Endnotes

¹Here, and in what follows, the state is used to refer to all the various official bodies with responsibility for the financial system. Normally, this would include financial supervisors and regulators, deposit insurance agencies, ministries of finance, and crisis resolution agencies, as well as central banks.

²For further discussion, see any financial sector text such as Ghosh (2006) or Schinasi (2006).

³The reference here is to the recent increased interest in macroprudential surveillance. For further discussion, see Brunnermeier et al. (2008).

⁴Also important are efforts to strengthen the robustness of financial markets and reduce the systemic risk of payment and settlement systems. See Schinasi (2006) for more details.

⁵This is an example of the fallacy of composition. See Brunnermeir et al. (2008) for additional examples of the fallacy of composition in the context of the financial system.

⁶For a discussion, see the International Monetary Fund (IMF) studies by Hoelscher and Quintyn (2003) and Collyns and Kincaid (2003).

⁷The so-called London Club approach is an example of such an approach and was used during the 1997–1998 Indonesian financial crises. See Adams, Litan, and Pomerleano (2000) and Pomerleano and Shaw (2005).

⁸See Barth, Caprio Jr., and Levine (2006) and Brunnermeier et al. (2008).

⁹For further discussion, see Brunnermeier et al. (2008).

¹⁰See Brunnermeier et al. (2008) and Bank for International Settlements (BIS) (2009).

¹¹See recent comments by Bank of England Governor Mervin King (2009).

¹²Rather obviously the tools and instruments used to manage systemic crises have expanded enormously during the current turmoil, but on an ad hoc basis (BIS 2009). In addition, some countries, such as the US, have been exploring ways to formally expand their crisis management tools.

¹³See Boorman et al. (2000) for further discussion.

¹⁴The problem of the time inconsistency of optimal policies is well known in the field of monetary economics. See Kydland and Prescott (1977).

¹⁵The references on both crises are numerous and still growing. The Asian financial crisis is well covered in various IMF reports and papers—including Boorman et al. (2000)—while the key features of the current turmoil are discussed in IMF (2009a,b,c,d), BIS (2009) and ADB (2008, 2009a).

¹⁶Among countries in the region, Japan's banking system would appear to have been one of the most significantly affected. For the most part this has been the result of sharp declines in local equity markets spilling over on to bank balance sheets rather than direct exposure to the financial products at the centre of the crisis in the US and Europe. See IMF (2009b).

¹⁷See Pomerleano (2009).

¹⁸Even though most of the region was affected, Indonesia, Korea, Malaysia, the Philippines, and Thailand were at the heart of the crisis. Japan was still dealing with the effects of the bursting of a real estate bubble at the time of the Asian crisis. See Boorman et al. (2000).

¹⁹See ADB (2009b ) and Adams (2008) for a review of East Asian banking systems 10 years after the crisis.

²⁰See Boorman et al. (2000) and Adams (2008).

²¹See the IMF's World Economic Outlook and Global Financial Stability Reports for 2008 and 2009 (IMF 2008c, 2009b).

²²See Reinhart and Rogoff (2008) for a discussion of the behavior of capital flows during traditional emerging market crises.

²³Indeed, there were even problems of a shortage of US dollar liquidity early in the crisis that led to the creation or expansion of US Federal Reserve currency swap lines. See BIS (2009).

²⁴See the IMF's Global Financial Stability Report of 2008 and 2009 for “real time” estimates of the cost of the crisis.

²⁵See the discussion of the ADB's Asia Economic Monitor in 2008 and 2009 (ADB 2008b, 2009a).

²⁶Notably, Korea and Indonesia as discussed in the IMF's World Economic Outlook and Global Financial Stability Reports (IMF 2009a, 2009b).

²⁷See Pomerleano (2009) for a guarded assessment of the implications of the slowdown for regional banking systems.

²⁸Across the region, some pressures have been evident in short-term interbank markets related to arbitrage across different funding sources. See BIS (2009) for further discussion.

²⁹See the IMF's Global Financial Stability Report (IMF 2008a) and BIS (2009).

³⁰This is essentially the breakdown used by a number of IMF studies, albeit with somewhat different terminology used. See Hoelscher and Quintyn (2003), Collyns and Kinkaid (2003), Boorman et al. (2000), and Laeven and Valencia (2008).

