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The global financial crisis has magnified the role of Financial Sector Surveillance (FSS) in the International Monetary Fund's activities. This chapter surveys the various steps and initiatives through which the Fund has increasingly deepened its involvement in FSS. Overall, this process can be characterised by a preliminary stage and two main phases. The preliminary stage dates back to the 1980s and early 1990s, and was mainly related to the Fund's research and technical assistance activities within the process of monetary and financial deregulation embraced by several member countries. The first ‘official’ phase of the Fund's involvement in FSS started in the aftermath of the Mexican crisis, and relates to the international call to include financial sector issues among the core areas of Fund surveillance. The second phase focuses on the objectives of bringing the coverage of financial sector issues ‘up-to-par’ with the coverage of other traditional core areas of surveillance, and of integrating financial analysis into the Fund's analytical macroeconomic framework. By urging the Fund to give greater attention to its member countries' financial systems, the international community's response to the global crisis may mark the beginning of a new phase of FSS. The Fund's financial sector surveillance, particularly on advanced economies, is of paramount importance for emerging market and developing countries, as they are vulnerable to spillover effects from crises originated in advanced economies. Emerging market and developing economies, which constitute the majority of the Fund's 187 members, are currently the recipients of over 50 programmes of financial support from the Fund (including those of a precautionary nature), totalling over $250 billion.

Financial crises (FC) remain a global threat to the financial stability of financial institutions and international bank regulatory capital requirement (IBRCR) by the Committee on Banking Supervision provides mechanism for curbing the adverse effect of FC on financial stability. Hence, the purpose of this study is to provide, evidence on how IBRCR tones down the adverse FC effects on bank financial stability (BFS).

The study uses 102 economies between 2006 and 2016 in a two-step dynamic generalized method of moments model.

The results show that while FC and IBRCR negatively and positively impact BFS, respectively, it is observed that under the increasing presence of IBRCR, the negative effect of FC on BFS declines. Additionally, the results show that economies that maintain minimum IBRCR above 10.5% recommended by BASEL III are able to reinforce a significant reduction in the negative effect of FC on BFS.

These findings imply that in as much as financial crisis is injurious to BFS, regulators and policymakers can rely on IBRCR to avert the injurious effects of FC on BFS. Clearly, while IBRCR is necessary for reinforcing BFS through FC, bank managers who maintain IBRCR above the recommended 10.5% stands a better chance to taming the avert effect of FC on BFS. Additionally, economies that have not full adopted the BASEL minimum capital requirement may have to do so given its potential of dampening the adverse effect of FC on BFS.

The study presents an international perspective of how BASEL capital requirements can help tame global financial crisis using a global sample of 102 economies.

The purpose of this paper is to provide empirical evidence on how 1999–2001 dot-com crisis and 2007–2009 subprime crisis affect the gains from international diversification from the perspective of US investors.

A conditional international CAPM with asymmetric multivariate GARCH-M specification is used to estimate international diversification gains.

The authors find that over the entire sample period, the average gains from international diversification is statistically significant and about 1.253 percent per year. During the subprime crisis period, the average gains decreases to about 0.567 percent per year, but it increases to 2.829 percent per year during the dot-com crisis.

These research findings although confirm the conjectures that international financial turmoil tends to increase the co-movements among global financial markets, are in contrast to the conjectures that international diversification does not work during the financial crisis as evidence from the dot-com crisis. Therefore, future research on international diversification should not just focus on the correlation among international financial markets and should adopt a fully parameterized asset pricing model to study this research topic.

Given the empirical results found in this paper that international diversification gains may be decreasing or increasing during the financial crisis, as long as investors are not able to predict international financial crises, it is the average gains from international diversification over the longer periods that should encourage investors to diversify, regardless of potentially lower benefits over the shorter periods of time.

The major value of this paper is that although the increase in the conditional correlation during the financial turmoil is consistent with previous studies, the empirical results clearly show that the impact of a financial crisis on the gains from international diversification cannot be solely determined by the correlation between domestic and world stock market returns since the gains also depend on the unsystematic risk from the domestic stock market. Consequently, it is premature for previous studies to conclude that the gain from international diversification is diminishing due to an increasing correlation among international stock markets during the financial crisis.

This paper aims to explain the importance of the international cooperation and coordination among supervisory authorities of different countries in event of banking crises. It also suggests that the harmonious relationship has to be attained in the adoption of ex ante financial regulatory measures and ex post compensation schemes. In other words, the paper highlights the linkage between ex ante preventive regulatory measures and ex post compensation schemes, on the one hand, and cooperation among national regulatory and supervisory authorities in globalized financial markets. Although the paper is relevant to most developed and emerging financial markets, it chooses Hong Kong as a context to examine this proposal. In the current literature, there are no similar approach linking these two paradigms and examining them in an integrated context.

