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This article provides an overview of the analytical tools used by insurance regulators and supervisors for the purposes of market and macro-prudential surveillance. It is largely based on responses from 24 OECD and non-OECD countries to a questionnaire on the use and relative importance of a set of common indicators and analytical tools that provide information on the soundness, performance and competitiveness of the insurance market. The article therefore provides a point of reference on the use of analytical tools for market surveillance and is intended to inform the further development of the OECD Global Insurance Statistics framework.

This report provides estimates of the costs associated with bank resolution both in terms of the expected costs that might arise should a bank fail (i.e. as “ex-post” costs), as well as the cost associated with the likelihood that a solvent bank might fail (i.e. as “ex-ante” costs) over the next year. It finds that expected resolution costs (ex-post costs) have dropped recently due to higher average capital ratios and a lower level of bank liabilities as a percentage of GDP. The annualised value of these expected resolution costs (ex-ante costs), which increased sharply after 2008, has since subsided, but remains well above its 2008 level. Overall, the estimates produced in this report support the notion that recent financial sector reforms have had an impact on reducing the costs associated with bank failure, including the expected costs to taxpayers. However, estimates are in most cases yet to return to pre-crisis levels.

Earlier OECD research has shown that capital flow management measures (CFMs) that are used as macro-prudential measures (MPMs), including currency-based restrictions applied to banks’ operations also with non-residents, have the intended negative impact on capital account openness as measured by covered interest parity indicators. But what is their impact as macro-prudential tools to improve resilience to financial stability risks? This paper refers to the Bruno and Shin (2013) study that suggests that currency-based restrictions act as an effective macro-prudential buffer by reducing the sensitivity in emerging economies of cross-border bank lending to global credit cycles as measured by the volatility index VIX. The specific restrictions considered by the Bruno and Shin study are defined as CFMs and MPMs by both the IMF and the OECD. The paper shows that this result is mitigated when using updated data and testing the same hypotheses for more countries. Therefore further research is needed before concluding on the effectiveness of CFMs used as MPMs. On the other hand, the paper does find that CFMs, including currency-based measures, play a role in managing the domestic credit implications of those central banks engaged in foreign exchange interventions. The paper suggests that countries concerned with financial stability risks that may arise from global credit push factors, while wishing to avoid price distortions caused by CFMs, could use Basel III-consistent liquidity coverage ratios and net stable funding ratios as alternatives to CFMs; they also have the advantage of not having raised objections between governments so far regarding international commitments to exchange rate flexibility and cross-border openness, including the OECD Code of Liberalisation of Capital Movements.

Climate change is a major political and economic challenge. This paper sketches out its relevance for the financial sector. Necessary low-carbon investments imply a significant yet manageable financing gap. However, we argue that beyond capital mobilisation that has attracted most attention until now, the main challenge is ensuring a transition-consistent capital reallocation. The financial sector has a key role to play in that respect, complementary to appropriately designed climate policies. To help the financial system fulfil its role, the understanding of the economics of climate change should be deepened and a sector-wide businessoriented appropriation of these issues should be promoted. JEL classification: Q54, E10, E44, G12, G14, G21, G22, G23, G28. Keywords: Climate change, low carbon, climate finance, green finance, investment, capital allocation, financial system, risks

This article provides an overview of the potential implications of climate change for the financial management of disaster risks. It outlines the contribution of insurance to reducing the economic disruption of disaster events and policy approaches to supporting the penetration of disaster insurance coverage and the capacity of insurance markets to absorb disaster risks, including through the use of capital markets instruments and international co-operation in risk pooling. It concludes with a number of recommendations for improving the financial management of disaster risks in the context of climate change and some areas of further work. JEL classification: G22, G23, H84, Q54 Keywords: Climate change, natural disasters, extreme events, insurance, reinsurance, catastrophe bonds

The current post-crisis economic and financial landscape has been characterised by rising asset prices – driven by record low interest rates and easy monetary policy – and low productive investment by firms in advanced countries. The OECD Business and Finance Outlook 2015 examines this situation and looks at the way in which companies, banks, institutional investors and shadow banking entities are operating in the low-growth and low-interest rate environment and explores the build-up of risks in the financial system. The “promises” of growth, employment, and adequate retirement income are seen to be at risk in the absence of policy actions. These issues were also discussed at a launch event of that publication, a summary of which is presented in this article. JEL classification: E2, E4, E5, F21, F23, G1, G2. Keywords: financial system, financial crisis, asset prices, financial institutions, institutional investors, shadow banking, pension systems, retirement income, financial education.

