Bank Liquidity Creation and Financial Crises delivers a consistent, logical presentation of bank liquidity creation and addresses questions of research and policy interest that can be easily understood by readers with no advanced or specialized industry knowledge. Authors Allen Berger and Christa Bouwman examine ways to measure bank liquidity creation, how much liquidity banks create in different countries, the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, the effects of bailouts, and much more. They also analyze bank liquidity creation in the US over the past three decades during both normal times and financial crises. Narrowing the gap between the "academic world" (focused on theories) and the "practitioner world" (dedicated to solving real-world problems), this book is a helpful new tool for evaluating a bank's performance over time and comparing it to its peer group. - Explains that bank liquidity creation is a more comprehensive measure of a bank's output than traditional measures and can also be used to measure bank liquidity - Describes how high levels of bank liquidity creation may cause or predict future financial crises - Addresses questions of research and policy interest related to bank liquidity creation around the world and provides links to websites with data and other materials to address these questions - Includes such hot-button topics as the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, and the effects of bailouts

This book adds to the resolution of two problems in finance and economics: i) what is macro-financial uncertainty? : How to measure it? How is it different from risk? How important is it for the financial markets? And ii) what sort of asymmetries underlie financial risk and uncertainty propagation across the global financial markets? That is, how risk and uncertainty change according to factors such as market states or market participants. In Chapter 2, which is entitled “Momentum Uncertainties”, the relationship between macroeconomic uncertainty and the abnormal returns of a momentum trading strategy in the stock market is studies. We show that high levels of uncertainty in the economy impact negatively and significantly the returns of a portfolio of stocks that consist of buying past winners and selling past losers. High uncertainty reduces below zero the abnormal returns of momentum, extinguishes the Sharpe ratio of the momentum strategy, while increases the probability of momentum crashes both by increasing the skewness and the kurtosis of the momentum return distribution. Uncertainty acts as an economic regime that underlies abrupt changes over time of the returns generated by momentum strategies. In Chapter 3, “Measuring Uncertainty in the Stock Market”, a new index for measuring stock market uncertainty on a daily basis is proposed. The index considers the inherent differentiation between uncertainty and the common variations between the series. The second contribution of chapter 3 is to show how this financial uncertainty index can also serve as an indicator of macroeconomic uncertainty. Finally, the dynamic relationship between uncertainty and the series of consumption, interest rates, production and stock market prices, among others, is analized. In chapter 4: “Uncertainty, Systemic Shocks and the Global Banking Sector: Has the Crisis Modified their Relationship?” we explore the stability of systemic risk and uncertainty propagation among financial institutions in the global economy, and show that it has remained stable over the last decade. Additionally, a new simple tool for measuring the resilience of financial institutions to these systemic shocks is provided. We examine the characteristics and stability of systemic risk and uncertainty, in relation to the dynamics of the banking sector stock returns. This sort of evidence is supportive of past claims, made in the field of macroeconomics, which hold that during the global financial crisis the financial system may have faced stronger versions of traditional shocks rather than a new type of shock. In chapter 5, “Currency downside risk, liquidity, and financial stability”, downside risk propagation across global currency markets and the ways in which it is related to liquidity is analyzed. Two primary contributions to the literature follow. First, tail-spillovers between currencies in the global FX market are estimated. This index is easy to build and does not require intraday data, which constitutes an important advantage. Second, we show that turnover is related to risk spillovers in global currency markets. Chapter 6 is entitled “Spillovers from the United States to Latin American and G7 Stock Markets: A VAR-Quantile Analysis”. This chapter contributes to the studies of contagion, market integration and cross-border spillovers during both regular and crisis episodes by carrying out a multivariate quantile analysis. It focuses on Latin American stock markets, which have been characterized by a highly positive dynamic in recent decades, in terms of market capitalization and liquidity ratios, after a far-reaching process of market liberalization and reforms to pension funds across the continent during the 80s and 90s. We document smaller dependences between the LA markets and the US market than those between the US and the developed economies, especially in the highest and lowest quantiles.

We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, and Japan’s recent decision to defer a consumption tax hike. Our uncertainty indices for fiscal, monetary, trade and exchange rate policy co-vary positively but also display distinct dynamics. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan’s macroeconomic performance, as reflected by impulse response functions for investment, employment and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by, in part, reducing policy uncertainty.

"The authors study the effect of financial crises on trade credit in a sample of 890 firms in six emerging economies. They find that although provision of trade credit increases right after the crisis, it consequently collapses in the following months and years. The authors observe that firms with weaker financial position (for example, high pre-crisis level of short-term debt and low cash stocks and cash flows) are more likely to reduce trade credit provided to their customers. This suggests that the decline in aggregate credit provision is driven by the reduction in the supply of trade credit, which follows the bank credit crunch. The results are consistent with the "redistribution view" of trade credit provision, in which bank credit is redistributed by way of trade credit by the firms with stronger financial position to the firms with weaker financial stand "--World Bank web site.

Discuss four crisis-prone areas of the economy-monetary control, bankruplcy, the international economy, and speculative bubbles.