“Financial Risk and Crisis Management after
the Global Financial Crisis” Series No.9 (6/2016)

General Overview:“Financial Risk and Crisis Management
after the Global Financial Crisis”1

Eiji Ogawai
Professor, Graduate School of Commerce and Management,
Hitotsubashi University
Councilor, The Japan Economic Research InstituteThis document is an English translation of the original Japanese, which appears in
the Jun. 2016 edition of The Japan Economic Research Institute Monthly Report,
published by The Japan Economic Research Institute.
11. Introduction
In this series of papers, eight researchers have authored articles on the
topic of “Financial Risk and Crisis Management after the Global Financial
Crisis.” During their writings, each author has been aware of numerous
factors during the global financial crisis and the Eurozone crisis: thefinancial risk management undertaken by financial institutions andcorporations; financial crisis management undertaken by the International
Monetary Fund (IMF) and central banks, such as the US Federal Reserve
Board (FRB); the problems faced by financial regulations; and the mannerin which these regulations reacted and were revised in the aftermath ofthese crises.
The discussions found in this series can be broadly classified into
micro-focused and macro-focused discussions. Micro-focused discussions
primarily concern themselves with financial risk management byorganizations, such as financial institutions and corporations, observing thecharacteristics of financial markets during and after the global financial
crisis. On the other hand, macro-focused discussions make observations onregional financial collaborations among parties such as the Association ofSoutheast Asian Nations (ASEAN)+3 nations, the IMF and FRB, as well as
the European Union (EU). These macro discussions also observe the roles
expected of and fulfilled by fiscal regulations in the realm of financial crisis
management.
This paper presents a comprehensive view on the aforementioned problems
based on the concepts espoused by the following eight papers in this series.
In addition, it discusses the issues in financial risk and crisis management
following the global financial crisis, including the state of financial risk andcrisis management going forward. Please note that the eight papers
authored for this series are as follows.
a) “The Global Financial Crisis and Management of the Eurozone Crisis”
Eiji Ogawa (Oct.2015)b) “New Movements of Financial Risk Analysis in Post Financial Crisis”
Hisashi Nakamura (Nov.2015)c) “Shocks in Japanese Corporate Bond Market during the Global
Financial Crisis”
Yukihiro Yasuda (Dec.2015)d) “The US-origin Global Financial Crisis and the Development of Financial
Regulations”
Hanazaki Masaharu(Jan.2016)

e) “Financial Crisis Management and the Development of the Banking
Union in the EU”
Yuri Sasaki (Feb.2016)f) “Capital Flow, Exchange Rate and Financial Risk Management in
Asia －Roles and Issues of Intra-Regional Financial Cooperation－”
Junko Shimizu (Mar.2016)g) “The Federal Reserve’s Management of the Financial Crisis throughQuantitative Easing and Currency Swap Agreements”
Chikafumi Nakamura(Apr.2016)h) “The IMF as a Global Framework for Currency and Financial Crisis
Management” Junko Koeda(may2016)

2. The Global Financial Crisis and Management of the Eurozone
CrisisIn the article “The Global Financial Crisis and Management of theEurozone Crisis,” Eiji Ogawa examines the phenomenon of US dollar
illiquidity and policy responses during the global financial crisis, following
an inquiry into the state of financial risk management as it pertains to US
dollar illiquidity. He continues with observations of policy responses to theEurozone crisis, after which he investigates the state of financial risk
management as it relates to the interplay between the IMF and regional
financial cooperation.
The global financial crisis had its epicenter in the US subprime loan crisis.
Yet, there was also the resulting corruption of the security instruments that
had these subprime loans as collateral and were being used for funding
operations by European financial institutions. These facts, in actuality, led
to great effects in short-term funding procurement for financial institutions
not only from credit risk in the securities and lending markets but also fromcounterparty risk in the short-term interbank lending market. In addition,amid the global imbalance, European financial institutions played the roleas international financial intermediaries between nations with positivebalances of trade (such as oil-producing countries) and the US (a nation
with a negative balance of trade). This fact resulted in knock-on effects fromthe American subprime loan crisis on the European institutions that had
been utilizing those securitized instruments in their funds operations.
Simultaneously, as economies began to sink into deeper downturns
worldwide, many nations saw their fiscal deficits balloon; one of them,
Greece, fell into a fiscal crisis, which affected numerous Eurozone nations.