This article on public equity financing for small and medium-sized enterprises (SMEs) complements earlier OECD work on market-based finance for SMEs. The development of this market segment could promote investment in SMEs and, together with securitisation and other non-bank debt financing instruments, encourage an enhanced allocation of risk and risk taking, and thus support growth. Despite the benefits of public SME equity, its share is small and an equity gap exists for risk financing more generally. A number of important impediments to the wider use of public equities for SMEs are identified, such as admission cost and listing requirements, lack of liquidity, educational gaps, limited ecosystems, and tax treatment, all of which require attention by regulators and policy makers alike.

This report demonstrates that the contingent liabilities associated with efforts to limit the adverse externalities stemming from failures in the European banking sector are substantially decreasing as a result of new regulation. Noting that the implied shifting of losses from taxpayers to bank creditors is desirable, the report recognises that losses do not disappear. It discusses the issue of where bank recovery or resolution bail-in losses may go. It underlines that the sectoral allocation of losses matters, but concludes that our understanding needs to be further developed and that more transparency about the structure of bank creditors would be desirable. Increasing transparency in this regard would, among other things, help assure policy makers that the new tools available can be used effectively and smoothly in actual practice. Also, raising awareness of investors in bail-inable bank debt about the associated risks should enhance the credibility of the bail-in framework.

This paper uses data drawn from 10 000 global companies in 75 advanced and emerging countries to look at trends in infrastructure and other non-financial industries in light of the talk of stagnation. There appears to be a twin paradox in the global economy: some companies and industries are possibly over-investing, driving down returns on equity (ROEs) versus the cost of capital and creating margin pressure globally, while others carry out too little long-term investment in favour of buybacks and the accumulation of cash. This pattern is associated with a shift in the centre of gravity of world economic activity towards emerging markets. Most of the over-investment appears to be occurring in the extremely strong growth of emerging market sales and investment in non-infrastructure companies, much of which is being financed from rapidly growing debt since the financial crisis. Global value chains, emerging market policies of financial repression, low interest rates, taxation incentives, natural resource endowments and other factors determine where investment is stronger and where it is restrained. Potential problems of debt-financed over-investment in non-infrastructure industries in emerging markets and the incentives for buybacks are identified as major policy issues that need to be addressed if sustainable growth is to be achieved. Evidence on the role of causal factors (sales, GDP, the return on equity, the cost of equity and debt and a measure of financial openness) on corporate capital spending is presented. Finally some policy recommendations are made. JEL classification: F21, G15, G18, G23 Keywords: Global economy, infrastructure, investment, listed companies

More than half a decade has passed since the most significant economic crisis of our lifetimes and a plethora of different interpretations has been offered about its origins. This paper consolidates the stylised facts put forward so far into a concise and coherent meta-narrative. The paper connects the dots between the arguments developed in the literature on macroeconomics and those laid out in the literature on financial economics. It focuses, in particular, on the interaction of monetary policy, international capital flows and the decisive impact of the rise of the shadow banking industry. JEL classification: A10, F30, G01 Keywords: Financial crisis, international capital flows, shadow banking

