Measuring Macroprudential Risk through Financial Fragility: A Minskyan Approach
This paper presents a method to capture the growth of financial fragility within a country and across countries. This is done by focusing on housing finance in the United States, the United Kingdom, and France. Following the theoretical framework developed by Hyman P. Minsky, the paper focuses on the risk of amplification of shock via a debt deflation instead of the risk of a shock per se. Thus, instead of focusing on credit risk, for example, financial fragility is defined in relation to the means used to service debts, given credit risk and all other sources of shocks. The greater the expected reliance on capital gains and debt refinancing to meet debt commitments, the greater the financial fragility, and so the higher the risk of debt deflation induced by a shock if no government intervention occurs. In the context of housing finance, this implies that the growth of subprime lending was not by itself a source of financial fragility; instead, it was the change in the underwriting methods in all sectors of the mortgage markets that created a financial situation favorable to the emergence of a debt deflation. Stated alternatively, when nonprime and prime mortgage lending moved to asset-based lending instead of income-based lending, the financial fragility of the economy grew rapidly.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dimitrios P Tsomocos, 2006.
"Towards a Measure of Financial Fragility,"
Economics Series Working Papers
2006-FE-04, University of Oxford, Department of Economics.
- Lea Zicchino & Dimitrios Tsomocos & Charles Goodhart & Oriol Aspachs Bracon, 2006. "Towards a Measure of Financial Fragility," FMG Discussion Papers dp554, Financial Markets Group.
- Oriol Aspachs & Charles A.E. Goodhart & Dimitrios P. Tsomocos & Lea Zicchino, 2006. "Towards a Measure of Financial Fragility," OFRC Working Papers Series 2006fe04, Oxford Financial Research Centre.
- Oriol Aspachs & Charles Goodhart & Dimitrios P. Tsomocos & Lea Zicchino, 2006. "Towards a measure of financial fragility," LSE Research Online Documents on Economics 24508, London School of Economics and Political Science, LSE Library.
- Yasushi Suzuki, 2005. "Uncertainty, financial fragility and monitoring: Will Basle-type pragmatism resolve the Japanese banking crisis?," Review of Political Economy, Taylor & Francis Journals, vol. 17(1), pages 45-61.
- L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 807-828, July.
- Luiz Fernando R. De Paula & Antonio José Alves, Jr., 2000. "External Financial Fragility and the 1998-1999 Brazilian Currency Crisis," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(4), pages 589-617, July.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_716. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.