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X Meeting of Heads of Financial Stability

Digital Meeting
September 9-11, 2020.


Since 2011, CEMLA has organized the Meeting on Financial Stability with the aim of providing analysis and discussion of relevant issues for financial stability, including macro-prudential policy instruments, institutional arrangements for the preservation of financial stability, financial stability models and indicators, as well as crisis management and resolution schemes. The Meeting is aimed to Senior officials in charge of regulation and supervision, as well as monitoring the stability of the financial system in central banks, supervisory agencies and multilateral institutions associated with the follow-up and the analysis of the international financial system. The Meeting has been held at Uruguay, Costa Rica, Chile, México, Argentina, Spain, Peru, and Colombia.

Since its implementation, ten meetings have been held. This X edition, was held in digital format, on September 9-11, 2020.  It was attended by 75 representatives from 25 institutions CEMLA’s members and associates (Argentina, Bahamas, Belize, Board of Governors of the Federal Reserve System, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Dominican Republic, ECCB, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Peru, Spain, Suriname, Trinidad & Tobago, Uruguay, and Venezuela).

The X Meeting was aimed at exchanging experiences on topical issues related to financial stability, among others: the COVID-19 and financial stability, macroprudential stress testing and financial stability monitoring.


The Rebirth of DSGE: Large Scale Models for Monetary-Fiscal-Financial Policy Analysis
Dimitrios Tsomocos, Saïd Business School and St. Edmund Hall, University of Oxford

Professor Tsomocos presented a model for a small open economy to study financial stability. This model incorporates a financial sector with endogenous financial frictions, dynamic feedback mechanisms between the financial and the real sector, as well as heterogeneity in the banking system. The model is calibrated using data of the Chilean economy. It therefore considers the economic characteristics that are important to understand the evolution of this country to an open economy with a safe banking system. For instance, the Chilean economy’s high dependence on copper may feedback to the financial sector directly or indirectly.  

The paper presented by Prof. Tsomocos looks at macroprudential regulation/monitoring in fragile times with macroeconomic shocks being amplified due to the presence of pecuniary externalities. There are two sources of externalities: cost of default and collateral constraints dependent on market valuation of capital. In this model, the banking sector is perfectly competitive. Heterogeneity is introduced through the presence of systemic banks and small banks. The real economy consists of households, a commodity exporting sector, and a domestic production sector. Firms may default leading to repercussions on the financial sector.  Further, the model has a central bank setting monetary policy, a regulator that sets capital requirements for banks, and a government.

Professor Tsomocos concluded that this model is able to study the effect of monetary policy shocks to financial stability. The heterogeneity in the banking sector could act as an amplifier mechanism: small banks face stronger adjustment costs to shocks and intensify the credit channel of monetary policy. The study of capital requirement effects should be done in the context of liquidity regulation. In the case of a small open economy, he explained that a liquidity coverage ratio and counter-cyclical capital buffers are reinforcing each other. They allow smoothing the cycle and hence improve welfare.


COVID-19 and Financial Stability
Michael Kiley, Board of Governors of the Federal Reserve System

Mr. Kiley discussed the economic and financial impact of COVID-19 on the US financial sector. Then, he described the three different policy measures that the Federal Reserve is using to overcome the situation: monetary policy measures, steps to stabilize short-term funding markets and actions to support more directly credit flows to households, businesses and communities. On the monetary policy measures, he explained that market conditions improved substantially following a series of policy actions, including purchases of Treasury securities and agency mortgage-backed securities in amounts needed to support smooth market functioning. Additionally, the Federal Reserve and some foreign central banks have taken coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements and other measures. Finally, the Federal Reserve has enacted a set of facilities to support the flow of credit to US households, businesses, and communities, including the Primary and Secondary Market Corporate Credit Facilities, the Main Street Lending Program, and the Municipal Liquidity Facility.