The European Commission (EC), European Central Bank (ECB), and IMF
formed a three-party troika system in response to this Eurozone crisis,
working together to provide financial support.
Numerous lessons have been learned from the responses to the global
financial crisis and Eurozone crisis. As a generalization, it is necessary toestablish a crisis management scheme during economic stability before theonset of crisis. Often, we do not reach conclusions (or have discussions)about establishing crisis management schemes until we experience theimminent shadow of crisis. However, the delays experienced by theestablishment of a crisis management scheme after being confronted withcrisis not only lead to a deeper crisis in the relevant country but also
increase the risk of spreading the effects of the said crisis to other nations. A
classic example of this is the two and a half years required to establish theEuropean Stability Mechanism after the onset of the Greek crisis, shackled
by the ban on fiscal transfers stipulated by a condition of the Lisbon Treaty.
This issue was already witnessed in eastern Asia, however; when the region
faced the Asian currency crisis of 1997, no regional financial cooperative
framework existed, forcing them to rely on assistance from the IMF.
Furthermore, while there had been discussions on establishing the AsianMonetary Fund (AMF), they never came to fruition. Stakeholders wereforced to wait until 2000 for agreement on the first regional financial
cooperative system in eastern Asia for financial crisis management, called
the Chiang Mai Initiative (CMI).
Another lesson gained from the global financial crisis is that through theprovision of dollar liquidity, the FRB was able to respond to US dollar
illiquidity (at times a liquidity crisis) and, at the very least, rapidly curtailcredit spreads. The FRB was likely able to act in this area in a consistentfashion given that this event had, by chance, coincided with illiquidity in
the US, which was the source of the global financial crisis. If, by chance, theUS economy had been under inflationary pressure and the FRB resultingly
attempted to adopt more restrictive fiscal policies, it would not be a foregone
conclusion that the FRB would be able to take the same actions for foreign
nations afflicted by the liquidity crisis. In preparation for such a situation,complementary efforts from the IMF through independent measures andregional financial cooperation would likely be necessary. To make such a
response viable in eastern Asia, the ASEAN+3 nations agreed to a currency
swap system under the CMI framework. Further, in the interest of evolving
the system’s functionality, the CMI currency swaps were multilateralized
from their initial two-party system (CMI Multilateralization or CMIM). The

ASEAN+3 Macroeconomic Research Office (AMRO) has also been
established to provide a surveillance function in the region for not only
crisis management but also crisis prevention.
A third lesson is that though the Eurozone crisis met with crisis
management efforts from the troika system formed by the EC, ECB, andIMF, this was a cooperative crisis management response between the IMF
and regional financial cooperation. Normally, for an international balance of
payments or currency crisis, the IMF would act alone in crisis management.
However, for the Asian currency crisis, though the IMF led the charge incrisis management, over half of the financial support provided in this crisis
yielded from the coffers of eastern Asian nations. That being said, in the
CMIM currency swaps, participating nations are working to increase the
IMF delinked portion, the amount a nation can receive without requiring
borrowing from the IMF. As such, actions are being taken to distance thissystem from the IMF despite its extolling of its complementary nature with
the IMF.

3. Risk Management in Financial Markets Post Financial Crisis
In “New Movements of Financial Risk Analysis in Post Financial Crisis,”
Hisashi Nakamura begins by explaining the textbook fundamentals on thetheoretical frameworks behind asset pricing theory. The rampant use offinancial techniques, such as derivative instrument development andsecuritization, saw significant growth in financial markets and resulted insegmented individual business risks. Diversified and absorbed risks within
massive capital markets led players at the time to believe around the
mid-2000s that they had constructed a robust system against risks in thefinancial markets and the real economy.
However, 2007 passed with the outbreak of the subprime crisis and thecollapse of Lehman Brothers (the Lehman Shock). The risks that had been
believed to be diversified and absorbed into the capital markets came backinto the light, wreaking unparalleled losses on the financial markets andthe real economy. As experienced in this global financial crisis, no-arbitrage
pricing approach that had been the primary tool for financial risk analysis
was unable to fully analyze recent financial market movements. Financial
sources of friction, such as information problems (moral hazard, adverse
selection, monitoring), transaction costs, defaults, psychological factors, andnetwork effects, can render markets incomplete. The Nakamura pieceindicates that these sources of friction make asset pricing difficult,suggesting that it is an urgent issue, both academically and in actual
financial practice, to construct a new asset valuation (asset pricing) modelthat allows for appropriate analysis of financial risk after the global
financial crisis.
After these statements, Nakamura introduces new directions in asset
pricing theory and financial risk analysis since the global financial crisis,indicating three specific directions for future research. The first considers
financial market models that introduce behavioral finance factors toinvestment behavior, which quantitatively analyze asset pricing models
from network effects (Kobayashi, 2016). The analysis results illustrate thatregardless of the lack of random elements in each investor’s investment
decision making, the interlinkage and accumulation in the market between
deterministic investment behaviors lead to the generation of seemingly
random and chaos phenomenon-like price movements. This suggests that
hypothesizing a probability model for financial markets, as had been donein models so far, is certainly not the only modelling method available.
The second direction introduced in the study by Nakamura comes fromempirical research on interest rate volatility predictions using information
contained within the yield curve (Takamizawa, 2015). The results of thisanalysis can be divided into three parts. First, interest rate factors caneffectively explain the volatility in the slope of the yield curve, on par withthe generalized autoregressive conditional heteroskedasticity model. Second,
when interest rate factors are combined with volatility factors, they can
explain the volatility of the curvature of the yield curve. Third, although thesimultaneous explanation of cross-sectional and time-series data by interest
rate models that satisfy arbitrage-free conditions has been traditionallyconsidered to be challenging, the discovery made by Nakamura is thepotential for resolving trade-off problems between cross-section andtime-series without unnecessarily increasing the number of factors.
Although this research does not necessarily predicate itself on theequilibrium approach, the empirical interpretation via induction of astructure that consistently explains both cross-section and time-series
implies a financial model framework yielded from the equilibrium approach.
The third research introduced is the theoretical verification of distortion
effects on pricing in financial markets yielded from moral hazard (Misumi,
Takaoka, and Nakamura, 2015). This research focuses on the moral hazard
when a broad distribution is displayed with a significant shortcoming insuccess rates, in situations where corporate managers can not only alternormal distributions based on the Brownian motion but also alter theoverall probability prediction, including the downward jump rate. It
establishes a formula for how this flavor of moral hazard distorts asset
pricing in the macro market, with the following three analysis results. First,
it indicates that moral hazard decreases the Sharpe ratio and hinders theattractiveness of investment in risk assets. Second, it moves market pricingof risk in the opposite direction versus that of investors’ marginal utility,
acting as a risk hedge and therefore raising risk-free interest rates. The
conclusion reached therein is that moral hazard amplifies the risk-free rate
puzzle, which was initially proposed by Weil (1989). Third, it clarifies thatthe distortions in real assets brought on by moral hazard can be alleviatedwhen investors can access financial markets.

