Two Muslim Brothers Who Took the Assimilation Path. By Kenan Trebincevic

Two Muslim Brothers Who Took the Assimilation Path. By Kenan Trebincevic
The Wall Street Journal, April 27, 2013, on page A11
http://online.wsj.com/article/SB10001424127887323789704578443473812237556.html

'I hope they're not Muslim," I told my brother, Eldin, when we first saw the pictures of the Boston bombers. We soon found out that Dzhokhar and Tamerlan Tsarnaev shared our religion, as we'd dreaded, when my Jewish college roommate jokingly texted: "Hey, would you please tell your people to stop blowing things up?"

I laughed, in sadness, but soon felt completely unnerved by how much the Tsarnaevs' story mirrored our own. My brother and I were born six years apart, and we're two foreign-born-and-named, athletic, Islamic brothers from difficult backgrounds in Eastern Europe, where we had experienced persecution and then been generously taken in by Americans. The 26-year-old Tamerlan Tsarnaev, killed in the police shootout, was the eldest, strong-minded child, like Eldin. Dzhokhar Tsarnaev, now in a federal medical detention center in Massachusetts, looked up to his sibling, as I always looked up to my strong-minded brother.

Boxing is big in Chechnya and nearby regions where the Tsarnaev family has its roots, and the brothers excelled in the sport, like their father. Martial arts are big in the Balkans, where we're from. Our dad owned a gym in our hometown of Brčko, Bosnia, where he trained athletes and where Eldin and I won brown belts and awards for karate.

The Tsarneavs were caught in the confusing war between Chechnya and Russia that erupted in 1999, and they wound up emigrating in 2003 to Cambridge, Mass. Caught in the bloody war between Bosnia and Serbia, factions of the former Yugoslavia, my family moved to Westport, Conn., in 1993.

Like the Tsarnaevs' father, our father suffered setbacks to his career in America, and to his health. While Anzor Tsarnaev reportedly toiled as a mechanic for $10 an hour, our dad, Senahid, slung poultry at a fast-food chicken place and took other low-paying jobs. While the Tsarnaevs' mother, Zubeidat, did facials at a Boston spa and later at their home to make ends meet, my mother, Adisa, baby-sat and found work at a data-processing firm. We too had little money, and it was hard to get jobs without connections or language skills.

Yet the Tsarnaev boys became angry, alienated young men who never quite assimilated into their new country (Tamerlan said on Twitter: "I don't have a single American friend, I don't understand them"), while my brother and I made many friends in the U.S. and wound up on the more successful side of the American dream.

There is a well-documented connection between unhappy, disenfranchised immigrants who can't connect and crime and terrorism. When I first moved here at age 13 I felt as lost, estranged and resentful as Tamerlan Tsarnaev appeared to be. In the days since the Boston bombing, I kept comparing Eldin's and my circumstances with the Tsarnaevs' to see where our paths diverged and what saved us from becoming embittered.

I was struck by news accounts that the Tsarnaev parents moved back to Russia, where they separated two years ago. One of their daughters lived in New Jersey, and she admitted that she hadn't spoken to her brothers in years. I was fortunate that my immediate family of four stayed together, first in Connecticut until my mother died of cancer in 2007, then in Queens, N.Y., where my father, brother and I now live blocks away from each other.

Even when I moved into my college dorm room at the University of Hartford and Eldin moved to the Stony Brook campus in Long Island, we spoke to our mother, father and each other daily—either by cellphone or email. I'm convinced that remaining a close-knit family kept my brother and me saner and safer. The Tsarnaev family, by contrast, seemed constantly roiled—by war, immigration, work and financial difficulties, serious illness and a marriage breakup. Throw in radical religion and, in retrospect, it seems a recipe for disaster.

Perhaps because my family survived the ethnic cleansing in the Balkans to wipe out Muslims, my family members—unlike Tamerlan Tsarnaev and his mother—did not seek solace with any specific religious figure or house of worship. While we remained proud of our heritage, we were sponsored by the Interfaith Council in Connecticut, a group of liberal churches and synagogues.

When we arrived in 1993 at JFK airport, we were met by the Rev. Don Hodges, a Methodist minister. He drove us to his Westport home, where we stayed for four months. It's not surprising or wrong for immigrants to deepen their focus on religion in a strange land. But I would speculate that in our case we felt such gratitude to the people of differing faiths who helped us that our chances of assimilating, and succeeding, in America were enhanced.

When my mother found a lump in her breast, the late surgeon Dr. Malcolm Beinfeld at Norwalk Hospital operated on her. Dr. Beinfeld, who was Jewish, told us that the Bosnian genocide against Muslims reminded him of the Holocaust. We never received a bill for the surgery or for my mother's subsequent radiation and chemotherapy.

A Protestant dentist, Richard Sands, asked my mother: "What does your son need?" At 13, I was taken to an orthodontist who gave me braces and took care of me for two years. I was embarrassed but deeply grateful that he never asked for a dime.

On my first day of school in Westport, Dr. Glenn Hightower, the principal, and a member of Mr. Hodges's church, introduced me to the seventh-grade English class with his arm draped around my shoulders. He explained that my family had been exiled in the Bosnian war, and he asked the other students to help me out. I had a foreign name, strange accent and could barely speak the language. I felt scared and pathetic, like a mutt waiting to be adopted. I was immediately befriended by Miguel Peman, a Catholic Spanish-American student, who offered me a seat.

When the school-bus driver who drove me home noticed that I had a long walk to Mr. Hodges's house, he introduced himself as Offir, from Israel, and dropped me off right at the driveway, making me promise not to tell anyone. Later, my Greek Orthodox soccer coach, Ted Popadoupolis, gave me rides to practices and games when my parents couldn't.

My brother and I didn't pursue sports with the dreams of Olympic glory that Tamerlan Tsarnaev apparently did. At schools in Westport, Norwalk and Hartford, a series of teachers and mentors helped us formulate a realistic career plan. They geared us toward a more feasible field than sports stardom: physical therapy.

We didn't experience the sort of disappointment and resentment that Tamerlan seems to have endured when his boxing dream went sour. Instead, sports teams gave us a sense of belonging.

Since my athletic father was a health nut, under his strong influence, my brother and I steered clear of the alcohol and drugs that seem to have plagued the Tsarnaevs—and might have fueled depression and hopelessness that, I would guess, twisted their judgment.

It is impossible to know what went on in someone else's childhood or what is happening in another's mind or heart. The Tsarnaevs took one path. My brother and I, despite our family's war displacement, persecution and years of poverty, thrived—but only with stable parents by our side, good jobs and help from many and diverse guardian angels. During a dark week, it was easy to forget that countless immigrants to America have similar stories to tell.

Mr. Trebincevic, a physical therapist who lives in Queens, is the coauthor, with Susan Shapiro, of "The Bosnia List," to be published by Viking next year.

Structural bank regulation initiatives: approaches and implications

By Leonardo Gambacorta and Adrian Van Rixtel

BIS Working Papers No 412
April 2013

http://www.bis.org/publ/work412.htm

The paper examines the basic rationale and features of the proposals adopted to separate specific investment and commercial banking activities (Volcker rule, Vickers and Liikanen proposals). In particular, it focuses on the likely implications of such initiatives for: (i) financial stability and systemic risk; (ii) banks' business models; and (iii) the international activities of global banks.

Keywords: regulation, bank business models, systemic risk, economies of scale, economies of scope, too big to fail

JELclassification: G21, G28

Excerpts:

The Volcker rule is narrow in scope but otherwise quite strict. It is narrow in that it seeks to carve out only proprietary trading while allowing market-making activities on behalf of customers. Moreover, it has several exemptions, including for transactions in specific instruments, such as US Treasury and agency securities. It is strict in that it forbids the coexistence of such trading activities and other banking activities in different subsidiaries within the same group. It similarly prevents investments in, and sponsorship of, entities that could expose institutions to equivalent risks, such as hedge funds and private equity funds. That said, it imposes very few additional restrictions on the transactions of banking organisations with other financial firms more generally (eg such as through constraints on lending or funding among them). However, it is worth remembering that the current US legislation does constrain the activities of depository institutions.

The Liikanen Report proposals are somewhat broader in scope but less strict.  They are broader because they seek to carve out both proprietary trading and market-making, without drawing a distinction between the two. They are less strict because they allow these activities to coexist with other banking business within the same group as long as these are carried out in separate subsidiaries. The proposals limit contagion within the group by requiring, in particular, that the subsidiaries be self-sufficient in terms of capital and liquidity and that transactions between the legal entities take place on market terms. Just like the Volcker rule, the proposals do not envisage significant restrictions between the protected banking unit and other financial firms, except that they require the separation of exposures to entities such as hedge funds and special investment vehicles (SIVs) in the trading entity.

The Vickers Commission proposals are even broader in scope but have a more articulated approach to strictness. They are broader in that they exclude a larger set of banking business from the protected entity, including also securities underwriting and secondary market purchases of loans and other financial instruments. A very narrow set of retail banking business must be within the protected entity (retail deposit-taking, overdrafts to individuals and loans to small and medium-sized enterprises (SMEs)); and another set may be conducted within it (eg some other forms of retail and corporate banking, including ancillary operations to hedge risks to support them). The approach to strictness is more articulated because it involves both intragroup and inter-firm restrictions (the “ring fence”). As in the Liikanen Report, protected activities can coexist with others in separate subsidiaries within the same group but subject to intragroup constraints that are somewhat tighter, including on the size of the linkages.3 Moreover, a series of restrictions limit the extent to which the banking unit within the ring fence can interact with other financial sector firms. An in-depth exploration of the economic underpinnings of the reforms is provided in Vickers (2012).