COVID-19 and Financial Stability
Ricardo Franco Moura, Central Bank of Brazil

Mr. Moura described the different policies aimed at mitigating financial stability risks in Brazil. In particular, monetary and foreign exchange policies, and the liquidity and capital regulation measures. He explained the objectives of the different measures taken by the Central Bank, such as, maintaining the banking sector liquid and stable, to provide conditions for the normal functioning of the credit channel, to ensure the well function of the foreign exchange market. Moreover, to maintain monetary conditions to enhance growth without compromising price stability among others. Finally, Mr. Moura concluded that the recent crisis required a coordinated response involving direct transfers, credit programs, and regulatory and market interventions.


Financial stability governance and central bank communications
Ricardo Correa, Board of Governors of the Federal Reserve System

Mr. Correa presented a study of sentiment in financial stability reports. Since forward guidance has gained importance, monetary policy decision speeches face rigid textual analysis. The authors extend this methodology to the context of financial stability communications. They demonstrate that sentiment conveyed in central bank communications is associated with movements in financial cycle indicators and is a good predictor of banking crises.

They use the text in the financial stability reports by the central banks of 24 countries between 2005 and 2017 to calculate a sentiment index composed by the difference between the number of negative words minus the number of positive words and divided by the number of total words. He highlighted that it is important to have a financial stability dictionary because there are different connotations compared to a finance context.

They investigated how financial stability communication strategies relate to differences in governance frameworks. They found that countries that communicate negative sentiment and have a financial stability committee have (i) smaller credit to GDP ratios, (ii) smaller debt service ratios, and (iii) lower credit growth relative to countries without a committee. They found some evidence that central banks in financial stability committees try to convey a “calmer” message.

Finally, Mr. Correa concluded that financial stability communications by central banks that take part in committees are relatively more effective at alleviating the deterioration of financial conditions and preventing financial crises. This is even more so if the central bank and supervisory authority are under the same roof. A “calmer” message could be explained by the ability to implement prudential policies, which also allows them to maintain lower monetary policy rates.


Macroprudential Stress Testing
Fabrizio López Gallo Dey, Banco de Mexico

Mr. Lopez-Gallo explained the importance of stress tests to evaluate the overall resilience of the financial system, in particular, to assess vulnerabilities to systemic risk. He described that Banco de México runs macroprudential stress tests to evaluate the financial system’s resilience by applying extreme but plausible scenarios that could affect the Mexican economy. Capital adequacy and regulatory leverage ratio are the main measures analyzed. He described the different steps that are usually followed to run macroprudential stress tests. As an example, he showed the scenarios considered for the stress tests published in the Financial Stability Report of the first semester of 2020 for 43 banks whose assets represent 99% of the banking system. The results suggest that the financial system’s average capital adequacy ratios remain above regulatory minimums plus capital buffers, even in the most adverse scenarios. Finally, he explained some of the challenges that these exercises face. First, uncertainty about the future economic path makes it harder to formulate adequate baseline and adverse scenarios. Second, uncertainty further complicates an effective communication of stress tests’ results. Finally, the incorporation of non-bank intermediaries into stress test models remains a challenge.


Macroprudential Stress Testing
Rodrigo Lluberas, Banco Central del Uruguay

Mr. Lluberas described the organization of the financial stability committee of the central bank, and some of their main tasks, such as, systemic risk assessment and research, information sharing and policy coordination, a map of risks and a financial stability report. Also, he explained the evolution of the financial stability index and the importance of a sectoral decomposition. The COVID-19 shock hit mostly the real and external dimensions while the financial sector was initially less affected. Based on a Growth at Risk (GaR) model, he showed the distribution of GDP growth forecast for 2020. Also, the COVID effect is reflected in an increase of the probability of growth below zero. He concluded that it is important to re-think methods and data used due to the high uncertainty about GDP growth after the COVID-19 shock. He pointed out that the identification of zombie lending due to emergency loan alleviation measures can be useful to formulate tough stress test scenarios for bank balance sheets in the future.