4. Corporate Fund Procurement during the Global Financial
CrisisIn “Shocks in Japanese Corporate Bond Market during the Global
Financial Crisis,” Yukihiro Yasuda considers the effects of the global
financial crisis on Japanese corporations. Moreover, he considers ways inwhich Japanese corporations responded to the effects of crisis in theirfunding procurement processes. Specifically, he focuses on Japan’s
publically traded firms and analyzes their behavior in terms of funding
procurement in the corporate bond market. This is because for Japan’s
financial sector, bond and commercial paper markets had fallen into
dysfunction, especially after the Lehman Shock of September 2008, thereby
leading to skyrocketing levels of bank lending. On the other hand, regarding
the question of specifically how Japanese firms responded to the global
financial crisis, a need for broad-based verification still exists. This isbecause our attempts to clarify the effects of the global financial crisis are
unsuccessful if we only base them on aggregate data from the corporatebond market due to the realization through Yasuda’s research that thoseeffects can widely differ based on the traits of each firm.
Analyzing the funding procurement environment for Japanese firms froma somewhat broad perspective, Yasuda outlines that since the late 1990s,
Japan’s corporate sector provided excess funds, i.e, Japan’s banks, whichwere major moneylenders, shrugged off bad debt problems and remained
healthy, and the contrary trend after the financial crisis in Japan thatlending balances continued to hold a sluggish pace.

Yasuda goes beyond this observation, refining his focus in the Japanese
corporate bond market and making a detailed inquiry into the manner inwhich the global financial crisis affected Japan’s publically traded firms.
The global financial crisis, especially after the Lehman Shock, inflicted a
temporary dysfunction upon Japan. Although 2008 saw decreased amounts
of procured funding and lower numbers of bond issuances, the following
year saw a dramatic increase in the amount of procured funding.
On the topic of corporate bond ratings, frozen effects were significant forfirms with relatively high credit risk; however, firms with relatively low
credit risks were more apt to experience safe haven effects from low
procurement costs. As such, a polarized phenomenon occurred in corporatebond ratings. Further, Yasuda indicates that companies facing difficulty infunding procurement made up the difference through borrowing from banks,
while overall, facility investment and other such areas did not see such clear
impact from the crisis.
As a result, the above analysis suggests that the corporate bond and bankmoneylending markets played complementary roles to one another,
implying joint application of both direct and indirect finance for healthysystem function instead of an adversarial relation between the two
methods.