Conclusions

A number of jurisdictions are considering whether to implement regulations that impose restrictions on the scope of banking activity, or have already taken concrete steps towards doing so. These initiatives include the so-called Volcker rule in the United States, the proposals of the Vickers Commission in the United Kingdom and the European Commission’s Liikanen Report. Draft legislation on structural bank regulation is underway in Germany and France.

The proposals for structural bank regulation break with the conventional wisdom that the banking sector’s efficiency and stability stands only to gain from the increased diversification of banks’ activities. Rather, structural bank regulation sees the combination of commercial banking and certain types of capital market-related activities as a source of systemic risk. The common element of all the proposals is to restrict universal banking by drawing a line somewhere between “commercial” and “investment” banking businesses. Hence, the various initiatives on structural bank regulation aim at changing how banks organise themselves.

Structural bank regulation initiatives are designed to reduce systemic risk in several ways. First, they can shield the institutions carrying out the protected activities from losses incurred elsewhere. Second, they can prevent any subsidies supporting the protected activities (eg central bank lending facilities and deposit guarantee schemes) from cutting the cost of risk-taking and inducing moral hazard in other business lines. Third, they can reduce the complexity and possibly the size of banking organisations, making them easier to manage, more transparent to outside stakeholders and easier to resolve.

However, the initiatives also raise some challenges. One risk is that banks may respond to the reforms by shifting activities beyond the perimeter of consolidated regulation. In fact, one reason why the Liikanen Report opts for subsidiarisation rather than full separation is to reduce this risk. Migration would be a concern if these activities proved to be systemic in nature.

Second, structural regulation may, through various channels, affect the international activities of universal banks in particular. For example, disincentives for global banking may be created by initiatives seeking to protect depositors and cut the costs of the official safety net within the home country jurisdiction. Moreover, ring-fencing and subsidiarisation may constrain the allocation of capital and liquidity within a globally operating banking group. Through these channels, structural regulation may contribute to a fragmentation of banking markets along national lines.

A third risk is that structural regulation may create business models that are, in fact, more difficult to supervise and resolve. For example, resolution strategies may be rather complex to design and implement for globally operating banks that have to face increasing heterogeneity in permitted business models at the national level.

Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute

By Joshua Aizenman, Brian Pinto and Vladyslav Sushko

BIS Working Papers No 411
April 2013

http://www.bis.org/publ/work411.htm

We examine how financial expansion and contraction cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly asymmetric effects, with the majority of real sectors adversely affected by contractions, but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.

Keywords: financial cycles, financial and trade openness, real transmission of financial shocks, foreign exchange reserves

JELclassification: F15, F31, F36, F4

South Korea: Give Nukes a Chance. By Denny Roy

South Korea: Give Nukes a Chance. By Denny Roy
Asia Pacific Bulletin, no. 204
Washington, D.C.: East-West Center
March 27, 2013
http://www.eastwestcenter.org/publications/south-korea-give-nukes-chance

Excerpts:

It is only a matter of time before North Korea fields an actual nuclear-tipped missile that works. With the persistent security threat from North Korea seemingly worsening, recent public opinion surveys show that a majority of South Koreans favor getting their own nuclear weapons. There is no doubt that South Korea is capable of making its own nuclear weapons, probably within a year. Indeed, the Republic of Korea (ROK) has explored this possibility occasionally since the 1970s, each time backing off under outside pressure.

There are some good reasons why, in principle, the world is better off with a smaller, rather than larger, number of nuclear weapon states. Nevertheless, there are two additional principles that apply here. First, nuclear weapons are a powerful deterrent; they are the main reason why the Cold War remained cold. Second, there may be a specific circumstance in which the introduction of a new nuclear weapons capability has a constructive influence on international security—call it the exception to the general nonproliferation rule.

Given the ROK’s present circumstances, Washington and Seoul should seriously consider the following policy change. Seoul gives the required 90 days notice required for it to withdraw from the Nuclear Nonproliferation Treaty, which allows for deratification in the case of “extraordinary events” that threaten national security. The ROK announces its intention to begin working toward a nuclear weapons capability, with the following conditions: (1) the South Korean program will match North Korea’s progress step-by-step towards deploying a reliable nuclear-armed missile; and (2) Seoul will commit to halting and shelving its program if North Korea does the same. For its part, Washington announces that US nonproliferation policy is compelled to tolerate an exception when a law-abiding state is threatened by a rogue state—in this case North Korea—that has both acquired nuclear weapons and threatened to use them aggressively. Pyongyang has repeatedly spoken of using its nuclear weapons to devastate both the ROK and the United States.

This policy change is necessary because US, ROK and (half-hearted) Chinese efforts to get North Korea to denuclearize are not working. [...]

An ROK nuclear weapons capability would impose a meaningful penalty on the DPRK for its nuclear weapons program. Aside from the sanctions ordered by the United Nations Security Council, which have proved no more than a nuisance and are amply compensated for by the growing economic relationship with China, Pyongyang has suffered no significant negative consequences for acquiring nuclear weapons. A South Korean nuclear capability would change that. The North Koreans would understand that their act brought about an outcome they very much do not want [...].

ROK nukes, furthermore, will help deter North Korean provocations. A capacity to attack a neighbor with nuclear weapons provides North Korea with cover for limited conventional attacks. Pyongyang has established a pattern of using quick, sharp jabs against South Korea. The goal is to rattle Seoul into accommodating North Korean economic and political demands. Seoul insists that future North Korean attacks will result in military retaliation by South Korean forces. Since South Korea has not hit back after previous incidents, it is uncertain whether this pledge will deter Pyongyang from trying this tactic again. A DPRK nuclear weapons capability worsens this already dangerous situation. North Korean planners might conclude that Seoul would not dare retaliate against a DPRK strike out of fear that the next step would be a nuclear attack on the ROK. A South Korean nuclear capability, however, would redress this imbalance. If ROK conventional military capabilities are superior to the DPRK and equal or superior at the nuclear level, deterrence against a North Korean attack is stronger.

South Korean nukes would close the credibility gap in the US-ROK alliance. The “umbrella” of America’s nuclear arsenal covers South Korea and theoretically negates the DPRK nuclear threat. However, South Koreans have always questioned the reliability of this commitment which potentially puts a US city at risk in order to protect a South Korean city. The doubts are growing more acute now that a North Korean capability is apparently close to realization. An ROK nuclear arsenal would remove this strain on the alliance and give the South Koreans a sense of greater control over their own destiny.

Pyongyang would not be the only target audience for Seoul’s announcement of intent to deploy nuclear weapons. Like the North Koreans, the People’s Republic of China (PRC) is deeply opposed to an ROK nuclear capability. The announcement would also signal to Beijing that the cost of failing to discipline their client state is rising dramatically. The Chinese are already debating whether the status quo of a rogue DPRK has become so adverse to Chinese interests that China must pressure Pyongyang more heavily even at the risk of causing regime collapse. South Korea’s imminent—and reversible—acquisition of nuclear weapons would strengthen the argument that the PRC must get tougher with the DPRK.

To be sure, this policy change would create its own problems. An ROK nuclear capability would pressure Japan to follow suit. A US-friendly, stable, law-abiding, liberal democratic country getting nukes is not necessarily a bad thing. But if so, the solution is for Washington and Seoul to emphasize that South Korea’s nuclear capability would be temporary and contingent, so Tokyo can remain non-nuclear.  Thankfully, there are precedents for middle-sized states giving up their nuclear weapons.

South Korea’s security situation is deteriorating and for the ROK’s leadership, national security is job number one. It is now time to get past the visceral opposition to proliferation and recognize that in this case, a conditional change of South Korea’s status to nuclear-weapon state can help manage the dangers created by a heightened North Korean threat.

Generalized linear modeling with highly dimensional data

Question from a student, University of Missouri-Kansas City:

Hi guys,
I have project in Regression class, and we have to use R to do it,but till now I didn't find appropriate code for this project, and I dont now which method I have to use.

I have to analysis of a high dimensional dataset. The data has a total of 500 features.

we have no knowledge as to which of the features are useful and which not. Thus we want to apply model selection techniques to obtain a subset of useful features. What we have to do is the following:

a) There are totally 2000 observations in the data. Use the first 1000 to train or fit your model, and the other 1000 for prediction.

b) You will report the number of features you select and the percentage of response you correctly predict. Your project is considered valid only if the obtained percentage exceeds 54%.

Please help me as much as you can.
Your help would be appreciated..
Thank you!

-------------------
Answer

well, doing batches of 30 variables I came across 88 of the 500 that minimize AIC for each batch:

t1=read.csv("qw.csv", header=FALSE)
nrow(t1)
# not a good solution -- better to get 1000 records randomly, but this is enough for now:
train_data=t1[1:1000,]
test_data=t1[1001:2000,]
library(bestglm)
x=train_data[,2:31]
y=train_data[,1]
xy=as.data.frame(cbind(x,y))
(bestAIC = bestglm(xy, IC="AIC"))

, and so on, going from  x=train_data[,2:31] to x=train_data[32:61], etc. Each run gives you a list of best variables to minimize AIC (I chose AIC but it can be any other criterion).