Stress Testing at the Central Bank of Colombia (BR)
Daniel Osorio, Banco de la República

Mr. Osorio described the features of the stress test at the central bank. Banco de la República performs a solvency stress test (SYSMO) of banks and liquidity stress tests of banks and investment funds. The tests serve different policy goals. The bank solvency stress test consists in building macroeconomic scenarios using DSGE models with feedback effects. The solvency stress test is mostly informative and used by the supervisory authority. The challenges for the SYSMO in light of the COVID-19 crisis is to account for broken financial-economic relationships and the repercussions of emergency measures, such as loan alleviation, on credit risk measurements in the future. 

Bank liquidity stress tests and tests on investment funds are performed to monitor asset markets. A liquidity stress test revealed no major problem with the level of liquidity and only some occasional problems with the distribution of liquidity.


Financial stability monitoring
Ángel Estrada, Banco de España

Mr. Estrada explained the identification of systemic risks and the tools Banco de España has developed in the last years. Regarding data driven indicators, they have developed a quarterly dashboard in the form of a heatmap, based on 130 indicators, to address the main systemic risk dimensions. They also developed a tool for stress testing and model-based indicators, in particular, GaR which allows to disentangle the impact of a shock on the left tail of the future growth distribution. Network analysis can help to understand how shocks propagate through interconnected bank balance sheets, to detect vulnerable banks and to lead to possible amplification of losses. Some of the most important challenges are that the existing cyclical indicator were designed to identify endogenously generated imbalances, which explains why the countercyclical capital buffer was not available at the onset of the current crisis.

Wednesday, September 9

Financial Stability in extraordinary times
Dr. Manuel Ramos-Francia, Director General, CEMLA

Session 1. Keynote: The Rebirth of DSGE: Large Scale Models for Monetary-Fiscal-Financial Policy Analysis
Chair: Serafín Martínez-Jaramillo, CEMLA

  • Dimitrios Tsomocos, Professor of Financial Economics, University of Oxford     


Panel discussion 1. COVID-19 and Financial Stability
Chair: Serafín Martínez-Jaramillo, CEMLA

  • Michael T. Kiley, Deputy Director, Financial Stability, Federal Reserve Board.
  • Paul Castillo Bardalez, Manager of Monetary Operations and Financial Stability, Banco Central de Reserva del Perú.
  • Ricardo Franco Moura, Head of Prudential and Foreign Exchange Regulation Department, Banco Central do Brasil.


Thursday, September 10

Session 2. Special talk: Financial Stability Governance and Central Bank Communications.
Chair: Serafín Martínez-Jaramillo, CEMLA
Ricardo Correa, Deputy Associate Director, Program Direction Section, International Finance, Federal Reserve Board.

Panel discussion 2. Macroprudential stress testing
Chair: Carola Müller, CEMLA

  • Fabrizio López-Gallo Dey, Financial Stability General Director, Banco de México
  • Rodrigo Lluberas, Head of Financial Stability, Banco Central del Uruguay
  • Daniel Esteban Osorio Rodríguez, Director of the Financial Stability Department, Banco de la República (Colombia).


Friday, September 11

Panel discussion 3. Financial stability monitoring
Chair: Matias Ossandon, CEMLA

  • Grzegorz Halaj, Director Financial Institutions, Financial Stability, Bank of Canada 
  • Angel Estrada García, Director General de Estabilidad Financiera, Regulación y Resolución, Banco de España.
  • Gilneu Francisco Astolfi Vivan, Head of Financial System Monitoring Department, Banco Central do Brasil


Meeting conclusions and next steps
Chair: Serafín Martínez-Jaramillo, CEMLA


Dimitrios Tsomocos
University of Oxford
Dr. Dimitrios P Tsomocos is a Professor of Financial Economics at Saïd Business School and a Fellow in Management at St Edmund Hall, University of Oxford.