Small and medium-sized enterprises (SMEs) are key contributors to economic growth and job creation. The current economic and financial crisis has reduced bank lending and has affected SMEs in particular. Capital markets will have to play a bigger role in financing SMEs in order to make them more resilient to financial shocks. This article reviews the spectrum of alternative market-based debt instruments for SME financing. It focuses on securitisation and covered bonds and also addresses issues regarding small/mid-cap bonds and private placements. It reviews the current state of the market for these instruments and identifies associated risks; analyses the barriers for issuers and investors alike; and provides best practices and high level recommendations to help alleviate barriers without hampering the overall stability of the system. JEL classification: G1, G2, G23, G28 Keywords: SME finance, SME securitisation, non-bank finance, (high-quality) securitisation, asset-backed securities (ABS), SME CLO (collateralised loan obligation), (covered) bonds, private placements, financial regulation, European DataWarehouse, Prime Collateralised Securities (PCS) initiative

What are the economic effects of implicit bank debt guarantees and who ultimately benefits from them? This paper finds that "financial excesses" – situations where bank credit reaches levels that reduce economic growth – have been stronger in OECD countries characterised by larger values of implicit guarantees and where bank creditors have not incurred losses in bank failure resolution cases. Also, implicit bank debt guarantees benefit financial sector employees and other high-income earners in two ways, increasing income inequality. First, implicit guarantees are likely to raise financial sector pay. This is consistent with the observation of "financial sector wage premia", or financial sector employees earning in excess of their profile in terms of age, education and other characteristics. Second, implicit guarantees are likely to result in more and cheaper bank lending. If so, well-off people tend to benefit relatively more since household credit is more unequally distributed than income. JEL classification: D63, E43, G21, G28, O47 Keywords: Bank funding costs, implicit guarantees for bank debt, bank failure resolution, finance and growth, finance and income inequality

The main hallmarks of the global financial crisis were too-big-to-fail institutions taking on too much risk with other people’s money: excess leverage and default pressure resulting from contagion and counterparty risk. This paper looks at whether the Basel III agreement addresses these issues effectively. Basel III has some very useful elements, notably a (much too light "back-up") leverage ratio, a capital buffer, a proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses and liquidity and stable funding ratios. However, the paper shows that Basel risk weighting and the use of internal bank models for determining them leads to systematic regulatory arbitrage that undermines its effectiveness. Empirical evidence about the determinants of the riskiness of a bank (measured in this study by the Distance-to-Default) shows that a simple leverage ratio vastly outperforms the Basel Tier 1 ratio. Furthermore, business model features (after controlling for macro factors) have a huge impact. Derivatives origination, prime broking, etc., carry vastly different risks to core deposit banking. Where such differences are present, it makes little sense to have a one-size-fits-all approach to capital rules. Capital rules make more sense when fundamentally different businesses are separated. JEL classification: G01, G15, G18, G20, G21, G24, G28 Keywords: Financial crisis, Basel III, derivatives, bank business models, distance-todefault, structural bank separation, banking reform, GSIFI banks

The main hallmarks of the global financial crisis were too-big-to-fail institutions taking on too much risk with other people’s money while gains were privatised and losses socialised. It is shown that banks need little capital in calm periods, but in a crisis they need too much – there is no reasonable ex-ante capital rule for large systemically important financial institutions that will make them safe. The bank regulators paradox is that large complex and interconnected banks need very little capital in the good times, but they can never have enough in an extreme crisis. Separation is required to deal with this problem, which derives mainly from counterparty risk. The study suggests banks should be considered for separation into a ring-fenced non-operating holding company (NOHC) structure with ring-fencing when they pass a key allowable threshold for the gross market value (GMV) of derivatives, a case which is reinforced if the bank has high wholesale funding and low levels of liquid trading assets. The pricing of derivatives and repos would become more commensurate with the risks if the NOHC proposal were to be pursued as a unifying strategy for the different national approaches. Most of the objections to this structure are summarised and rebutted. Other national proposals for separation in Switzerland, the Volcker rule, the Vickers rule, and the Liikanen proposal are argued to be inferior to the ring-fenced NOHC proposal, on the grounds that empirical evidence about what matters for a safe business model is not taken properly into account. JEL classification: G01, G15, G18, G20, G21, G24, G28 Keywords: Financial crisis, derivatives, bank business models, distance-to-default, structural bank separation, banking reform, GSIFI banks