5. New Movements in Financial Regulations after the Global
Financial Crisis
In “The US-origin Global Financial Crisis and the Development of
Financial Regulations,” Masaharu Hanazaki clarifies the context and traits
behind the global financial crisis, on which he bases an organization oftrends in financial regulatory reform in recent years and a clarification of
the problems facing these reforms. Hanazaki indicates an expansion of
fiscal deregulation in the US as a key trait of the financially expansionary
period of the 2000s, the decade which also spawned the global financial
crisis. America’s traditionally restrictive financial system began to shift
toward deregulation during and after the 1980s. Precisely, the effective
removal of barriers between banking and securities operations in America
was one factor that influenced the expansion of a financial bubble being
inflated primarily by financial institutions.
Given this sort of context for the global financial crisis, post-crisis financial
regulations saw a dominant wave of stronger capital adequacyrequirements, introduction of liquidity regulations, increased capital
adequacy requirements for large-scale financial institutions, and other such
bolstered financial regulations. More specifically, financial regulations in
the US after the Lehman Shock included the establishment of theEmergency Economic Stabilization Act, announcement of financial
regulatory reforms, and enactment of the Dodd–Frank Act, which included
the Volcker Rule. On the global stage, discussions were conducted on
fundamental reform in the Basel Accords by the Basel Committee on
Banking
Supervision,leadingtoenhanced
capitaladequacy
regulations—the first pillar of the third Basel Accord—to be implemented ina stepwise fashion with full enforcement expected in January 2019.
Macroprudential policies, a new perspective on fiscal responsibility, havealso seen increased necessity. Macroprudential policies intend to suppress
financial systemic risk. The introduction of liquidity regulations, the second
pillar of Basel III, is predicated on the concepts of macroprudential policies.
Within the financial regulatory reforms that are in progress as of the timeof this writing, including Basel III, we may safely say that the scope andstrength of these regulations are both expanding. However, this is not only
due to the lax or nonexistent nature of regulations at the time of onset andintensification of the global financial crisis. In other words, Hanazaki
indicates that the strengthening of fiscal regulations is unlikely to be able toprevent the occurrence of another financial crisis. In contrast, the existenceof fiscal regulations and the systems borne thereof could themselves
encourage the onset of financial crisis.
More precisely, capital adequacy regulations carry the adverse effects ofassisting risky behavior on the part of banks as well as procyclicality. In
addition, global capital adequacy requirements ignore the differences infinancial systems that exist between nations. In the future, shifting theonus from global regulations toward local ones would be critical. Hanazaki
concludes that the experience surrounding the global financial crisis is areminder signaling the need for fundamental re-evaluation of the state of
our financial regulations.

6. Financial Crisis Management and the Development of the
Banking Union in the EU
To resolve the problems with the controversial introduction of a sharedcurrency that had become evident following the global and European

financial crises, the financial regulatory systems that had been largely
controlled by each home nation were unified within the Eurozone and abanking union was formed. In “Financial Crisis Management and theDevelopment of the Banking Union in the EU,” Yuri Sasaki explores thisbanking union. Sasaki tracks the integration path of the EU up to theformation of the banking union, reflects on the crisis and its effects, andclarifies the reasons for delays in unification of financial regulations while
making notes on the costs of unification.
Until the occurrence of the global and Eurozone financial crises, theEurozone had fundamentally been based on home-country financial
regulations. Therefore, although there were internationally unified
regulations, such as the Basel Accords in place at the time, each nation
would be in charge of regulatory oversight for other regulations or even for
national implementation of the Basel Accords. This is because the roots ofeach nation’s regulations, financial business frameworks, and presence ofpolitical issues faced by each nation varied from nation to nation. However,at the outbreak of crisis, the use of a single currency in Europe led to thenecessity for public bailout and sovereign risk propagated among thenations involved, leading to an increased necessity for financial regulations
to be unified further. The European banking union includes regulations
such as the Single Supervisory Mechanism, Single (Bankruptcy) Resolution
Mechanism, and Deposit Guarantee Scheme, which is, as of this writing,
being implemented as a tool of the banking union.
After the financial crises, Europe has greatly reformed its financial
oversight system. With regard to microprudential oversight, financing was
the only primary tool for dealing with crisis and macroprudential oversight
had only just been recently implemented. As such, fundamental reform had
not been introduced at that point. However, as the Greek-borne crisis
spread its effects across the Eurozone, a new sovereign crisis deepened in
the region and discerning the financial crisis from the sovereign crisis
became a critical matter. Further, in the 2013 Cypriot crisis, the limits
began to come to view for only adopting a home-country oversight system forbanks in nations using the Euro as a common currency. As such, thebanking union framework picked up real traction.
With unification came the question of scope of application for these issues
in instances where the Euro currency area and the EU’s scope weredifferent. However, there were numerous obstacles to this effort, including
difficulty presented by attempting to keep a similar level of oversight, theexistence of nations where securing deposit insurance funds is challenging,and so on. In the introduction of the Euro as a common currency, or evenwhen considering the logic of optimal currency zones, no clear explicit
considerations existed concerning the costs of unifying such regulations or
the costs that would occur from non-unified regulations. However, as has
been made clear from the experience of the financial crisis, the costs of
non-integrated regulations are significant, and consequently, the situation
demands further unification in regulations. Therefore, Hanazaki indicatesthat in the consideration of the pros and cons behind market and currency
integration, these types of issues with oversight regulations may wellrequire more consideration in the future.