A mathematical economist by trade, his main areas of expertise include:

  • Banking and regulation
  • Incomplete asset markets
  • Systemic risk
  • Financial instability
  • Issues of new financial architecture

Dimitrios' research has had a substantial impact on economic policy around the world. In particular, he analyses issues of contagion, financial fragility, interbank linkages and the impact of the Basel Accord and financial regulation in the macroeconomy, using a General Equilibrium model with incomplete asset markets, money and endogenous default. He is working towards designing a new paradigm of monetary policy, financial stability analysis and macroprudential regulation.

He co-developed the Goodhart – Tsomocos model of financial fragility in 2003 while working at the Bank of England. The impact has been significant and more than ten central banks have calibrated the model, including the Bank of Bulgaria, Bank of Colombia, Bank of England and the Bank of Korea. In 2011, Dimitrios provided testimony to House of Lords for the Economic and Financial Affairs and International Trade Sub Committee's report, 'The future of economic governance in the EU'.

Dimitrios has been an economic advisor to one of the main political parties in Greece and regularly provides commentary on the state of the Greek economy to local and international media. He has worked with central banks in countries including England, Bulgaria, Colombia, Greece, Korea and Norway to implement the Goodhart – Dimitrios model and advise them on issues of financial stability. He also serves as a Senior Research Associate at the Financial Markets Group at the London School of Economics.

Prior to joining the Saïd Business School in 2002, Dimitrios was an economist at the Bank of England. He holds a BA, MA, M.Phil., and a PhD from Yale University.


Mikael T. Kiley
Board of Governors of the Federal Reserve System

Is the Deputy Director, Division of Financial Stability, Federal Reserve Board:Primary responsibilities include providing the Board and FOMC with analysis of issues related to financial stability, including interaction with monetary policy, and developing strategic priorities to achieve Federal Reserve objectives and work effectively with, among others, domestic agencies participating in Financial Stability Oversight Council (FSOC) and international groups participating in the Financial Stability Board (FSB) (2017-). Member, Senior Officers Committee: Management committee that supports the Federal Reserve’s Executive Committee in identification of strategic priorities, risk, and budgeting (2017-) Co-organizer, Systemic Risk Integration Forum, Federal Reserve Board (2017-): Coordinate discussions of systemic risk within the Federal Reserve System under the Large Institutions Supervision Coordinating Committee (LISCC) structure. (2017-) Member, Policy Advisory Committee, Supervision and Regulation, Federal Reserve Board (2019-): Financial Stability Board, Analytical Group on Vulnerabilities, Federal Reserve Representative (2018-) Financial Stability Board, Surveillance Framework Group, Federal Reserve Representative (2019-).


Ricardo Franco Moura
Banco Central do Brasil

Ricardo Moura is the head of Prudential and Foreign Exchange Regulation at the Central Bank of Brazil, and its representative at the Basel Committee on Banking Supervision. Previously, he was a member of the secretariat at the Financial Stability Board, and before that he was a senior adviser to the board and the executive secretary of the Financial Stability Committee at the Central Bank of Brazil.


Ricardo Correa
Board of Governors of the Federal Reserve System

Ricardo Correa is a Deputy Associate Director in the International Finance Division at the Board of Governors of the Federal Reserve System.  His research fields include banking, empirical corporate finance, and international finance.  He conducts policy analysis in the areas of international banking and financial stability.  He received a Ph.D. in economics from Columbia University and a B.A. in economics from the Universidad de los Andes in Bogotá, Colombia.