If I try to process more than 30 (or 31) columns with bestglm it takes too much time because it uses other programs and optimization is different... and clearly inefficient.

now, the problem seems reduced to using less than 90 variables instead of the original 500. Not the real solution, since I am doing this in a piecemeal basis, but maybe close to what we are looking for, which is to get 54pct of the observed values.

using other methods I got even less candidates to be used as variables, but let's keep the ones we found before

then I tried this: after finding the best candidates I created this object, a data frame:

dat = data.frame(train_data$V1, train_data$V50, train_data$V66, train_data$V325, train_data$V426, train_data$V28, train_data$V44, train_data$V75, train_data$V111, train_data$V128, train_data$V149, train_data$V152, train_data$V154, train_data$V179, train_data$V181, train_data$V189, train_data$V203, train_data$V210, train_data$V213, train_data$V216, train_data$V218, train_data$V234, train_data$V243, train_data$V309, train_data$V311, train_data$V323, train_data$V338, train_data$V382, train_data$V384, train_data$V405, train_data$V412, train_data$V415, train_data$V417, train_data$V424, train_data$V425, train_data$V434, train_data$V483)


then, I invoked this:

model = train(train_data$V1 ~ train_data$V50 + train_data$V66 + train_data$V325 + train_data$V426 + train_data$V28 + train_data$V44 + train_data$V75 + train_data$V111 + train_data$V128 + train_data$V149 + train_data$V152 + train_data$V154 + train_data$V179 + train_data$V181 + train_data$V189 + train_data$V203 + train_data$V210 + train_data$V213 + train_data$V216 + train_data$V218 + train_data$V234 + train_data$V243 + train_data$V309 + train_data$V311 + train_data$V323 + train_data$V338 + train_data$V382 + train_data$V384 + train_data$V405 + train_data$V412 + train_data$V415 + train_data$V417 + train_data$V424 + train_data$V425 + train_data$V434 + train_data$V483,
               dat,
               method='nnet',
               linout=TRUE,
               trace = FALSE)
ps = predict(model, dat)


if you check the result, ps, you find that most values are the same:

606 are -0.2158001115381
346 are 0.364988437287819

the rest of the 1000 values are very close to these two, the whole thing is this:

just 1 is -0.10
   1  is -0.14
   1  is -0.17
   1  is -0.18
   3  is -0.20
 617 are -0.21
   1  is 0.195
   1  is 0.359
   1  is 0.360
   1  is 0.362
   2  is 0.363
 370  are 0.364

, so I just converged all negative values to -1 and all positive values to 1 (let's assume is propensity not to buy or to buy), and then I found that 380 rows were negative when the original value to be predicted was -1 (499 rows), that is, a success percentage of 76 pct

only 257 values were positive when the original values were positive (success rate of 257/501 = 51.3pct)

the combined success rate in predicting the response variable values is a bit above 63%, which is above the value we aimed at, 54pct

---
now, I tried with the second data set, test_data (the second 1000 rows)

negative values when original response value was negative too:
          success rate is 453/501 = .90419

impressive?  See how disappointing is this:

positive values when original response value was positive too:
          success rate is 123/499 = .24649

the combined success rate is about 57pct, which is barely above the mark

---
do I trust my own method?

of course not, I would get all previous consumer surveys (buy/not buy) my company had in the files and then I will check if I can get a success rate at or above 57pct (which to me is too low, to say nothing of 54pct)

for the time and effort I spent maybe I should have tossed an electronic coin, with a bit of luck you can get a bit above 50pct success     : - )

maybe to prevent this they chose 54pct, since in 1000 runs you could be very well near 50pct

---
refinement, or "If we had all the time of the world..."

since I got enough free time, I tried this (same dat data frame):

model = train(train_data$V1 ~ log(train_data$V50) + log(train_data$V66) + log(train_data$V325) + log(train_data$V426) + log(train_data$V28) + log(train_data$V44) + log(train_data$V75) + log(train_data$V111) + log(train_data$V128) + log(train_data$V149) + log(train_data$V152) + log(train_data$V154) + log(train_data$V179) + log(train_data$V181) + log(train_data$V189) + log(train_data$V203) + log(train_data$V210) + log(train_data$V213) + log(train_data$V216) + log(train_data$V218) + log(train_data$V234) + log(train_data$V243) + log(train_data$V309) + log(train_data$V311) + log(train_data$V323) + log(train_data$V338) + log(train_data$V382) + log(train_data$V384) + log(train_data$V405) + log(train_data$V412) + log(train_data$V415) + log(train_data$V417) + log(train_data$V424) + log(train_data$V425) + log(train_data$V434) + log(train_data$V483),
               dat,
               method='nnet',
               linout=TRUE,
               trace = FALSE)
ps = predict(model, dat)

negative values when original response value was negative too: .7

positive values when original response value was positive too: .69

combined success rate: 69.4pct

# now we try with the other 1000 values:
[same dat data frame, but using test_data instead of train_data]

model = train(test_data$V1 ~ log(test_data$V50) + log(test_data$V66) + log(test_data$V325) + log(test_data$V426) + log(test_data$V28) + log(test_data$V44) + log(test_data$V75) + log(test_data$V111) + log(test_data$V128) + log(test_data$V149) + log(test_data$V152) + log(test_data$V154) + log(test_data$V179) + log(test_data$V181) + log(test_data$V189) + log(test_data$V203) + log(test_data$V210) + log(test_data$V213) + log(test_data$V216) + log(test_data$V218) + log(test_data$V234) + log(test_data$V243) + log(test_data$V309) + log(test_data$V311) + log(test_data$V323) + log(test_data$V338) + log(test_data$V382) + log(test_data$V384) + log(test_data$V405) + log(test_data$V412) + log(test_data$V415) + log(test_data$V417) + log(test_data$V424) + log(test_data$V425) + log(test_data$V434) + log(test_data$V483),
               dat,
               method='nnet',
               linout=TRUE,
               trace = FALSE)
ps = predict(model, dat)


negative values when original response value was negative too:
          success rate is 322/499 = .645

positive values when original response value was positive too:
          success rate is 307/501 = .612

combined success rate: 62.9pct

other things I tried failed -- if we had all the time of the world we could try other possibilities and get better results... or not

you'll tell me if you can reproduce the results, which are clearly above the 54pct mark

CPSS: Implementation monitoring of standards

Implementation monitoring of standards
CPSS, Apr 17, 2013
http://www.bis.org/cpss/cpssinfo2_5.htm

The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have started the process of monitoring implementation of the Principles for financial market infrastructures (the PFMIs). The PFMIs are international standards for payment, clearing and settlement systems, including central counterparties, and trade repositories. They are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks. The PFMIs were issued by CPSS-IOSCO in April 2012 and jurisdictions around the world are currently in the process of implementing them into their regulatory frameworks to foster the safety, efficiency and resilience of their financial market infrastructures (FMIs).

Full, timely and consistent implementation of the PFMIs is fundamental to ensuring the safety, soundness and efficiency of key FMIs and for supporting the resilience of the global financial system. In addition, the PFMIs play an important part in the G20's mandate that all standardised over-the-counter (OTC) derivatives should be centrally cleared. Global central clearing requirements reinforce the importance of strong safeguards and consistent oversight of derivatives central counterparties (CCPs) in particular. CPSS and IOSCO members are committed to adopt the principles and responsibilities contained in the PFMIs in line with the G20 and Financial Stability Board (FSB) expectations.

Scope of the assessments

The implementation monitoring will cover the implementation of the principles contained in the PFMIs as well as responsibilities A to E. Reviews will be carried out in stages, assessing first whether a jurisdiction has completed the process of adopting the legislation and other policies that will enable it to implement the principles and responsibilities and subsequently whether these changes are complete and consistent with the principles and responsibilities. Assessments will also examine consistency in the outcomes of implementation of the principles by FMIs and implementation of the responsibilities by authorities. The results of the assessments will be published on both CPSS and IOSCO websites.

Jurisdictional coverage - The assessments will cover the following jurisdictions: Argentina, Australia, Belgium, Brazil Canada, Chile, China, European Union, France, Germany, Hong Kong SAR, Indonesia, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.  The jurisdictional coverage reflects, among other factors, the importance of the PFMIs to the G20 mandate for central clearing of OTC derivatives and the need to ensure robust risk management by CCPs.

Types of FMI - In many jurisdictions, the framework for regulation, supervision and oversight is different for each type of financial market infrastructure (FMI). Whilst initial overall assessments will cover the regulation changes necessary for all types of FMIs, further thematic assessments (assessing the consistency of implementation) are likely to focus on OTC derivatives CCPs and TRs, given their importance for the successful completion of the G20 commitments regarding central clearing and transparency for derivatives products. Prioritising OTC derivatives CCPs and TRs will help ensure timely initial reporting given that most jurisdictions have made most progress in implementing reforms for these sectors.


Timing

A first assessment is currently underway examining whether jurisdictions have made regulatory changes that reflect the principles and responsibilities in the PFMI. Results of this assessment are due to be published in the third quarter of 2013. 