7. Currency/Financial Crisis Management for Asian Regional
Financial Cooperatives
In “Capital Flow, Exchange Rate and Financial Risk Management inAsia—Roles and Issues of Intra-Regional Financial Cooperation—,” Junko
Shimizu provides an overview on the changes in capital flow in Asia after
the global financial crisis, analyzing the type of factors that influenced
Asia’s capital flows. Shimizu also examines the oft-called-for bolstering ofcrisis response systems and Japan’s role in Asian currency/financial crisis
management.
Beyond push and pull factors, the major influences on capital flow comefrom short-term capital flows that are reliant on future expectations of
exchange rates. For example, in 2015 and thereafter, the rise of dominant
expectations of a weakening Chinese renminbi (RMB) saw Asian currencies
fall into a cycle of devaluation. However, if we compare devaluation rates
versus the dollar over the 12 months of 2015, we see that many currencies
experienced greater devaluation versus that felt by the RMB. For thenations experiencing greater currency devaluation than that of the RMB,
Shimizu indicates that plummeting raw resource prices, one moredisrupting factor in international finance of late, is an additional factor
behind these more significant devaluations.
Notably, nations relatively less reliant on exports to China (India, Japan,
the Philippines) saw lower devaluation rates in their currencies. Yet, it isalso true that even Hong Kong, Singapore, and Taiwan, nations with highreliance on exports to China, did not see such significant drops in theircurrencies. According to Shimizu, the reason for this differs per nation: forHong Kong, its currency board system based on US dollar foreign reserves;

for Singapore, its highly creditworthy (to external players) central bank, theMonetary Authority of Singapore (MAS), and its wealth of foreign currency
reserves, 10.2 months’ worth as of September 2015; for Taiwan, its holdingsof 22.3 months of foreign reserves and other such factors played roles in its
stability.
One disruptive factor in international financial markets in 2015 was thedecline of resource prices, including crude oil. This damaged the fiscal
stability of resource-rich nations, such as Indonesia and Malaysia, trapping
it into a vicious cycle of currency devaluation. Shimizu divides the region’s
nations into those with 20% of more of their economies taken up by fuelexports (e.g., Indonesia, Malaysia, India) and those with fuel exports
comprising less than 5% of their economies (e.g., Hong Kong, Japan, thePhilippines). If we take this viewpoint and connect it with exchange
devaluation over the 12 months in 2015, we find that exchange rates weremore favorable for nations that were more reliant on fuel reports.
In May 2000, minister-level talks were conducted in Chiang Mai, Thailand,
between finance ministers of 13 countries (the ASEAN+3 nations),
intending “to build two-party support systems between each nation throughmutual financial agreements”; this intention led to agreement on thecreation of the CMI. As a collective financial support system, thisframework seeks to maintain stability of currency and financial markets aswell as supplement existing international funding support systems, such asthat available from the IMF.
To expand the IMF delinked portion, the amount that can be leveraged
without any IMF financial support requirements, currency regulators fromthe ASEAN+3 nations were forced to construct a decision-making system toactivate currency swaps by their own determination rather than relying on
the IMF. One specific measure to this end is the establishment of a mutual
monitoring system whereby countries monitor each other’s economic status(regional surveillance). At present, finance ministers from the ASEAN+3
countries meet in May every year to discuss each nation’s economic
situation, with participants from each country’s central bank also
participating in a similar policy discussion twice a year. The agreement tomultilateralize the CMI swaps (initiating the CMIM) coincided with theApril 2011 establishment of the independent monitoring institution, theAMRO, in Singapore. Along with conducting economic surveillance in the
ASEAN+3 regions, the institution also supports execution of CMIM
currency swaps.
Today, the Chinese RMB is widely traded in the world’s offshore markets,and the RMB’s future exchange rates significantly influence Asia’s capitalflow and movement in Asian currencies. The China Foreign Exchange Trade
System (CFETS), operated by the People’s Bank of China, announced andinitiated a new RMB-based index with a basket of 13 currencies in
December 2015 called the CFETS RMB Index. In the future, based on the
supply and demand of exchange markets, China will increase the RMB’s
flexibility through the adoption of a managed float system that references
the currency basket. This shift to a currency basket system for the RMB is
expected to also lead to an Asia-wide shift toward exchange policies thatutilize the basket-band-crawling rule. The RMB and the Japanese Yen have
served asymmetrically as investment currencies or safe haven currencies
during risk-on and risk-off, respectively. Shimizu concludes that in all
likelihood, each will exert its particular strengths and collaborate mutually,ushering in an era of collaborative intra-regional exchange policies that canstabilize Asian currencies overall.