³¹For further discussion see the IMF studies by Hoelscher and Quintyn (2003) and Collyns and Kincaid (2003).

³²Either using own reserves or by activating currency swap lines as during the current global crisis. See World Economic Outlook (IMF 2008 d) and BIS (2009).

³³World Economic Outlook (2008 d).

³⁴Alternatively, central banks can lend through established channels and then encourage lending to where the liquidity is needed.

³⁵Even in the case of currency boards, however, special funds may exist that can be used to provide liquidity and/or the currency may initially be over backed. See Collyns and Kincaid (2003).

³⁶Including Operation Twist type operations in the US.

³⁷See Boorman et al. (2000).

³⁸The degree of cooperation required from deposit insurance agencies will depend on the nature of their role and whether they have supervisory functions in addition to a pay-box role. See Hoelscher and Quintyn (2003).

³⁹For further discussion see Collyns and Kincaid (2003).

⁴⁰Iceland's experience stands out during the current turmoil (Buiter 2008) as well as that of Indonesia during the Asian financial crisis (Boorman et al. 2000).

⁴¹See the Global Financial Stability Reports (IMF 2008a, 2008b, and 2009).

⁴²See Boorman et al. (2000).

⁴³See Ingves, Seelig, and He (2006).

⁴⁴Ingves (2009) and Global Financial Stability Report (IMF 2008a).

⁴⁵Numerous mechanisms and structures typically play a key role during the second phase. In many crises, new vehicles such as asset management companies (AMCs) may also begin to play a role as efforts are made to deal with impaired assets. Very often these AMCs are creations of the state but their precise structure and ownership as well as their funding and mandates tend to differ across crisis experiences. And, whereas some countries have created very centralized AMCs to which all banks can transfer impaired assets, some countries have created decentralized AMCs that are linked directly to particular banks. See Adams, Litan, and Pomerleano (2000).

⁴⁶See Ingves, Seelig, and He (2006) for further discussion.

⁴⁷Ingves, Seelig, and He (2006).

⁴⁸This is a reference to the public-private partnership in the US that was set up to price impaired loans and securities.

⁴⁹See Hoelscher and Quintyn (2003).

⁵⁰For further discussion see the Global Financial Stability Report (IMF 2008a).

⁵¹See Ingves, Seelig, and He (2006).

⁵²See Adams, Litan and Pomerleano (2000).

⁵³See Asia Economic Monitor ( ADB 2008 a).

⁵⁴See Hoelscher and Quintyn (2003), Collyns and Kincaid (2003), and Boorman et al. (2000).

⁵⁵This was the case in the Philippines in the early 1980s (see Boorman et al. 2000).

⁵⁶See speech by Bank of England Governor ,Mervyn King, Finance: A Return from Risk to the Worshipful Company of International Bankers, at the Mansion House, 17 March 2009.

⁵⁷Note the emphasis on real capital, which could be Tier I capital as defined by Basel.

⁵⁸A key recent example might be the Lehman's bankruptcy in late 2008. See BIS (2009) and IMF (2009a,b).

⁵⁹See Athanasopoulou, Segoviano, and Tieman (2009), the IMF Global Financial Stability Report (2009a), Adrian and Brunnermeier (2008),), and Archarya (2009).

⁶⁰This has clearly been the case during the current turmoil as discussed earlier in this paper and in BIS (2009).

⁶¹In addition, there is no experience with ex ante and ex post systemic risk regulation to identify the optimal institutional structure.

⁶²In ex ante terms, these would include discretionary actions such as changes in capital requirements, stepped up macro prudential supervision, and more rules based approaches such as dynamic provisioning. Ex post , they would include decisions on how to respond to systemic stress and whether, for example, to bail out financial firms and/or provide liquidity support.

⁶³Kawai and Pomerleano (2009a and 2009b) stress the importance of an independent view of systemic risk.

⁶⁴There is no reason why the central bank could not undertake some “normal” lender of last resort lending in situations when systemic risk is not an issue. This could be achieved by the SRC allowing the central bank to undertake lender of last resort lending on its own account within pre-specified limits.

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