As illustrated by the Global Financial Crisis and the more recent Covid-19 pandemic, when asset prices fall, margin levels increase and highly leveraged financial institutions are forced to... Show moreAs illustrated by the Global Financial Crisis and the more recent Covid-19 pandemic, when asset prices fall, margin levels increase and highly leveraged financial institutions are forced to deleverage, causing market participants to ‘run’ in advance of other market participants motivated to do exactly the same thing. As a result, a vicious cycle can emerge where lenders raise margin levels thereby demanding more financial collateral, forcing de-leveraging and more asset fire sales, eventually generating a downward leverage and liquidity spiral. The source of this instability is a recurring phenomenon involving the build-up of leverage that makes the economy particularly vulnerable to financial crises.My dissertation investigates the use of collateral transactions in the shadow banking sector. In particular, it will argue for the introduction of more stringent margin measures to tame financial uncertainty by limiting leverage and dampen procyclicality. One plausible way to restrict leverage is to impose minimum margin regulation, which would ex-ante limit the amount of leverage a financial institution can obtain. This dissertation will therefore propose four complementary measures that would ultimately result in a harmonised legal and regulatory margin framework in the EU shadow banking sector. Show less
The widespread presence of foreign banks in Central and Eastern Europe (CEE) was seen as a potential source of instability during the financial crisis of 2008/09. However, foreign banks acted... Show moreThe widespread presence of foreign banks in Central and Eastern Europe (CEE) was seen as a potential source of instability during the financial crisis of 2008/09. However, foreign banks acted primarily as a stabilizing force by supporting their subsidiaries and forwarding liquidity, rather than cutting and running. In doing so they closed a significant gap in the EU’s financial stability framework and prevented both a worse financial crisis and currency crises in the new member states. In this paper, I argue that the expectation that foreign banks would step in as private lenders-of-last-resort was exactly the reason why CEE policymakers had encouraged foreign bank entry around the year 2000. Their policy frameworks looked unsuitable for withstanding a financial crisis, but this was the result of rule and policy transfers from the EU which did not take these unique market structures into account. Indeed, already by 2004 it was clear that foreign banks would manage liquidity conditions in CEE and that monetary policy would, at best, accommodate that. The theoretical contribution based on this is that financial market structures developed to be a pillar of the regional financial system in their own right. Although they emerged without central guidance, high levels of foreign bank ownership had the effect of aligning expectations and resulted in material support during the financial crisis. Balance-of-Payments support, it follows, is not just the result of official cooperation; private actors may wield more control over liquidity conditions than central banks. Show less