8. The FRB’s Quantitative Easing and Currency Swap
Agreements as Financial Crisis Management Tools
After the onset of the global financial crisis, the US found itself needing toresolve the US dollar illiquidity that had originally occurred within its own
borders and later spread to the rest of the world. The US government
provided liquidity through untraditional monetary policies, such as
quantitative easing (QE), domestically and through currency swap
agreements with other nations. In “The Federal Reserve’s Management of
the Financial Crisis through Quantitative Easing and Currency Swap
Agreements,” Chikafumi Nakamura focuses on the role played by the QE
policies and currency swaps of US that were ongoing since 2008 in terms ofcrisis management for the world’s financial systems.
Taking a look at movements in financial institutions receiving direct andsignificant amounts of liquidity from the FRB, we can see a dramatic pullaway from provision of external credit at the beginning of the global
financial crisis. However, this returned to a new outflow due to the QE1round that followed, while the outbreak of the Eurozone crisis in late 2011
saw a return to net inflow that would continue for some time after. Further,
US financial institutions were not proactive in securities investments
during QE. This suggests ineffective functioning of portfolio rebalancing
effects, whereby financial institutions rebalance their portfolios byleveraging increased deposits from bought-up US sovereign debt andinvesting in riskier assets. This suggests that the tender provided to the US
financial system through its QE policies did not generate sufficient portfolio
rebalancing effects and that the indirect QE attempts to effect the world’s
financial system were also limited.
Contrastingly, the FRB’s liquidity provision mechanism through currency
swap agreements set the FRB in the role of “international lender of lastresort” in the global financial system, where the US dollar is a core trading
currency. A significant portion of the US dollars the FRB provided throughthese currency swap arrangements was taken up by the ECB, exceeding$580 billion shortly after the occurrence of the global financial crisis.
Furthermore, the two facts (the May 9, 2010 decision to resume US dollar
swaps when the Eurozone crisis deepened and the accelerated use ofcurrency swaps from late 2011 into 2012) provide evidence that the
Fed-provided dollar swaps not only worked to handle the global financial
crisis but also functioned as a crisis management system for otherinternational crises.
At the end of a string of extensions, the FRB announces that it would
normalize currency swap arrangements with the Bank of Canada, Bank ofEngland, Bank of Japan, ECB and Swiss National Bank. This supply of US
dollar liquidity allows for each nation’s central banks to engage in currency
swaps as their central banking authorities deem necessary based on market
conditions.
However, the reason why the FRB, an organization tasked with the
maximal well-being of the US domestically, would work to ensure thestability of international financial systems is in fact consistent with its
reasons for QE. When the US dollar faces insufficient liquidity, unlesscentral banks can obtain dollar supplies via swaps, they may be forced to
draw down their dollar-denominated reserves, which would cause higher
interest rates for US sovereign debt. Illiquidity of the dollar in global
financial markets, where it is a key currency, can also suppress the US
economy and create concerns over deflation.
This suggests a problem with the FRB’s function as an international lenderof last resort. For example, if a country’s economic cycle was asymmetric tothat of the US, then such a currency swap agreement could work against theFed’s monetary policy. Nakamura raises the concern that these swaps
agreed upon by the FRB with other central banks may not in fact occur forthat reason. Nakamura also cites the paper of Prasad (2014), indicating that
the FRB’s swap agreements with only a limited number of countries during

the global financial crisis were imposed upon by political decisions as towhether these swaps would actually be executed. According to the author,
having the liquidity of the world’s financial systems reliant on a single
country’s central bank is in itself a problem that invites uncertainty.
As such, Nakamura concludes that the FRB’s crisis management systemcentered on its swap agreements is, in fact, not a panacea but is one that
invites uncertainty. Therefore, it is vital to consider a new, more neutral
way to secure liquidity in preparing the world for the next crisis.