Fabrizio López-Gallo Dey
Banco de México

Fabrizio López Gallo is the Director General of Financial Stability at Banco de México since September 2018. He is responsible of developing and overseeing strategies, research, policies, regulations, and metrics to issue recommendations and institutional opinions on topics related to financial stability. Moreover, he is the Executive Secretariat of the Financial Stability Council, a coordination body among regulatory financial authorities for assessing systemic risk and implementing macroprudential policy. He is also a member of the Basel Committee on Banking Supervision (BCBS) and has participated in a broad number of different working groups of the BCBS, the Committee on the Global Financial System and the Financial Stability Board, among others. He has published extensively on topics such as financial network analysis, credit risk, and evaluations of regulatory financial policies. He has been lecturer at Pompeu Fabra University in Barcelona, Universidad Panamericana and ITAM in Mexico. He has also been a visiting researcher at the Bank for International Settlements (BIS) and consultant for The World Bank. He received a B.A. in Actuary from Instituto Tecnológico Autónomo de México (ITAM), where he also completed a Master in Finance. He obtained his Master and PhD degrees in Economics at Pompeu Fabra University.


Daniel Esteban Osorio Rodríguez
Banco de la República (Colombia)

Daniel Osorio is the Head of the Financial Stability Department of the Central Bank of Colombia since August 2017. Daniel holds a PhD in Economics from the London School of Economics, and since 2015 has worked on the development of the stress testing framework currently in use at the Bank. His research focuses on the fields of monetary policy, financial regulation, financial development and financial stability.


Grzegorz Halaj
Bank of Canada

Grzegorz Halaj is a Director in Financial Institutions Division and was previously a Principal Researcher in Model Development and Research Division of the Financial Stability Department. Prior to joining the Bank of Canada, he was an Economist in the Financial Stability and Macroprudential Policy Directorate of the ECB and before that he worked as an expert in asset/ liability management in a large banking group in Europe and as an expert in Financial stability of the National Bank of Poland.


Angel Estrada García
Banco de España

As director of the General Directorate of Financial Stability, Regulation and Resolution of the Bank of Spain, Ángel Estrada is responsible for i) the compilation, validation and publication of information from credit institutions; ii) the analysis of the Spanish financial system and the definition the orientation of the macroprudential policy; iii) the supervision of the preventive resolution of the entities; and iv) the drafting and implementation of the regulation of the banking entities.

Most of Ángel Estrada's professional career has been developed in different departments of the Bank of Spain. Initially, he was responsible for the conjunctural developments of the Spanish economy, later specializing in more structural aspects. In subsequent years, Ángel Estrada held different positions in the Government of Spain, which culminated in his appointment as Director General of Macroeconomic Analysis and International Economics at the Ministry of Economy and Finance. On his return to the Bank of Spain, he worked on the implementation of some operational aspects related to macroprudential policies and, later, on the coordination of the Deputy General Directorate for International Affairs. Before being appointed at his current position, he was director of the Department of Financial Stability and Macroprudential Policy.

Ángel Estrada has a master's degree in monetary and financial economics from the Centro de Estudios Monetarios y Financieros (CEMFI) a degree in economics from the Universidad Complutense de Madrid.      


Gilneu Francisco Astolfi Viva
Banco Central do Brasil

Gilneu Francisco Astolfi Vivan is the Head of Financial System Monitoring Department from Central Bank of Brazil. The Department is in charge of the assessments about the current situation and tendency in liquidity, capital, profitability, and credit of financial institutions, measure potential systemic risk events and impacts, measure shadow bank relevance, and any other kind of event that could affect the financial stability. These assessments are presented in the Financial Stability Committee and published in the Financial Stability Report, edited by the Department. Besides, it manages the Credit Bureau, used by the Financial System and Supervision.

He works in the Supervision area since 1994, developing works in areas like liquidity risk and credit risk monitoring, Basel rules implementation, and development of Systemic Risk tools, like stress test scenarios, contagions measures, sensitivity analyses. He represents Brazil in some international Groups about liquidity and supervision. Today is a member of AGV/FSB - Analytical Group of Vulnerabilities.

He is M. A. in Economics and worked at IMF experts in Peru, Costa Rica, Jamaica, and Paraguay. Finally, he publishes some articles about improvements in data collection, Basel rules implementation, and NPL measurement.