For a Sick Friend: First, Do No Harm. By Letty Cottin Pogrebin

For a Sick Friend: First, Do No Harm. By Letty Cottin Pogrebin
Conversing with the ill can be awkward, but keeping a few simple commandments makes a huge difference
The Wall Street Journal, April 13, 2013, on page C3
http://online.wsj.com/article/SB10001424127887324240804578416574019136696.html


'A closed mouth gathers no feet." It's a charming axiom, but silence isn't always an option when we're dealing with a friend who's sick or in despair. The natural human reaction is to feel awkward and upset in the face of illness, but unless we control those feelings and come up with an appropriate response, there's a good chance that we'll blurt out some cringe-worthy cliché, craven remark or blunt question that, in retrospect, we'll regret.

Take this real-life exchange. If ever the tone deaf needed a poster child, Fred is their man.

"How'd it go?" he asked his friend, Pete, who'd just had cancer surgery.

"Great!" said Pete. "They got it all."

"Really?" said Fred. "How do they know?"

A few simple commandments makes a huge difference when conversing with the ill.

Later, when Pete told him how demoralizing his remark had been, Fred's excuse was, "I was nervous. I just said what popped into my head."

We're all nervous around illness and mortality, but whatever pops into our heads should not necessarily plop out of our mouths. Yet, in my own experience as a breast-cancer patient, and for many of the people I have interviewed, friends do make hurtful remarks. Marion Fontana, who was diagnosed with breast cancer eight years after her husband, a New York City firefighter, died in the collapse of the World Trade Center, was told that she must have really bad karma to attract so much bad luck. In another case, upon hearing a man's leukemia diagnosis, his friend shrieked, "Wow! A girl in my office just died of that!"

You can't make this stuff up.

If we're not unwittingly insulting our sick friends, we're spouting clichés like "Everything happens for a reason." Though our intent is to comfort the patient, we also say such things to comfort ourselves and tamp down our own feelings of vulnerability. From now on, rather than sound like a Hallmark card, you might want to heed the following 10 Commandments for Conversing With a Sick Friend.

1. Rejoice at their good news. Don't minimize their bad news. A guy tells you that the doctors got it all, say "Hallelujah!" A man with advanced bladder cancer says that he's taking his kids to Disneyland next summer, don't bite your lip and mutter, "We'll see." Tell him it's a great idea. (What harm can it do?) Which doesn't mean that you should slap a happy face on a friend's grim diagnosis by saying something like, "Don't worry! Nowadays breast cancer is like having a cold!"

The best response in any encounter with a sick friend is to say, "Tell me what I can do to make things easier for you—I really want to help."

2. Treat your sick friends as you always did—but never forget their changed circumstance. However contradictory that may sound, I promise you can learn to live within the paradox if you keep your friend's illness and its constraints in mind but don't treat them as if their illness is who they are. Speak to them as you always did (tease them, kid around with them, get mad at them) but indulge their occasional blue moods or hissy-fits. Most important, start conversations about other things (sports, politics, food, movies) as soon as possible and you'll help speed their journey from the morass of illness to the miracle of the ordinary.

3. Avoid self-referential comments. A friend with a hacking cough doesn't need to hear, "You think that's bad? I had double pneumonia." Don't tell someone with brain cancer that you know how painful it must be because you get migraines. Don't complain about your colicky baby to the mother of a child with spina bifida. I'm not saying sick people have lost their capacity to empathize with others, just that solipsism is unhelpful and rude. The truest thing you can say to a sick or suffering friend is, "I can only try to imagine what you're going through."

4. Don't assume, verify. Several friends of Michele, a Canadian writer, reacted to her cancer diagnosis with, "Well, at least you caught it early, so you'll be all right!" In fact, she did not catch it early, and never said or hinted otherwise. So when someone said, "You caught it early," she thought, "No, I didn't, therefore I'm going to die." Repeat after me: "Assume nothing."

5. Get the facts straight before you open your mouth.Did your friend have a heart or liver transplant? Chemo or radiation? Don't just ask, "How are you?" Ask questions specific to your friend's health. "How's your rotator cuff these days?" "Did the blood test show Lyme disease?" "Are your new meds working?" If you need help remembering who has shingles and who has lupus, or the date of a friend's operation, enter a health note under the person's name in your contacts list or stick a Post-it by the phone and update the information as needed.

6. Help your sick friend feel useful. Zero in on one of their skills and lead to it. Assuming they're up to the task, ask a cybersmart patient to set up a Web page for you; ask a bridge or chess maven to give you pointers on the game; ask a retired teacher to guide your teenager through the college application process. In most cases, your request won't be seen as an imposition but a vote of confidence in your friend's talent and worth.

7. Don't infantilize the patient. Never speak to a grown-up the way you'd talk to a child. Objectionable sentences include, "How are we today, dearie?" "That's a good boy." "I bet you could swallow this teeny-tiny pill if you really tried." And the most wince-worthy, "Are we ready to go wee-wee?" Protect your friend's dignity at all costs.

8. Think twice before giving advice.Don't forward medical alerts, newspaper clippings or your Aunt Sadie's cure for gout. Your idea of a health bulletin that's useful or revelatory may mislead, upset, confuse or agitate your friend. Sick people have doctors to tell them what to do. Your job is simply to be their friend.

9. Let patients who are terminally ill set the conversational agenda.If they're unaware that they're dying, don't be the one to tell them. If they know they're at the end of life and want to talk about it, don't contradict or interrupt them; let them vent or weep or curse the Fates. Hand them a tissue and cry with them. If they want to confide their last wish, or trust you with a long-kept secret, thank them for the honor and listen hard. Someday you'll want to remember every word they say.

10. Don't pressure them to practice 'positive thinking.' The implication is that they caused their illness in the first place by negative thinking—by feeling discouraged, depressed or not having the "right attitude." Positive thinking can't cure Huntington's disease, ALS or inoperable brain cancer. Telling a terminal patient to keep up the fight isn't just futile, it's cruel. Insisting that they see the glass as half full may deny them the truth of what they know and the chance to tie up life's loose ends while there's still time. As one hospice patient put it, "All I want from my friends right now is the freedom to sulk and say goodbye."

Though most of us feel dis-eased around disease, colloquial English proffers a sparse vocabulary for the expression of embarrassment, fear, anxiety, grief or sorrow. These 10 commandments should help you relate to your sick friends with greater empathy, warmth and grace.

—Ms. Pogrebin is the author of 10 books and a founding editor of Ms. magazine. Her latest book is "How to Be a Friend to a Friend Who's Sick," from which this essay is adapted.

BCBS: Monitoring tools for intraday liquidity management - final document

BCBS: Monitoring tools for intraday liquidity management - final document
April 2013

http://www.bis.org/publ/bcbs248.htm

This document is the final version of the Committee's Monitoring tools for intraday liquidity management. It was developed in consultation with the Committee on Payment and Settlement Systems to enable banking supervisors to better monitor a bank's management of intraday liquidity risk and its ability to meet payment and settlement obligations on a timely basis. Over time, the tools will also provide supervisors with a better understanding of banks' payment and settlement behaviour.

The framework includes:

• the detailed design of the monitoring tools for a bank's intraday liquidity risk;
• stress scenarios;
• key application issues; and
• the reporting regime.

Management of intraday liquidity risk forms a key element of a bank's overall liquidity risk management framework. As such, the set of seven quantitative monitoring tools will complement the qualitative guidance on intraday liquidity management set out in the Basel Committee's 2008 Principles for Sound Liquidity Risk Management and Supervision. It is important to note that the tools are being introduced for monitoring purposes only and that internationally active banks will be required to apply them. National supervisors will determine the extent to which the tools apply to non-internationally active banks within their jurisdictions.

Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013), which sets out one of the Committee's key reforms to strengthen global liquidity regulations does not include intraday liquidity within its calibration. The reporting of the monitoring tools will commence on a monthly basis from 1 January 2015 to coincide with the implementation of the LCR reporting requirements.

 An earlier version of the framework of monitoring tools was issued for consultation in July 2012. The Committee wishes to thank those who provided feedback and comments as these were instrumental in revising and finalising the monitoring tools.

Authorities' access to trade repository data - consultative report

CPSS: Authorities' access to trade repository data - consultative report
April 2013
www.bis.org/publ/cpss108.htm

The consultative report Authorities' access to trade repository data was published for public comment on 11 April 2013. 

Trade repositories (TRs) are entities that maintain a centralised electronic record of over-the-counter (OTC) derivatives transaction data. TRs will play a key role in increasing transparency in the OTC derivatives markets by improving the availability of data to authorities and the public in a manner that supports the proper handling and use of the data. For a broad range of authorities and official international financial institutions, it is essential to be able to access the data needed to fulfil their respective mandates while maintaining the confidentiality of the data pursuant to the laws of relevant jurisdictions.

The purpose of the report is to provide guidance to TRs and authorities on the principles that should guide authorities' access to data held in TRs for typical and non-typical data requests. The report also sets out possible approaches to addressing confidentiality concerns and access constraints. Accompanying the report is a cover note that lists the specific related issues for comment.
Comments should be sent by 10 May 2013 to both the CPSS secretariat (cpss@bis.org) and the IOSCO secretariat (accessdata@iosco.org). The comments will be published on the websites of the BIS and IOSCO unless commentators have requested otherwise.