9. The IMF as a Global Framework for Currency and Financial
Crisis Management
In “The IMF as a Global Framework for Currency and Financial Crisis
Management,” Junko Koeda takes a theoretical view on the particularcharacteristics of the IMF, amid the context of the IMF’s crisis management
framework that played a major global role as an “international lender of lastresort” in the international society. Koeda compares the roles played by the
FRB’s currency swaps and Asia’s regional financial collaborative
frameworks as studied in other papers, observing the characteristics andproblems of the IMF’s crisis management framework.
Koeda clarifies that due to the IMF’s inability to shirk fiscal limitations, itwill find it difficult to provide “unlimited” funding. The IMF has instead set
up a more flexible lending framework. Specifically, the establishment of theFlexible Credit Line (FCL) in 2009 made it possible for the IMF to provide
funding to countries with strong economic fundamentals without imposing
access limits or conditionality. However, there has not been visibly active
use of the FCL. One reason that has been indicated is the rigorous loan
qualification criteria (Reichmann and Resende, 2014). In theory, theexistence of a liquidity supply function can help prevent a liquidity crisis.
Thus, it is not necessarily accurate to say that this function is ineffective
just because it is not in use. However, the lending framework likely needs
further revisions. Koeda suggests that it would be meaningful to enhance
the ability to preapprove lending criteria and respond rapidly to a crisis as
well as simultaneously set up a new framework in which loans could be
provided to numerous countries simultaneously.
Even without the ability to provide unlimited funding, the IMF can still
fulfill a critical role as a “crisis manager.” However, because of the strong
lingering stigma against the IMF and growing presence of otherinternational lenders of last resort, such as the FRB, Koeda indicates thatproviding a global viewpoint beyond national and regional benefit andcontributing to appropriate policy execution are major issues for the Fund.
Further, although enhancing multilateral dialogues could also be effective,
dealing appropriately with the rapidly changing global economy is difficult.
Further, even if the IMF is able to provide the appropriate advice, a nationin crisis that does not request the IMF’s funding will not be bound to
execute policy based on that advice; therefore, as indicated by Koeda, IMF’s
policy surveillance activities have major limitations.

10. Conclusion
If we observe financial risk management from the micro perspective, weclearly see the limits of financial risk analysis from the experience of the
global financial crisis. On the other hand, there is no universal analysis
method to replace it as yet. Hisashi Nakamura focuses on investor behavior,
moral hazard, and information contained within the yield curve, conducting
individual analyses from new angles on specific issues. However, the resultsof these analyses are, by nature, limited to providing suggestions. Actual
implications for risk management require further study.
Yukihiro Yasuda specifically focuses on corporate finance from a micro
perspective, examining funding procurement behavior for corporations
during the global financial crisis. The results of his analysis suggest thatthe corporate bond and bank lending markets played complementary roles
to one another. His suggestion has implications that instead of the
traditional adversarial model applied to the relation between direct andindirect finance, the joint inter-workings of these two funding procurement
routes can function healthily. Going forward, with the experience provided
by the global financial crisis, it will be critical to analyze the sort of effects
leveled on corporate funding procurement behavior as financial institution
behavior and the relevant regulatory stance switches to a morerisk-emphasizing attitude.
These tendencies that been observed at the micro level among financial
institutions and financial markets, as well as corporate funding
procurement, will naturally be affected by future changes in monetary
regulation. As such, it is critical to consider financial risk management after
the global financial crisis when studying financial regulations. The issuepresented by Hanazaki—monetary regulations also invite financial

crisis—is crucial. Furthermore, Hanazaki indicates that though the world’s
eye is focused entirely on global monetary regulations, these global
regulations ignore the diversity in financial systems among different
nations. Further, if we include observations of the development of a banking
union in the EU as brought up by Sasaki, it is likely that there needs to begreater concern for local financial regulations as they pertain to the relation
among national, regional, and global levels.
On the other hand, in the study of the development of a banking union in
the EU as a financial crisis management tool, Sasaki indicates the issue
that optimal currency area theory, a theoretical framework for currency
integration, has not considered financial regulations to any significant
degree. Optimal currency area theory argues the importance of labortransfer, open economies, and fiscal transfers (fiscal unions) during
asymmetric shocks; however, it is likely necessary to consider the topic ofcurrency integration that the costs of differing monetary regulations andthe costs of unified monetary regulations are both significant.
Ogawa, Chikafumi Nakamura, Shimizu, and Koeda explore financial crisis
management as it was when confronted by the global financial crisis andthe Eurozone crisis from a macro perspective. While Ogawa opines on theoverall picture, Nakamura mentions the FRB, Koeda focuses on the IMF,
and Shimizu focuses on East Asia’s financial cooperative system, the CMIM.
An issue made clear by the global financial crisis is the liquidity crisis
caused by increased counterparty risk among financial institutions. In otherwords, they faced a crisis of liquidity in the US dollar. In response, the FRB
leveraged its power through the currency swap agreements it had
established with other major central banks. This means that the world did
not see such significant activity from the IMF, which had played a majorrole in balance of payment crises in the past. It may well have been that the
IMF’s limits as an international lender of last resort were revealed due to its
inability to provide US dollars on an unlimited scale. On the other hand, wecannot surely say that the FRB can always respond as an international
lender of last resort. During the global financial crisis, it had happened bychance that the US was in a situation requiring liquidity supply
domestically through the enactment of QE policies, meaning that its
internal and external policies were in sync, allowing the FRB to act;
however, if there had not been in sync, it is possible that it would haveprioritized the US domestic economy rather than international welfare.
Further, financial support in the Eurozone crisis from the troika systemamong the EC, ECB, and IMF was conducted under a collaborative systemwhereby the IMF did not have more than half of the decision-making rights.
The IMF’s financial support systems up to that point had been one-party
systems whereby the IMF alone would make decisions regarding support.
Further verification is likely necessary regarding the effectiveness of crisis
management provided by such financial support systems. On the other hand,financial cooperation in eastern Asia has seen the ASEAN+3 nations takethe experience of the 1997 Asian currency crisis and build the CMIM system
and AMRO surveillance framework while maintaining a complementaryrole with the IMF. At this stage, the goal is to decrease IMF links, limiting
the IMF’s enforcement of its monetary support conditions. It is an urgent
issue for the IMF to put together financial crisis management that is
effective from a macro standpoint when it comes to the IMF’s role as alender of last resort and the IMF’s relationship with regional financial
cooperatives.

