Early regulator interventions into problem banks is one of the key suggestions of Basel II. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are...

The post-crisis financial reforms address the need for systemic regulation, focused not only on individual banks but also on the whole financial system. The regulator principal objective is to set banks' capital requirements equal to international minimum standards in order to mimimise systemic...

The purpose of this paper is to verify experimentally the possibility and the degree of persistence of a self-fulfilling bank panic. Furthermore, we test various means to prevent or to curb it: the suspension of deposit convertibility, the "narrow banking" solution. We confirm the possibility of...

The academic literature has regularly argued that market discipline can support regulatory authority mechanisms in ensuring banking sector stability. This includes, amongst other things, using forward-looking market prices to identify those credit institutions that are most at risk of failure....

Prior to the 2008 financial crisis, the economic model of PPPs benefited from a very favorable environment in terms of credit availability and cost. The high level of liquidity in financial markets allowed rising abundant and not expensive external resources, because of both the low level of...

This paper investigates Value at Risk and Expected Shortfall for CAC 40, S&P 500, Wheat and Crude Oil indexes during the 2008 financial crisis. We show an underestimation of the risk of loss for the unconditional VaR models as compared with the conditional models. This underestimation is...

Modified Cox-Ingersoll-Ross model is employed, combining with Hamilton (1989) type Markov regime switching framework, to study foreign exchange rates, where all parameter values depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the...

The disaster myopia hypothesis is a theoretical argument that may explain why crises are a recurrent event. Under very optimistic circumstances, investors disregard any relevant information concerning the increasing degree of risk. Agents' propensity to underestimate the probability of adverse...

We decompose volatility of a stock market index both in time and scale using wavelet filters and design a probabilistic indicator for valatilities, analogous to the Richter scale in geophysics. The peak-over-threshold method is used to fit the generalized Pareto probability distribution for the...

The 2007/08 financial crisis results in two major problems that issue difficult challenges for the economic theory and policy. The first challenge is the rise of unemployment notwithstanding growing imbalances of budget deficits. The second is the monetary and financial instability threatening...