• Full report (49 pages, 308 kb)
• Cover note (3 pages, 45 kb)

Market-Based Structural Top-Down Stress Tests of the Banking System. By Jorge Chan-Lau

Market-Based Structural Top-Down Stress Tests of the Banking System. By Jorge Chan-Lau
IMF Working Paper No. 13/88
April 10, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40468.0

Summary: Despite increased need for top-down stress tests of financial institutions, performing them is challenging owing to the absence of granular information on banks’ trading and loan portfolios. To deal with these data shortcomings, this paper presents a market-based structural top-down stress testing methodology that relies in market-based measures of a bank's probability of default and structural models of default risk to infer the capital losses they could experience in stress scenarios. As an illustration, the methodology is applied to a set of banks in an advanced emerging market economy.

Regulators Let Big Banks Look Safer Than They Are. By Sheila Bair

Regulators Let Big Banks Look Safer Than They Are. By Sheila Bair
The Wall Street Journal, April 2, 2013, on page A13
http://online.wsj.com/article/SB10001424127887323415304578370703145206368.html

The recent Senate report on the J.P. Morgan Chase "London Whale" trading debacle revealed emails, telephone conversations and other evidence of how Chase managers manipulated their internal risk models to boost the bank's regulatory capital ratios. Risk models are common and certainly not illegal. Nevertheless, their use in bolstering a bank's capital ratios can give the public a false sense of security about the stability of the nation's largest financial institutions.

Capital ratios (also called capital adequacy ratios) reflect the percentage of a bank's assets that are funded with equity and are a key barometer of the institution's financial strength—they measure the bank's ability to absorb losses and still remain solvent. This should be a simple measure, but it isn't. That's because regulators allow banks to use a process called "risk weighting," which allows them to raise their capital ratios by characterizing the assets they hold as "low risk."

For instance, as part of the Federal Reserve's recent stress test, the Bank of America reported to the Federal Reserve that its capital ratio is 11.4%. But that was a measure of the bank's common equity as a percentage of the assets it holds as weighted by their risk—which is much less than the value of these assets according to accounting rules. Take out the risk-weighting adjustment, and its capital ratio falls to 7.8%.

On average, the three big universal banking companies (J.P. Morgan Chase, Bank of America and Citigroup) risk-weight their assets at only 55% of their total assets. For every trillion dollars in accounting assets, these megabanks calculate their capital ratio as if the assets represented only $550 billion of risk.

As we learned during the 2008 financial crisis, financial models can be unreliable. Their assumptions about the risk of steep declines in housing prices were fatally flawed, causing catastrophic drops in the value of mortgage-backed securities. And now the London Whale episode has shown how capital regulations create incentives for even legitimate models to be manipulated.

According to the evidence compiled by the Senate Permanent Subcommittee on Investigations, the Chase staff was able to magically cut the risks of the Whale's trades in half. Of course, they also camouflaged the true dangers in those trades.

The ease with which models can be manipulated results in wildly divergent risk-weightings among banks with similar portfolios. Ironically, the government permits a bank to use its own internal models to help determine the riskiness of assets, such as securities and derivatives, which are held for trading—but not to determine the riskiness of good old-fashioned loans. The risk weights of loans are determined by regulation and generally subject to tougher capital treatment. As a result, financial institutions with large trading books can have less capital and still report higher capital ratios than traditional banks whose portfolios consist primarily of loans.

Compare, for instance, the risk-based ratios of Morgan Stanley, an investment bank that has struggled since the crisis, and U.S. Bancorp, a traditional commercial lender that has been one of the industry's best performers. According to the Fed's latest stress test, Morgan Stanley reported a risk-based capital ratio of nearly 14%; take out the risk weighting and its ratio drops to 7%. USB has a risk-based ratio of about 9%, virtually the same as its ratio on a non-risk weighted basis.

In the U.S. and most other countries, banks can also load up on their own country's government-backed debt and treat it as having zero risk. Many banks in distressed European nations have aggressively purchased their country's government debt to enhance their risk-based capital ratios.

In addition, if a bank buys the debt of another bank, it only needs to include 20% of the accounting value of those holdings for determining its capital requirements—but it must include 100% of the value of bonds of a commercial issuer. The rules governing capital ratios treat Citibank's debt as having one-fifth the risk of IBM's. In a financial system that is already far too interconnected, it defies reason that regulators give banks such strong capital incentives to invest in each other.

Regulators need to use a simple, effective ratio as the main determinant of a bank's capital strength and go back to the drawing board on risk-weighting assets. It does make sense to look at the riskiness of banks' assets in determining the adequacy of its capital. But the current rules are upside down, providing more generous treatment of derivatives trading than fully collateralized small-business lending.

The main argument megabanks advance against a tough capital ratio is that it would force them to raise more capital and hurt the economic recovery. But the megabanks aren't doing much new lending. Since the crisis, they have piled up excess reserves and expanded their securities and derivatives positions—where they get a capital break—while loans, which are subject to tougher capital rules, have remained nearly flat.

Though all banks have struggled to lend in the current environment, midsize banks, with their higher capital levels, have the strongest loan growth, and community banks do the lion's share of small-business lending. A strong capital ratio will reduce megabanks' incentives to trade instead of making loans. Over the long term, it will make these banks a more stable source of credit for the real economy and give them greater capacity to absorb unexpected losses. Bet on it, there will be future London Whale surprises, and the next one might not be so easy to harpoon.

Ms. Bair, the chairman of the Federal Deposit Insurance Corporation from 2006 to 2011, is the author of "Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself" (Free Press, 2012).

China's Demography and its Implications

China's Demography and its Implications. By Il Houng Lee, Qingjun Xu, and Murtaza Syed
IMF Working Paper No. 13/82
Mar 28, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40446.0

Summary: In coming decades, China will undergo a notable demographic transformation, with its old-age dependency ratio doubling to 24 percent by 2030 and rising even more precipitously thereafter. This paper uses the permanent income hypothesis to reassess national savings behavior, with greater prominence and more careful consideration given to the role played by changing demography. We use a forward-looking and dynamic approach that considers the entire population distribution. We find that this not only holds up well empirically but may also be superior to the static dependency ratios typically employed in the literature. Going further, we simulate global savings behavior based on our framework and find that China’s demographics should have induced a negative current account in the 2000s and a positive one in the 2010s given the rising share of prime savers, only turning negative around 2045. The opposite is true for the United States and Western Europe. The observed divergence in current account outcomes from the simulated path appears to have been partly policy induced. Over the next couple of decades, individual countries’ convergence toward the simulated savings pattern will be influenced by their past divergences and future policy choices. Other implications arising from China’s demography, including the growth model, the pension system, the labor market, and the public finances are also briefly reviewed.

China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency

China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency. By Il Houng Lee, Murtaza Syed, and Liu Xueyan (Xueyan Liu???)
IMF Working Paper No. 13/83
March 29, 2013

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40446.0

Summary: This paper proposes a possible framework for identifying excessive investment. Based on this method, it finds evidence that some types of investment are becoming excessive in China, particularly in inland provinces. In these regions, private consumption has on average become more dependent on investment (rather than vice versa) and the impact is relatively short-lived, necessitating ever higher levels of investment to maintain economic activity. By contrast, private consumption has become more self-sustaining in coastal provinces, in large part because investment here tends to benefit household incomes more than corporates. If existing trends continue, valuable resources could be wasted at a time when China’s ability to finance investment is facing increasing constraints due to dwindling land, labor, and government resources and becoming more reliant on liquidity expansion, with attendant risks of financial instability and asset bubbles. Thus, investment should not be indiscriminately directed toward urbanization or industrialization of Western regions but shifted toward sectors with greater and more lasting spillovers to household income and consumption. In this context, investment in agriculture and services is found to be superior to that in manufacturing and real estate. Financial reform would facilitate such a reorientation, helping China to enhance capital efficiency and keep growth buoyant even as aggregate investment is lowered to sustainable levels.

America's Voluntary Standards System: A 'Best Practice' Model for Asian Innovation Policies? By Dieter Ernst

America's Voluntary Standards System: A 'Best Practice' Model for Asian Innovation Policies? By Dieter Ernst
East-West Center, Policy Studies, No. 66, March 2013
ISBN: 978-0-309-26204-5 (print); 978-0-86638-205-2 (electronic)
Pages: xvi, 66
http://www.eastwestcenter.org/publications/americas-voluntary-standards-system-best-practice-model-asian-innovation-policies


Summary

Across Asia there is a keen interest in the potential advantages of America's market-led system of voluntary standards and its contribution to US innovation leadership in complex technologies.

For its proponents, the US tradition of bottom-up, decentralized, informal, market-led standardization is a "best practice" model for innovation policy. Observers in Asia are, however, concerned about possible drawbacks of a standards system largely driven by the private sector.

This study reviews the historical roots of the American system, examines its defining characteristics, and highlights its strengths and weaknesses. A tradition of decentralized local self-government has given voice to diverse stakeholders in innovation. However, a lack of effective coordination of multiple stakeholder strategies constrains effective and open standardization processes.

Asian countries seeking to improve their standards systems should study the strengths and weaknesses of the American system. Attempts to replicate the US standards system will face clear limitations--persistent differences in Asia's economic institutions, levels of development, and growth models are bound to limit convergence to a US-style market-led voluntary standards system.

Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe

Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe. By A Barajas et alii.
IMF Working Paper No. 13/81
March 28, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40441.0

Summary: This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.


