Special RAstaNEWS Session at MMF 201315-10-2013
The Rastanews special session on Financial Crises focused on the recent supbrime and euro-area sovereign debt crises, yielding contributions that followed two main directions.
Firstly, authors investigated the effects of the crises on the interbank market, with special attention towards credit/liquidity risk dynamics and lending-borrowing linkages. Results point to major changes triggered by the subprime crisis, which seem to have led to a wide increase in the level and variability of credit/liquidity risk, as well as in the persistence of money market shocks. The crisis also led to changes in the network structure of borrowing-lending relationships, increasing the propensity to relationship lending and mutual support (i.e., banks have increased their propensity to lend to institutions that are already a counterparty), as well as to borrow from institutions to which financial institutions were already lending. The euro area sovereign crisis also appears to have contributed to increasing credit/liquidity risk levels, particularly after its spillover to the Italian economy.
Secondly, money market rate term structure information was employed to construct composite indicators of overall financial stress conditions, embedding information from the corporate, mortgage and Treasury bonds markets. Two methodologies were proposed, exploiting both panel data information, and time and frequency domain information, respectively. An out-of-sample forecasting exercise showed that the proposed composite indicators have predictive ability concerning incoming macroeconomic and financial risk.
A theoretical framework useful for the understanding of the recessionary effects of the subprime crisis, and therefore for accurate measurement of its cost, was finally proposed; as a key finding, we point out that not accounting for the shadow economy response to the financial shock may in fact lead to overestimating output and employment losses of up to 60%.