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Purpose The purpose of this paper is to discuss more efficient mechanisms of regulation in the financial system.Design/methodology/approach The authors developed a theoretical two-period model of financial flows (FFs) that considers households, banks, and a social planner.Findings It is important to highlight that different from other studies that do not distinguish between financial crisis and financial instability, the authors assume financial instability does not mean crisis, but represents a deviation in the behavior of the aggregate financial intermediation and in the financial operations of each bank from the equilibrium.Practical implications The practical implication of the model is the proposition of an efficient policy for financial stability based on forward-looking financial regulations.Social implications An important result is that bank failures occur when banks do not maintain sufficient resources to support the liquidity constraint from the interbank market. Another result is that the central bank reacts, via exchange of reserves with the market, to financial instability. This behavior on the part of the central bank is inefficient because the banks will assume that in the case of failure they will be “saved;” thus it creates an adverse incentive (moral hazard) that can amplify the risk over the entire financial system.Originality/value The originality of the model is the proposition of an efficient policy for financial stability based on a forward-looking financial regulation. In this strategy the regulator acts in advance (ex ante) to minimize the mismatch of FFs in relation to the flow balance. This manner of acting is a counterpoint to the financial regulation based on capital requirement. [ABSTRACT FROM AUTHOR]

Las reservas internacionales constituyen una de las herramientas de que disponen los bancos centrales para proporcionar un seguro de liquidez y hacer frente a contingencias futuras y a cambios repentinos en los flujos de capitales. Este trabajo analiza los factores económicos que explican el comportamiento de las reservas en el caso argentino. Atal efecto, se estiman modelos de VEC (vector de corrección de errores), con datos trimestrales de ese país, que cubren el período 1994-2013. Los resultados muestran que el PIB real y el riesgo país serían los principales determinantes de la volatilidad en las reservas, mientras que otros factores, como los términos del intercambio y los componentes de la balanza de pagos (balanza comercial y cuenta capital y financiera, respectivamente) habrían sido menos importantes. [ABSTRACT FROM AUTHOR]

The rapid growth in international reserves accumulation in many emerging Asian economies has challenged economists with a puzzle and has revitalised the reserves adequacy literature recently. Recent works mostly focus on a large group of countries in trying to explain such behaviour. However, this paper aims to assess reserves adequacy for Thailand in particular. We see that taking into account the catastrophic impact of the 1997 Asian financial crisis, the rapid development and worldwide integration of financial systems, the current high level of Thailand's reserves seems reasonable subject to some modifications in the traditional rules and theoretical approaches used in this paper to justify the reserves level in Thailand over the past decades. [ABSTRACT FROM AUTHOR]

Abstract: We model a stylized banking system where banks are characterized by the amount of capital, cash reserves and their exposure to the interbank loan market as borrowers as well as lenders. A network of interbank lending is established that is used as a transmission mechanism for the failure of banks through the system. We trigger a potential banking crisis by exogenously failing a bank and investigate the spread of this failure within the banking system. We find the obvious result that the size of the bank initially failing is the dominant factor whether contagion occurs, but for the extent of its spread the characteristics of the network of interbank loans are most important. These results have implications for the regulation of banking systems that are briefly discussed, most notably that a reliance on balance sheet regulations is not sufficient but must be supplemented by considerations for the structure of financial linkages between banks. [Copyright &y& Elsevier]

The global financial system appears to be heading for a new crisis, triggered in large part by growing and unsustainable levels of global debt. Reserve currencies are an essential element of the world's current financial infrastructure, and are widely recognized for their role in facilitating international transactions. History has taught us that such currencies are also quite transient, being subject to adjustments and changes as economic conditions evolve over time. The United States dollar now serves as the de facto world's reserve currency. However, this is unlikely to continue unchallenged and unchanged into the future. The G20 and the International Monetary Fund (IMF) appear to be now considering a reserve currency, such as the Special Drawing Rights (SDR), which is obtained through participation of many currencies. The major question is not what will become the new global reserve currency, but how this new currency will be managed. One of the critical issues associated with this currency management effort is that of determining the information systems architecture that will be required, including whether an associated Service Oriented Architecture (SOA) would be helpful in managing this new global currency. An extremely important element in this currency determination activity is a strong governance protocol that all the governments and sovereigns will accept and comply with. Otherwise any new global reserve currency, regardless of whether it is associated with a major information systems architecture foundation, will likely be unsustainable. In this paper, we examine these issues. [ABSTRACT FROM AUTHOR]

This paper uses binary classification trees (BCTs) to predict capital account crises. BCTs successively compare candidate variables and thresholds to split the data into two subsamples, allowing for a large number of indicators to be considered and complex interactions to emerge in a way that standard regressions cannot easily replicate. We identify a robust leading indicator role for three variables (international reserves, current account balance, and short-term external debt) as well as a reserve cover measure that combines them. External indebtedness and domestic GDP growth forecasts are also important predictors of vulnerability. Out of sample, we were able to capture some of the main emerging market crises with relatively few false alarms but the overall out-of-sample performance of our forecasts was mixed. Global cyclical variables help explain vulnerability to crises but they are difficult to predict and, therefore, are of limited use for forecasting purposes. [ABSTRACT FROM AUTHOR]

Currency crises creates extremely high costs in economies. The depletion of foreign exchange reserves, a severe recession and negative GDP growth rates are observe in the countries where the currency crises are occurred. There seems to be great benefits from identifying reliable early warning indicators helping to predict currency crisis. Thus, policy makers would enable to forestall impending pressure on their countries currency system by using early warning indicators. The "signal approach" to proposed by Kaminsky ve Reinhart (1998) to predict currency crisis is commonly employed in empirical studies as an early warning system. It involves monitoring a number of variables that tend to behave differently or to exhibit an unusual behavior in the periods preceding a crisis. A certain threshold is determined for each indicator, which, when exceeded, issues a warning signal that a crisis may occur within a period of time. This study aims to predict the 1994 and 2001 currency crises in Turkey by using signal approach. Empirical analysis reveals that almost 67 percent of the indicators examined signal the occurrence of currency crises. It is concluded that 9 of 15 indicators are determined as leading indicators and are found to be significant in signal approach based on their noise to signal ratio and six of indicators lacked predictive power from list of potential indicators. [ABSTRACT FROM AUTHOR]

Abstract: This paper investigates the relationship between financing constraints and investment–cash flow sensitivities by focusing on cash holdings of firms as the main classification variable to separate firms into financially constrained and unconstrained categories. The idea is that high cash reserves increase the ability of firms to undertake profitable investment opportunities. Our classification is based on an optimal cash model, which helps us identify the firms that deviate significantly from their target cash ratio. We conduct the analysis for an emerging market, before and during a financial crisis to test the hypothesis that the hedging role of cash is more critical in states of the world characterized by high asymmetric information and excessive costs of external finance. The results are in line with our expectations and show that constrained firms exhibit greater investment–cash flow sensitivities than unconstrained firms. Also, there is strong evidence that cash stands as an effective device for firms, mainly during the crisis period. [Copyright &y& Elsevier]

Developing countries’ reserves have increased dramatically in recent years—growing by over 60% since the Asian financial crisis. This paper explores the self-insurance motivation behind this. As a first step, it revisits the literature on international reserve demand. This paper then examines the reserve-holding trends in a sample of 65 developing countries. It seeks to answer the following: Have reserves increased across the board or have these been concentrated in a few countries? If so, does it represent a break in previous policy? At what cost? This paper concludes by briefly examining some policy implications and avenues for future research. [Copyright &y& Elsevier]