Excerpts:

Ample empirical evidence has shown a positive, albeit non-linear, relationship between financial system depth, economic growth, and macroeconomic volatility. At the same time, rapid expansion in credit has been associated with higher bank fragility and the likelihood of a systemic banking crisis.1 This seemingly conflicting evidence is actually consistent with theory. The same mechanisms through which finance helps growth also makes it susceptible to shocks and, ultimately, fragility. Specifically, the maturity and liquidity transformation from short-term savings and deposit facilities into long-term investments is at the core of the positive impact finance on the real economy, but it can also render the system susceptible to shocks. The information asymmetries and ensuing agency problems between savers and entrepreneurs that banks help to alleviate can also turn into a source of fragility given agency conflicts between depositors/creditors and banks.

The importance of the financial sector for the overall economy raises the question of the “optimal” or “Goldilocks” level of financial depth and the requisite policies to reach this optimum. Given the dual-faced nature of financial deepening, contributing to growth while often resulting in boom-bust cycles, and the identification of non-linear relationships between growth, volatility, and financial depth, it is apparent that additional deepening is not always desirable. Further, there is increasing evidence for a critical role of the financial system in defining policy space and the transmission of fiscal, monetary and exchange rate policies (IMF, 2012). Both shallow as well as over-extended financial systems can severely reduce the available policy space and hamper transmission channels.

The conceptual and empirical frameworks offered in this paper are relevant for the academic and policy debate on financial sector deepening, particularly in developing countries. We introduce the concept of a financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems around the globe. Specifically, this concept allows us to assess the performance of countries’ financial systems over time relative to structural country characteristics and other state variables (e.g., macroeconomic and institutional variables). Depending on the position of country’s financial system relative to the frontier, policy options can be prioritized to address deficiencies.

Three different sets of policies can be delineated depending on a country’s standing relative to the frontier. Market-developing policies, related to macroeconomic stability, long-term institution building, and other measures to overcome constraints imposed by a small size or volatile economic structure, can help push out the frontier. Market-enabling policies, which address deficiencies such as regulatory barriers and lack of competition, can help a financial system move toward the frontier. Finally, market-harnessing policies help prevent a financial system from moving beyond the frontier (the long-term sustainable equilibrium), and include regulatory oversight and short-term macroeconomic management.

We also operationalize this conceptual framework by presenting a benchmark model that predicts countries’ level of financial development based on structural characteristics (e.g., income, size, and demographic characteristics) and other fundamental factors. The most straightforward approach for assessing a country’s progress in financial deepening is to benchmark its financial system against peers or regional averages. Such comparisons, while useful, do not allow for a systematic unbundling of structural and policy factors that have a bearing on financial deepening. Using regression analysis, we relate gaps between predicted and actual levels of financial development to an array of macroeconomic, regulatory, and institutional variables. We also provide preliminary evidence that overshooting the predicted level of financial development is associated with credit boom-bust episodes, underlining the importance of optimizing rather than maximizing financial development.

This paper is related to several literatures. First, it is directly related to an earlier exercise to derive an access possibilities frontier as a conceptual tool to assess the optimal level of sustainable outreach of the financial system (Beck, and de la Torre, 2007). While Beck, and de la Torre (2007) focus on the microeconomics of access to and use of financial services, this paper provides a macroeconomic perspective on financial sector development. Second, our paper is related to the empirical literature on benchmarking. Based on Beck et al. (2008) and Al Hussainy et al. (2011), we derive a benchmarking model that relates a country’s level of financial development over time to a statistical benchmark, obtained from a large panel regression.

In a broader sense, the paper is also related to the literature on the finance-growth nexus, financial crises, and studies identifying policies needed for sound and effective financial systems. The finance and growth literature, as surveyed by Levine (2005), among others, has found a positive relationship between financial deepening and growth. More recent work, however, has uncovered non-linearities in this relationship. There is evidence that the effect of financial development is strongest among middle-income countries (Barajas et al., 2012), whereas other work finds a declining effect of finance on growth as countries grow richer.2 More recently, Arcand et al. (2012) find that the finance-growth relationship becomes negative as private credit reaches 110 percent of GDP, while Dabla-Norris and Srivisal (2013) document a positive relationship between financial depth and macroeconomic volatility at very high levels.

Our paper is also related to a growing literature exploring the anatomy of financial crises. This literature has pointed to the role of macroeconomic, bank-level and regulatory factors in driving and exacerbating financial fragility. Finally, our paper is related to a diverse literature exploring macroeconomic and institutional determinants of sound and efficient financial deepening.

Cyprus: Some Early Lessons. By Thorsten Beck

Cyprus: Some Early Lessons. By Thorsten Beck
World Bank Blogs, Mar 28, 2013

The crisis is Cyprus is still unfolding and the final resolution might still have some way to go, but the events in Nicosia and Brussels already offer some first lessons. And these lessons look certainly familiar to those who have studied previous crises.  Bets are that Cyprus will not be the Troika’s last patient, with one South European finance minister already dreading the moment where he might be in a situation like his Cypriot colleague.  Even more important, thus to analyze the on-going Cyprus crisis resolution for insights into where the resolution of the Eurozone crisis might be headed and what needs to be done.

1. A deposit insurance scheme is only as good as the sovereign backing it

One of the main objectives of deposit insurance is to prevent bank runs. That was also the idea behind the increase of deposit insurance limits across the Eurozone to 100,000 Euro after the Global Financial Crisis. However, deposit insurance is typically designed for idiosyncratic bank failures, not for systemic crises.  In the latter case, it is important that public back stop funding is available.  Obviously, the credibility of the latter depends on a solvent sovereign. As Cyprus has shown, if the solvency of the sovereign is itself in question, this will undermine the confidence of depositors in a deposit insurance scheme.  In the case of Cyprus, this confidence has been further undermined by the initial idea of imposing a tax on insured deposits, effectively an insurance co-payment, contradicting maybe not in legal terms but definitely in spirit the promise of deposit insurance of up to 100,000 Euros. The confidence that has been destroyed with the protracted resolution process and the back-and-forth over loss distribution will be hard to re-establish. A banking system without the necessary trust, in turn, will be hard pressed to fulfill its basic functions of facilitating payment services and intermediating savings. Ultimately, this lack of confidence can only be overcome by a Eurozone wide deposit insurance scheme with public back-stop funding by ESM and a regulatory and supervisory framework that depositors can trust.

2. A large financial system is not necessarily growth enhancing

An extensive literature has documented the positive relationship between financial deepening and economic growth, even though the recent crisis has shed doubts on this relationship (Levine, 2005, Beck, 2012).  However, both theoretical and empirical literature focus on the intermediation function of the financial system, not on the size of the financial system per se. Very different from this financial facilitator view is the financial center view, which sees the financial sector as an export sector, i.e. one that seeks to build a nationally centered financial center stronghold based on relative comparative advantages such as skill base, favorable regulatory and tax policies, (financial safety net) subsidies, etc. Economic benefits of such a financial center might also include important spin-offs coming from professional services (legal, accounting, consulting, etc.) that tend to cluster around the financial sector.

In recent work with Hans Degryse and Christiane Kneer (2013) and using pre-2007 data, we have shown that a large financial system might stimulate growth in the short-term, but comes at the expense of higher volatility. It is the financial intermediation function of finance that helps improve growth prospects not a large financial center, a lesson that Cyprus could have learned from Iceland.

3. Crisis resolution as political distribution fight

Resolution processes are basically distributional fights about who has to bear losses.   The week-long negotiations about loss allocation in Cyprus are telling in this respect.  While it was initially Eurozone authorities that were blamed for imposing losses on insured depositors, there is an increasingly clear picture that it was maybe the Cypriot government itself that pushed for such a solution in order to avoid imposing losses on large, (and thus most likely) richer and more connected depositors.

While the Cypriot case might be the most egregious recent example for the entanglement of politics and crisis resolution, the recent crises offer ample examples of how politically sensitive the financial system is.  Just two more examples here:  First, even during and after the Global Financial Crisis of 2008 and 2009, there was still open political pressure across Europe to maintain or build up national champions in the respective banking systems, even at the risk of creating more too-big-to-fail banks.  Second, the push by the German government to exempt German small savings and cooperative banks from ECB supervision and thus the banking union can be explained only on political basis and not with economic terms, as the "too-many-to-fail" is as serious as the "too-big-to-fail" problem.

4. Plus ca change, plus c'est la meme chose

European authorities and many observers have pointed to the special character of each of the patients of the Eurozone crisis and their special circumstances. Ireland and Spain suffered from housing booms and subsequent busts, Portugal from high current account deficits stemming from lack of competitiveness and mis-allocation of capital inflows, Greece from high government deficit and debt and now Cyprus from an oversized banking system. So, seemingly different causes, which call for different solutions!
But there is one common thread across all crisis countries, and that is the close ties between government and bank solvency. In the case of Ireland, this tie was established when the ECB pushed the Irish authorities to assume the liabilities of several failed Irish banks. In the case of Greece, it was the other way around, with Greek banks having to be recapitalized once sovereign debt was restructured.  In all crisis countries, this link is deepened as their economies go into recession, worsening government’s fiscal balance, thus increasing sovereign risk, which in turn puts balance sheets of banks under pressure that hold these bonds but also depend on the same government for possible recapitalization. This tie is exacerbated by the tendency of banks to invest heavily in their home country’s sovereign bonds, a tendency even stronger in the Eurozone’s periphery (Acharya, Drechsler and Schnabl, 2012).  Zero capital requirements for government bond holdings under the Basel regime, based on the illusion that such bonds in OECD countries are safe from default, have not helped either.