The results of an IMF study on controls on capital inflows in emerging economies, using a probit regression approach, are first replicated and tested for stability. The IMF results, downplayed by the authors, have been used by others to suggest controls can be helpful in a crisis situation. However, the stability findings suggest the results are not sufficiently robust to make strong claims in this regard. The same 37 countries and the IMF capital control measures are then used in a panel regression study to examine the impact of capital inflows on annual real GDP growth around the Global Financial Crisis. The results between the pre-crisis and the crisis periods are inconsistent with the IMF study – finding that capital restrictions on inflows (particularly debt liabilities) are most useful in good times when inflows to emerging markets are strong and upward pressure on managed exchange rates and reserves accumulation is greatest. However, lower controls on bonds and on FDI inflows seem to be associated with better growth outcomes during the crisis period studied. These findings are more consistent with studies that see capital controls as part of exchange rate targeting policies and concerns about excess reserves accumulation. JEL Classification: C23, C25, F21, F43, G01 Keywords: Capital controls, economic growth, emerging economies, financial crisis

The infrastructure financing market has gone through a process of radical transformation starting from the mid-2000s. Different reasons – including a changed macroeconomic environment, more stringent regulations on financial intermediaries, and a modified appetite for long-term asset investments – have led to a reallocation of flows from the banking sector to the institutional investors sector. This article provides an overview of international trends in infrastructure finance. It proposes a map of the different investment channels that private investors can use to access the infrastructure investment on the equity and debt side, highlighting the historical evolution of these segments in the past few years. Recently designed financial structures, such as different forms of partnership between banks and institutional investors, securitisation models and debt/credit fund vehicles, are also taken into consideration. JEL classification: E2, G1, G11, G2, G3, H44, H54, H81 Keywords: infrastructure financing, long-term investment, institutional investors, public-private partnerships, bank institutional investors partnerships, syndicated loans, project bonds, securitisation, debt/credit fund vehicles, financial market regulation

The value of implicit guarantees has declined from its peak at the height of the financial crisis, which is consistent with progress made regarding the bank regulatory reform agenda, as one would expect that many of the reform measures imply a more limited value of implicit guarantees for bank debt. Implicit guarantees persist however and their value continues to be significant, estimated here to be equivalent to EUR 50 billion of annual funding costs savings for a sample of more than 100 large European banks. This estimated funding cost advantage is a conservative estimate as it only focuses on one type of debt that can be measured in "real-time", that is as data on credit ratings, debt issuance and prices of debt become available. In any case, bank debt continues to be considered "special" by market participants and this observation implies that the substantial economic distortions, including distortions to risk-taking incentives and competition, arising from this situation also persist.

This article provides a framework for analysing the character and degree of ownership engagement by institutional investors.It argues that the general term "institutional investor" in itself doesn’t say very much about the quality or degree of ownership engagement. It is therefore an evasive "shorthand" for policy discussions about ownership engagement. The reason is that there are large differences in ownership engagement between different categories of institutional investors. There are also differences in ownership engagement within the same category of institutional investors such as hedge funds, investment funds, etc. These differences arise from the fact that the degree of ownership engagement is determined by a number of different features and choices that together make up the institutional investor’s "business model". When ownership engagement is not a central part of the business model, public policies and voluntary standards aiming to improve the quality of ownership engagement among institutional investors are likely to have limited effect. Based on an empirical overview of the relative sise of different categories of institutional investors, the article identifies a set of 7 features and 19 choices that in different combinations define the institutional investor’s business model. These features and choices are then used to establish a taxonomy for identifying different degrees of ownership engagement ranging from "no engagement" to "inside engagement".

The paper explores the issue of macro-prudential policies in the light of empirical evidence on the determinants of bank systemic risk, and the effectiveness of capital controls. In many ways this reflects a step back in time towards sector approaches to monetary policy that were so prevalent in the 1960s, 1970s and early 1980s. Complexity and interdependence is such that proposals on these issues should be treated with care until much more is understood about the issue. JEL Classification: C23, C25, F21, F43, G01. Keywords: Macro-prudential policies, capital controls, economic growth, emerging economies, financial crisis.