms and providing assurances to the public about the conditions of windows individual banks.For each BHC, the four projected capital ratios under the severely adverse scenario were disclosed publicly, alongside details on projected net income and projected loan losses windows by type of loan (First-lien mortgages, domestic; Junior liens and helocs, domestic; Commercial and industrial; Commercial real estate, domestic;.The disclosure of aggregate results will not crowd out the incentives of speculators to produce and trade on bank-specific information.Of course, market windows discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs.Moreover, their results are intended to be disclosed publicly.Specifically, in the context of banks, a piece of bad news that is made public via the disclosure of stress test results might trigger an inefficient run on a bank that does not pass the test.This problem is particularly severe if the stress test results are noisy,.g., if the data used in the stress test are not sufficiently rich to determine precisely the risk faced by the bank, thus generating predictions that are not perfect.The selloff of shares and other assets, in what today we would call a fire sale, precipitated a sharp decline in the stock market and widespread disruptions in other financial markets.Some Reflections on the Crisis and the Policy Response speech delivered at "Rethinking Finance a conference sponsored by the Russell Sage Foundation and Century Foundation, New York, April.Stan frequently counseled his students to take a historical perspective, which is good advice in general, but particularly helpful for understanding financial crises, which have been around a very long time.The structure of this policy brief is as follows: First, I provide a short overview of the nature of the newly required stress tests and the meaning of their results.For example, see Board of Governors of the Federal Reserve System (2013 Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice (PDF) (Washington: without Board of Governors, August).For example, if a financial institution is found test to be unprepared for a large economic shock, then market participants will limit their exposure to this financial institution. An expert on financial crises, Stan has stress written prolifically on the subject and has also served on the front lines, so to speak-notably, in his role as the first deputy managing director of the International Monetary Fund during the emerging market crises of the 1990s.
Notably, oversight of the shadow banking system is being strengthened through the designation, by the new Financial Stability Oversight Council, of nonbank systemically important financial institutions (sifis) for consolidated supervision by the Federal Reserve, and measures are being undertaken to address the potential instability.
Here, the context and the responses differed between 1907 and the recent crisis.
See Bagehot, Lombard Street, in note.
Considering a wider array of scenarios that could emerge from recent economic developments would improve the ability of the tests to identify weak spots in the financial system.
This will force the financial institution to take actions to improve its capital positions in order to regain the confidence stress test reflections on financial crises pdf of market participants.