5. If you kick the can down the road, you will run out of road eventually 

The multiple rounds of support packages for Greece by Troika, built on assumptions and data, often outdated by the time agreements were signed, has clearly shown that you can delay the day of reckoning only so long. By kicking the can down the road, however, you risk deteriorating the situation even further. In the case of Greece that led eventually to restructuring of sovereign debt. Delaying crisis resolution of Cyprus for months if not years has most likely also increased losses in the banking system.  A lesson familiar from many emerging market crises (World Bank. 2001)!  On a first look, the Troika seemed eager to avoid this mistake in the case of Cyprus, forcing recognition and allocation of losses in the banking system early on without overburdening the sovereign debt position. However, the recession if not depression that is sure to follow in the next few years in Cyprus will certainly increase the already high debt-to-GDP ratio and might ultimately lead to the need for sovereign debt restructuring.

6. The Eurozone crisis — a tragedy of commons

The protracted resolution process of Cyprus has shown yet again, that in addition to a banking, sovereign, macroeconomic and currency crisis, the Eurozone faces a governance crisis. Decisions are taken jointly by national authorities who each represent the interest of their respective country (and taxpayers), without taking into account the externalities of national decisions arising on the Eurozone level. It is in the interest of every member government with fragile banks to "share the burden" with the other members, be it through the ECB’s liquidity support or the Target 2 payment system. Rather than coming up with crisis resolution on the political level, the ECB and the Eurosystem are being used to apply short-term (liquidity) palliatives that deepen distributional problems and make the crisis resolution more difficult. What is ultimately missing is a democratically legitimized authority that represents Eurozone interests.

7. Learning from the Vikings

In 2008, Iceland took a very different approach from the Eurozone when faced with the failure of their oversized banking system. It allowed its banks to fail, transferred domestic deposits into good banks and left foreign deposits and other claims and bad assets in the original banks, to be resolved over time.  While the banking crisis and its resolution has been a traumatic experience for the Icelandic economy and society, with repercussions even for diplomatic relations between Iceland and several European countries, it avoided a loss and thus insolvency transfer from the banking sector to the sovereign.  Iceland's government has kept its investment rating throughout the crisis. And while mistakes might have been made in the resolution process (Danielsson, 2011), Iceland’s banking sector does not drag down Iceland’s growth any longer and might eventually even make a positive contribution.

The resolution approach in Cyprus seems to follow the Icelandic approach. While the Cypriot case might be a special one (as part of the losses fall outside the Eurozone and Cypriot banks are less connected with the rest of the Eurozone than previous crisis cases), there are suggestions that future resolution cases might impose losses not just on junior and maybe senior creditors of banks, but even on depositors to thus reduce pressure on government’s balance sheets.  A move towards market discipline, for certain; whether this is due to learning from experience, tighter government budgets across Europe or for political reasons remains to be seen.

8. Banking union with just supervision does not work

The move towards a Single Supervisory Mechanism has been hailed as major progress towards a banking union and stronger currency union.  As the case of Cyprus shows, this is certainly not enough.  The holes in the balance sheets of Cypriot banks became obvious in 2011 when Greek sovereign debt was restructured, but given political circumstances, the absence of a bank resolution framework in Cyprus and — most importantly — the absence of resources to undertake such a restructuring, the problems have not been addressed until now.  Even once the ECB has supervisory power over the Eurozone banking system, without a Eurozone-wide resolution authority with the necessary powers and resources, it will find itself forced to inject more and more liquidity and keep the zombies alive, if national authorities are unwilling to resolve a failing bank.

9. A banking union is needed for the Eurozone, but won't help for the current crisis!

While the Eurozone will not be sustainable as currency union without a banking union, a banking union cannot help solve the current crisis. First, building up the necessary structures for a Eurozone or European regulatory and bank resolution framework cannot be done overnight, while the crisis needs immediate attention. Second, the current discussion on banking union is overshadowed by distributional discussions, as the bank fragility is heavily concentrated in the peripheral countries, and using a Eurozone-wide deposit insurance and supervision mechanism to solve legacy problems is like introducing insurance after the insurance case has occurred. The current crisis has to be solved before banking union is in place. Ideally, this would be done through the establishment of an asset management company or European Recapitalization Agency, which would sort out fragile bank across Europe, and also be able to take an equity stake in restructured banks to thus benefit from possible upsides (Beck, Gros and Schoenmaker, 2012).  This would help disentangle government and bank ties, discussed above, and might make for a more expedient and less politicized resolution process than if done on the national level.

10. A currency union with capital controls?

The protracted resolution process of the Cypriot banking crisis has increased the likelihood of a systemic bank run in Cyprus once the banks open, though even if the current solution would have been arrived at in the first attempt, little confidence in Cypriot banks might have been left.  As in other crises (Argentina and Iceland) that perspective has led authorities to impose capital controls, an unprecedented step within the Eurozone. Effectively, however, this implies that a Cypriot Euro is not the same as a German or Dutch Euro, as they cannot be freely exchanged via the banking system, thus a contradiction to the idea of a common currency (Wolff, 2013).

However, these controls only formalize and legalize what has been developing over the past few years: a rapidly disintegrating Eurozone capital market.  National supervisors increasingly focus on safeguarding their home financial system, trying to keep capital and liquidity within their home country (Gros, 2012).  Anecdotal evidence suggests that this does not only affect the inter-bank market but even intra-group transaction between, let’s say, Italian parent banks and their Austrian and German subsidiaries.  Another example of the tragedy of commons, discussed above.

11. Finally, there is no free lunch

This might sound like a broken disk, but the Global Financial Crisis and subsequent Eurozone crisis has offered multiple incidences to remind us that you cannot have the cake and eat it.  This applies as much to Dutch savers attracted by high interests in Icesave and then disappointed by the failure of Iceland to assume the obligations of its banks as to Cypriot banks piling up on Greek government bonds promising high returns even in 2010 when it had become all but obvious that Greece would require sovereign debt restructuring.  On a broader level, the idea that a joint currency only brings advantages for everyone involved, but no additional responsibilities in term of reduced sovereignty and burden-sharing and insurance arrangements also resembles the free lunch idea.

On a positive note, the Cyprus bail-out has shown that Eurozone authorities have learnt from previous failures by forcing an early recognition of losses in Cyprus and by moving towards a banking union, even if very slowly. As discussed above, however, there are still considerable political constraints and barriers to overcome, so that it is ultimately left to each observer to decide whether the glass is half full or half empty.


References:

Acharya, Viral, Itamar Drechsler and Philipp Schnabl. 2012. A tale of two overhangs: the nexus of financial sector and sovereign credit risks. Vox 15 April 2012
Beck, Thorsten. 2012. Finance and growth: lessons from the literature and the recent crisis. Paper prepared for the LSE growth commission.
Beck, Thorsten, Hans Degryse and Christiane Kneer. 2012. Is more finance better?
Disentangling intermediation and size effects of financial systems. Journal of Financial Stability, forthcoming.
Beck, Thorsten, Daniel Gros, Dirk Schoenmaker (2012): Banking union instead of Eurobonds — disentangling sovereign and banking crises, Vox 24 June 2012.
Danielsson, Jon. 2011. How not to resolve a banking crisis: Learning from Iceland’s mistakes  Vox, 26 November 2011
Gros. Daniel. 2012. The Single European Market in Banking in decline — ECB to the rescue? Vox , 16 Ocotber 2012
Levine, Ross. 2005. Finance and growth: theory and evidence. In Handbook of Economic
Growth, ed. Philippe Aghion and Steven N. Durlauf, 865–934. Amsterdam: Elsevier.
Wolff, Guntram. 2013. Capital controls are a grave risk to the eurozone. Financial Times 26 March 2013.
World Bank. 2001. Finance For Growth: Policy Choices in a Volatile World. Policy Research Report


Full article:
http://blogs.worldbank.org/allaboutfinance/cyprus-some-early-lessons

How Effective are Macroprudential Policies in China? By Bin Wang and Tao Sun

How Effective are Macroprudential Policies in China? By Bin Wang and Tao Sun
IMF Working Paper No. 13/75
March 27, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40425.0

Summary: This paper investigates macroprudential policies and their role in containing systemic risk in China. It shows that China faces systemic risk in both the time (procyclicality) and cross-sectional (contagion) dimensions. The former is reflected as credit and asset price risks, while the latter is reflected as the links between the banking sector and informal financing and local government financing platforms. Empirical analysis based on 171 banks shows that some macroprudential policy tools (e.g., the reserve requirement ratio and house-related policies) are useful, but they cannot guarantee protection against systemic risk in the current economic and financial environment. Nevertheless, better-targeted macroprudential policies have greater potential to contain systemic risk pertaining to the different sizes of the banks and their location in regions with different levels of economic development. Complementing macroprudential policies with further reforms, including further commercialization of large banks, would help improve the effectiveness of those policies in containing systemic risk in China.


