Risks and Vulnerabilities in the U.S. Bond Mutual Fund Industry

Bouveret, Antoine; Yu, Jie

doi:10.5089/9781513582320.001

Cited by 2 publications

(4 citation statements)

References 31 publications

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“…Where 𝑅 𝐴 denotes the returns of bank A, 𝛼 is the threshold (5 percent in our example), and ℎ is the joint density of the returns of banks A and B (see Bouveret and Yu (2021) for details).…”

Section: Box 10 Assessing Contagion Through Conditional Analysismentioning

confidence: 99%

“…Contagion effects can be estimated by assuming that each vulnerable bank faces a FI issue. Statistical methods can be used to estimate the expected impact on other banks conditional on the affected bank facing a FI issue, modelled by a large shock to equity prices or CDS spreads (Bouveret and Yu, 2021;IMF (2020b). This study models the distribution of weekly returns using a Student distribution and use a Student copula to model the dependence between each bank (Box 10).…”

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confidence: 99%

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Nordic-Baltic Regional Report

2023

IMF Staff Country Reports

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Background on Risk and Context 1.Various international banking scandals concerning AML/CFT breaches have taken place in the Nordic Baltic region, with far-reaching economic and reputational consequences. Similar to other global scandals, most of these took place at a time when AML/CFT standards and their application were still at a nascent stage, with some instances in 2005 although they would be discovered well into 2015 and beyond, including some taking place up to 2017. These scandals have also shown the importance of international cooperation and AML/CFT strong regulatory frameworks. 2.In the Nordic Baltic region, the Danske case stands out due to its extensive cross-borderactivities among countries in the region, affecting in turn other financial institutions. This Danish bank acquired in 2007 the Finland-based Sampo Bank, which also had an Estonian branch. At this branch, during 2007-2013, 44% of all deposits came from non-residents customers. These customers conducted around 7.5 million transactions with an aggregated flow of money added up to approximately 200 billion euros. The Estonian branch had its own IT platforms, and the procedural documentation was written in Estonian or Russian. Therefore, Danske Bank lacked adequate awareness into these activities and wrongly assumed that the branch was compliant with the AML/CFT requirements established by the applicable regulations in Estonia. Around 15,000 customers were involved in suspicious transactions, including politically exposed persons and their business associates or family members. As per the Danish FSA reports, in 2012, non-resident Russian portfolios made up to 35% of the profits of the Estonian branch while the overall percentage of Russian clients in the branch was 8%. A critical report sent by the Estonian FSA was discussed at Danske's board but went ignored. The minutes of those meetings did not include any changes to the bank's AML/CFT controls. The bank was forced to close the Estonian branch in 2019 and pled guilty to fraud in the U.S, forfeiting $2 billion along with an additional fine for EUR 470 million in Denmark. 3.The geographical closeness to other former Soviet countries and the Commonwealth of Independent States (CIS) also sets the tone and the specific subset of threats and vulnerabilities. Several banks of the region have been affected by activities centered around the so-called oligarchs. The fall of the Soviet Union and subsequent privatization of its assets gave rise to this class of high-net worth individuals. A subset of these customers has been involved in opaque business practices and the obfuscation of their source of wealth, and in well documented cases, they have been acting as strawmen on behalf of powerful political figures. Several Nordic-Baltic countries became significant recipients of these funds, sometimes ill-gotten either due to political connections or due to illicit business practices and lack of accountability. The tracing of funds and the source of wealth of these customers is challenging due to the lack o...

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Section: Box 10 Assessing Contagion Through Conditional Analysismentioning

confidence: 99%

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confidence: 99%

Nordic-Baltic Regional Report

2023

IMF Staff Country Reports

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“…4 We demonstrate that these mechanisms were also at play in European money market funds during the COVID-19-turmoil. Exposure of MMFs to liquidity risk is of particular concern in the European case, where Bouveret and Danieli (2021) show that private-debt MMFs display a large and concentrated exposure to private money market instruments, which "are not very liquid even in normal times" (p.65). We demonstrate empirically that excess levels of liquidity transformation (proxied by the level of investment in illiquid assets) will lead to higher outflows from funds that are subject to the EU money market funds regulation.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Similarly, MMFs are commonly expected to raise liquidity by allowing assets to mature, rather than selling them in secondary markets. However, even though MMFs are generally perceived as safe and liquid investments, they are subject to credit and liquidity risks, in particular when investing in less frequently traded instruments such as commercial paper and certificates of deposit issued by the private sector (Financial Stability Board (2020), Bouveret and Danieli (2021)).…”

Section: Introductionmentioning

confidence: 99%