The paper adopts a conceptual framework after the 2008 global financial crisis and takes Hong Kong, an international financial centre in which numerous branches or subsidiaries of foreign financial institutions locate, as an example to examine how the coordination with foreign supervisory authorities are being conducted and to analyse whether the present regulatory framework in Hong Kong is effective and sufficient against banking crises. Through the review of the literature, the important link between ex ante regulatory measures and ex post compensation schemes is found to be significant in adopting proper solutions.

Through analysing the Hong Kong financial regulators’ reports on the collapse of Lehman Brother, the paper finds out that even though there is some weakness in the cooperation and coordination between regulators after the 2008 financial crisis, Hong Kong is still in the progress of proposing bank special resolution regime. Although there has been some awareness on the issue of coordination between home and host states regulatory measures, there is still a lack of awareness of the connection between regulatory measures and compensation schemes.

Conflict of interests could hardly be prevented in the course of cooperation and coordination among home and host regulatory authorities, and the coordination of the important link between ex ante regulatory measures and ex post compensation scheme which involves legal and economic analyses is a challenging task.

The paper’s findings show that there are practical implications for the recent rapid development of special resolution regime for global systematically important financial institutions against future banking crises and for managing the balance between the adoption of financial supervisory laws and special resolution measures.

This paper suggests that the harmonious coordination between ex ante regulatory measures and ex post compensation schemes has to be achieved through international context to avoid the absurd situations. This conceptual integrated framework presented in the current paper is not touched upon by the existing literature. This important concept is valuable for future research, and it is significant to financial regulators, legislators and the government in adjusting policy against banking crises in both developed and developing countries.

The Asian Monetary Fund, proposed during the 1997–1998 Asian Financial Crisis, was an attempt by East Asian nations to develop collective policy responses to financial crises and provide rapid distribution of emergency funding. It was envisaged that policy prescriptions would exhibit greater regional sensitivity and prevent contagion. The proposal was rejected because of the perceived perpetuation of moral hazard, duplication and conflict with the International Monetary Fund and belief that historical disunity would prevent successful collaboration. This paper advocates, in the context of international financial architecture reform, enhanced East Asian regionalism is crucial to prevent and manage future financial crises.

In recent decades, interconnections between countries have increased substantially worldwide as the process of integration and globalisation intensifies, with a positive impact in terms of economic development, but, also with a vulnerability to external shocks, such as the financial contagion phenomenon. The analysis of this research field becomes even more relevant in the context of a new major exogenous shock, but which, this time, has different specificities, being a sanitary crisis. Thus, the chapter aims to investigate the impact of crises on capital market volatility for the period of 1995–2021, using the bibliometric analysis highlighting the dynamics of the literature and potential future research directions through a science mapping that enables investigating scientific knowledge. In order to explore the development of the research field in terms of publications, author impact, affiliated institutions and countries, citation patterns, trending topics, relationship between keywords–authors–journals, abstracts’ analysis, authors and documents clustering by coupling, multiple correspondence analysis of major research themes, keyword analysis, co-citation analysis and authors, institutions and countries collaboration analysis have been applied. Hence, almost 500 publications from Web of Science database covering the period 1995–2021 have been extracted. The empirical findings emphasise the conceptual structure, with clusters focussing mainly on long-term receivables, market efficiency, volatility, dynamic conditional correlation (DCC)-GARCH models, asymmetric effects. According to the intellectual structure of the field, Lambertides N., Zopiatis A., McAleer M. or Savva C. S. are the most representative authors for the sub-area of volatility topic; whilst Balcerzak A. P., Pietrzak M. B., Zinecker M., Meluzin T. and Faldzinski M. are the reference names for the whole spectrum of DCC-GARCH models’ topic. Jayasekera R., Lundblad C., Choundhry T., Gupta R. and Demirer R. are the authors mostly associated with asymmetric effects’ topic, whilst Thorp S., Bouchaud J. P. and Dungey M. with the quantitative finance. The Journal of Banking & Finance, the Journal of International Money and Finance and the International Review of Financial Analysis as well as Economic Modelling, Research in International Business and Finance and the International Journal of Finance & Economics are the most prolific journals in the field of capital flow and financial crises. This chapter’s main contribution is to build a structure of knowledge for the impact of crises on capital market volatility, elaborate and classify empirical research into relevant dimensions that can be used as a reference for comprehensively developing research. Finally, the bibliometric analysis results may provide insight into future research prospects. Our conclusions offer some recommendations for market practitioners and policy-making.

This work presents a model of a two-period economy to discuss the link between the precautionary motivation for holding international reserves and the country's monetary policy concerns due to a crisis.

There are two possible states of nature in the second period of the economy: a normal state and a crisis state. These states of nature represent uncertainty to the policy maker and he can insure against a crisis. The household has a constant-elasticity-of-substitution (CES) utility function, where utility depends on consumption and money.

By allowing money in the utility function and in the household financial constraint and considering that the objective of the central bank is to smooth inflation, it is concluded that monetary policy plays a role in the precautionary motivation of holding international reserves.