ISBN/ISSN: 9781484355886 / 2227-8885

Supervisory framework for measuirng and controlling large exposures

Supervisory framework for measuirng and controlling large exposures
BCBS, Mar 2013
http://www.bis.org/publ/bcbs246.htm

The Basel Committee on Banking Supervision has today published a proposed supervisory framework for measuring and controlling large exposures.

 One of the key lessons from the financial crisis is that banks did not always consistently measure, aggregate and control exposures to single counterparties across their books and operations. And throughout history there have been instances of banks failing due to concentrated exposures to individual counterparties (eg Johnson Matthey Bankers in the UK in 1984, the Korean banking crisis in the late 1990s). Large exposures regulation has arisen as a tool for containing the maximum loss a bank could face in the event of a sudden counterparty failure to a level that does not endanger the bank's solvency.

A separate key lesson from the crisis is that material losses in one systemically important financial institution (SIFI) can trigger concerns about the solvency of other SIFIs, with potentially catastrophic consequences for global financial stability. The Committee is of the view that the large exposures framework is a tool that could be used to mitigate the risk of contagion between global systemically important banks, thus underpinning financial stability.

Finally, the consultation paper presents proposals to strengthen the oversight and regulation of the shadow banking system in relation to large exposures.  In particular, the proposals include policy measures designed to capture bank-like activities conducted by non-banks that are of concern to supervisors.

The proposed new standard aims to ensure greater consistency in the way banks and supervisors measure, aggregate and control exposures to single counterparties. Acting as a backstop to risk-based capital requirements, the standard would supplement the existing risk-based capital framework by protecting banks from substantive losses caused by the sudden default of a counterparty or group of connected counterparties. The consultative paper would replace the Basel Committee's 1991 guidance Measuring and controlling large credit exposures.

Issues with the Bayes estimator of a conjugate normal hierarchy model

Someone asks for an instability issue in R's integrate program:

Hello everyone,

I am supposed to calculate the Bayes estimator of a conjugate normal hierarchy model. However, the Bayes estimator does not have a closed form,

The book "Theory of Point Estimation" claims that the numerical evaluation of  this estimator is simple. But my two attempts below both failed.

1. I tried directly using the integration routine in R on the numerator and denominator separately. Maybe because of the infinite domain, occasionally the results are far from reasonable.

2. I tried two ways of change of variables so that the resulting domain can be finite. I let


But the estimator results are very similar to the direct integration on the original integrand. More often than it should occur, we obtain quite large evaluation of the Bayes estimator, up to 10^6 magnitude.

I wonder if there is any other numerical integration trick which can lead to a more accurate evaluation.

I appreciate any suggestion.


-------------------------------------------
xxx
Some State University
-------------------------------------------

Well, what happens here? Her program have a part that says:

[Bayes(nu,p,sigma,xbar) is the ratio of both integrals, "f", and "g" are the integrals, f is the numerator, g the denominator, so Bayes = f/g]

Now, executing Bayes(2,10,1,9.3) fails:

> Bayes(2,10,1,9.3)
[1] 1477.394

, which is much greater than the expected approx. 8.


I tried this with the same program, integrate, to do this simple case (dnorm is the normal distribution density):

> integrate(dnorm,0,1)
0.3413447 with absolute error < 3.8e-15
> integrate(dnorm,0,10)
0.5 with absolute error < 3.7e-05
> integrate(dnorm,0,100)
0.5 with absolute error < 1.6e-07
> integrate(dnorm,0,1000)
0.5 with absolute error < 4.4e-06
> integrate(dnorm,0,10000000000)
0 with absolute error < 0



As we can see, the last try, with a very large value, fails miserably, value is 0 (instead of 0.5) and absolute error is negative.

The program "integrate" uses code that is part of supposedly "a Subroutine Package for Automatic Integration", as it is advertised, but it cannot anticipate everything -- and we hit an instability we cannot solve.

My suggestion was to use integrate(f,0,1) and integrate(g,0,1) always until we get results outside what is reasonable. In those cases, we should try integrate(f,0,.999) and integrate(g,0,.999) with as many nines as we can (I got problems with just .9999, that's why I wrote .999 there).

Of course, you can always try a different method. Since this function is well-behaved, any simple method could be good enough.

Basel: Consultative document on recognising the cost of credit protection purchased

Basel Committee issues consultative document on recognising the cost of credit protection purchased
March 22, 2013
http://www.bis.org/press/p130322.htm

The Basel Committee on Banking Supervision has today published a proposal that would strengthen capital requirements when banks engage in certain high-cost credit protection transactions.

The Committee has previously expressed concerns about potential regulatory capital arbitrage related to certain credit protection transactions. At that time it noted that it would continue to monitor developments with respect to such transactions and would consider imposing a globally harmonised minimum capital Pillar 1 requirement if necessary. After further consideration, the Committee decided to move forward with a more comprehensive Pillar 1 proposal.

While the Committee recognises that the purchase of credit protection can be an effective risk management tool, the proposed changes are intended to ensure that the costs, and not just the benefits, of purchased credit protection are appropriately recognised in regulatory capital. It does this by requiring that banks, under certain circumstances, calculate the present value of premia paid for credit protection, which should be considered as an exposure amount of the protection-purchasing bank and be assigned a 1,250% risk weight.

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Recognising the cost of credit protection purchased

http://www.bis.org/publ/bcbs245.htm

The proposal set out in this consultative document would strengthen capital requirements when banks engage in certain high-cost credit protection transactions. The Committee has previously expressed concerns about potential regulatory capital arbitrage related to certain credit protection transactions. At that time it noted that it would continue to monitor developments with respect to such transactions and would consider imposing a globally harmonised minimum capital Pillar 1 requirement if necessary. After further consideration, the Committee decided to move forward with a more comprehensive Pillar 1 proposal.

While the Committee recognises that the purchase of credit protection can be an effective risk management tool, the proposed changes are intended to ensure that the costs, and not just the benefits, of purchased credit protection are appropriately recognised in regulatory capital. It does this by requiring that banks, under certain circumstances, calculate the present value of premia paid for credit protection, which should be considered as an exposure amount of the protection-purchasing bank and be assigned a 1,250% risk weight.

 

---

Full text of the consultative doc: http://www.bis.org/publ/bcbs245.pdf

Basel Committee: supervisory guidance on external audits of banks (consultation)

Basel Committee publishes for consultation supervisory guidance on external audits of banks
March 21, 2013
http://www.bis.org/press/p130321.htm

The Basel Committee on Banking Supervision has today published supervisory guidance on External audits of banks for consultation along with a letter to the International Auditing and Assurance Standards Board (IAASB).

The consultative paper aims to enhance and supersede the existing guidance that was published by the Basel Committee in 2002 on the relationship between banking supervisors and banks' external auditors and in 2008 on external audit quality and banking supervision. The evolution of bank practices and the introduction of new standards and regulations over the last 10 years warranted a thorough revision of the Committee's supervisory guidance. In addition, the recent financial crisis has highlighted the need to improve the quality of external audits of banks. The proposed enhanced guidance sets out supervisory expectations of how:

• external auditors can discharge their responsibilities more effectively;
• audit committees can contribute to audit quality in their oversight of the external audit;
• an effective relationship between external auditors and supervisors can lead to regular communication of mutually useful information; and
• regular and effective dialogue between the banking supervisory authorities and relevant audit oversight bodies can enhance the quality of bank audits.

The Committee's letter to the IAASB calls for enhancing the International Standards on Auditing (ISAs) to include more authoritative guidance relating to the audit of banks. It sets out specific areas where the Committee believes the ISAs should be improved.

Commenting on today's publications, Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said, "The Committee has developed guidance that builds on recent experience and will help raise the bar with regard to what supervisors expect of banks' external auditors and audit committees. We also recognise the great importance of audit standards and are keen to support the IAASB in enhancing audit quality."

Comments on the proposals should be submitted by Friday 21 June 2013 by e-mail to: baselcommittee@bis.org. Alternatively, comments may be sent by post to: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the website of the Bank for International Settlements unless a comment contributor specifically requests confidential treatment.

Tracking Global Demand for Advanced Economy Sovereign Debt

Tracking Global Demand for Advanced Economy Sovereign Debt. Prepared by Serkan Arslanalp and Takahiro Tsuda
IMF Working Paper No. 12/284
December 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40135.0

Recent events have shown that sovereign, just like banks, can be subject to runs, highlighting the importance of the investor base for their liabilities. This paper proposes a methodology for compiling internationally comparable estimates of investor holdings of sovereign debt. Based on this methodology, it introduces a dataset for 24 major advanced economies that can be used to track US$42 trillion of sovereign debt holdings on a quarterly basis over 2004-11. While recent outflows from euro periphery countries have received wide attention, most sovereign borrowers have continued to increase reliance on foreign investors. This may have helped reduce borrowing costs, but it can imply higher refinancing risks going forward. Meanwhile, advanced economy banks’ exposure to their own government debt has begun to increase across the board after the global financial crisis, strengthening sovereign-bank linkages. In light of these risks, the paper proposes a framework— sovereign funding shock scenarios (FSS)—to conduct forward-looking analysis to assess sovereigns’ vulnerability to sudden investor outflows, which can be used along with standard debt sustainability analyses (DSA). It also introduces two risk indices—investor base risk index (IRI) and foreign investor position index (FIPI)—to assess sovereigns’ vulnerability to shifts in investor behavior.