References[1]Kobayashi, Kenta (2016) “Pricing Variation Models in Financial Markets
Constructed from Investment Behavior,” ed. Ogawa, Eiji, The Global

Financial Crisis and Interest Rates/Exchange Rates: Effects on
Currencies/Finance and Restructuring Valuation Methods, Tokyo
University Press.

(in Japanese)[2]Takamizawa, Hideyuki（2015）“ Impact of No-arbitrage on Interest Rate
Dynamics,” mimeo.
[3]Misumi, Takashi, Hisashi Nakamura, and Koichiro Takaoka（2015）“ Moral Hazard Premium: Valuation of Moral Hazard under Diffusive
and Jump Risks,” mimeo.
[4]Weil, Philippe （1989） “The Equity Premium Puzzle and the Risk-Free
Rate Puzzle,” Journal of Monetary Economics, 24: 401-421.
[5]Prasad, Eswar S. （ 2014 ） The Dollar Trap: How the U.S. Dollar
Tightened Its Grip on Global Finance, Princeton University Press.
[6]Reichmann, Thomas and Carlos de Resende（2014）“The IMF’s Lending
Toolkit and the Global Financial Crisis,” Background Paper, Independent
Evaluation Office, IMF.

Profile of Professor Eiji Ogawa,
Born in 1957, Hokkaido, Japan.
B.A.(Commerce) and Ph.D. (Commerce) from Hitotsubashi University.
Lecturer, Associate Professor, and Professor, Graduate School of Commerceand Management, Hitotsubashi University (April 1999–present).
Year 2009-2010, Dean of Graduate School, Graduate School of Commerceand Management, Hitotsubashi University, Year 2011-2014, Director andVice-President.
Visiting Scholar, Harvard University Department of Economics (1986–1988),
University of California, Berkeley, Department of Economics (1992),
International Monetary Fund Research Office (September 2000).
Specialty: International Finance
Major Publications:
Kokusai tsuka shisutemu no anteisei (The stability of the internationalmonetary system), Toyo Keizai Inc., 1998.
Chugoku no taitou to higashi Ajia no kinyu shijou (The rise of China andEast Asia’s financial markets) (jointly edited with the Ministry of
Finance, Policy Research Institute), Nippon Hyoron Sha Co., Ltd., 2006.
(in Japanese)
Ogawa, Eiji, ed. Ajia bondo no keizaigaku” (Asian bond economics), Toyo
Keizai Inc., 2009 (in Japanese)
Ogawa, Eiji, ed. Gurobaru inbaransu to kokusai tsuka taisei (Global
Imbalances and International Monetary System), Toyo Keizai Inc., 2013
(in Japanese)
Ogawa, Eiji, Japan Center for Economic Research ed. Gekiryuu ajiamaneeshinkou kinyuu shijou no hatten to kadai ( Torrent of Asia
Money-Development and Challenges of Emerging Financial Markets),
Nikkei Publishing Inc., 2015 (in Japanese)
Ogawa, Eiji, ed. Euro-ken kiki to sekai keizai: shinnin kaifuku no tame no
housaku to Ajia he no eikyou (The Euro Zone Crisis and the World
Economy: Measures to recover credibility and their effect on Asia),
University of Tokyo Press, 2015. (in Japanese)
Ogawa, Eiji, ed. Sekai kinyuu kiki to kinri, kawase, tsuuka, kinyuu e noeikyo to hyouka shuhou no saikouchiku (The Global Financial Crisisand Its Effect on Interest rates, Foreign Exchange Rates and Currencies
and Finance ad Rebuilding Evaluation Methods), University of Tokyo
Press, 2015. (in Japanese)i