The model can be used to calculate optimal reserves holdings in its complete or even in its simplified version. Furthermore, it is possible to evaluate the impact of the intra-temporal substitution elasticity between consumption and real money in the decision of accumulating international reserves.

Higher intra-temporal substitution elasticities implies in more insurance via international reserves, and this discussion is not found in the existent literature on international reserves.

This paper sets out to argue that, due to a stable set of economic policies over the past decade, today Brazil is much more resilient to international financial crises than in the 1990s.

The paper presents preliminary macroeconomic data in a country case study.

The paper concludes that the initial impact of the current international financial crisis on Brazil has been much less severe than similar crisis episodes in the past.

Given that the crisis is still unfolding, the paper presents only preliminary data regarding its impact on emerging markets.

The paper suggests that emerging markets should adopt flexible exchange rate regimes and stable macroeconomic policies as a means to reduce their exposure to international shocks.

The paper makes an initial diagnosis regarding the impact of the international financial crisis on emerging markets that have adopted sensible economic policies, and is of interest to scholars, business people, and policymakers in developed and emerging countries.

This paper aims to investigate the moderating effects of a board of directors on foreign direct investment (FDI)’s international diversification in Turkey.

A sample of Turkish multinational firms with FDI was used. Two different aspects of international diversification were considered: the relationship between international diversification and financial performance and the moderating effect of board composition on the relationship between international diversification and the firm’s financial performance. Firm-level data were obtained from the Istanbul Stock Exchange in Turkey.

The findings reveal that international diversification leads to better financial performance according to market-based measures. On the other hand, this study indicates that the board characteristics have a moderating effect on international diversification and financial performance.

The study is based on a sample of publicly listed firms in Turkey, and this restriction limits the generalizability of the findings.

The internalization efforts of Turkish FDI have led to better financial performance in terms of market-based measures. The results have stated that the interest of independent outside directors is aligned with lower-risk investment decisions. Independence of independent outside directors in Turkey is interrogated by practitioners or the Capital Markets Board of Turkey. The larger board size which a moderator variable is provided, the wider shareholder value in Turkey is.

One can understand that the development of market-supporting institutions provides the support for entry to an emerging economy which is inefficient or incomplete markets and highly concentrated family ownership.

These findings provide important implications for corporate governance and highlight the need for further research on the role of governance in firm internationalization. This study not only helps to understand how board characteristics affect the choice of international diversification decisions, but the results also allow to assess the performance implications of these choices for a particular period.

The purpose of this paper is to highlight how the basic binomial option pricing model (BOPM) might be used by regulators to help formulate rules, prior to financial crisis, that help prevent loan overstatement by banks in emerging market economies undergoing financial crises.

The paper draws on the theory of soft budget constraints (SBC) to construct a simple model in which banks overstate loans to minimize losses. The model is used to illustrate how guarantees of bailout assistance (BA) (to banks) by crisis stricken countries’ financial authorities may encourage banks to overstate loans and delay the implementation of IFRS for loan valuation. However, the model also illustrates how promises of BA may be depicted as binomial put options which provide banks with the option of either: reporting loan values on poor projects accurately and receiving the loans’ liquidation values; or, overstating loans and receiving the guaranteed BA. An illustration is also provided of how authorities may use this representation to help minimize bank loan overstatement in periods of financial crisis. In order to provide an illustration of how the option value of binomial assistance may evolve during a financial crisis, the model is generalized to the Mexican financial crisis of the late 1990s. During this period, Mexican authorities’ guarantees of BA to the nation’s largest banks encouraged those institutions to overstate loans and delay the implementation of (previously adopted) international “best practices” based loan valuation standards.

Application of the model to the Mexican financial crisis provides evidence that, in spite of Mexico’s “official” 1997 adoption of international “best accounting practices” for banks, “iron clad” guarantees of BA by the country’s financial authorities to Mexico’s largest banks provided those institutions with an incentive to knowingly overstate loans in the late 1990s and early 2000s.

The model is compared against only one country in which the BA was directly infused into banks’ loan portfolios. Thus, as conceived, it is directly applicable to crisis countries in which the bailout took this form. However, the many quantitative variations of SBC models as well as recent studies which have applied the binomial model to other forms of bailout (e.g. direct purchases of bank shares by authorities) suggest that the model could be modified to accommodate different bailout scenarios.

The model and application show that guaranteed BA can be viewed as a put option and that ex-ante regulatory policies based on the correct valuation of the BA as a binomial option might prevent banks from overstating loans.

Use of the binomial or similar approaches to valuing BA may help regulators to determine the level of BA that will not encourage banks to overstate the value of their loans.

Recent research has used the BOPM to value, on an ex-post basis, the BA which appears on the balance sheet of institutions which have been rescued. However, little research has advocated the use of this type of model to help prevent, on an ex-ante basis, the overstatement of loans on poor projects.