Academic journal article ABA Banking Journal

Can't Jump off This Island

Academic journal article ABA Banking Journal

Can't Jump off This Island

Article excerpt

SMALL, REGIONAL BANKS DAILY are handed little reminders that globalization has pretty much finished the work that financial deregulation started. The geographically insulated balance sheet is slowly disappearing. Boundaries and barriers have been dismantled. Economies and industries are tied together.

Now, "jump risks" are flattening the remaining landscape of regional banking. Geopolitical "jumps" like 9/11 cut across space and time. Such risk was always lurking about, but jump risk math provided increasingly tractable ways of analyzing jumps.

Sept. 11 is a vivid recent illustration of a geopolitical jump with a dramatic impulse response. (Naturally, my focus on other aspects of jump events is not intended to minimize the tragic direct consequences of those events.) A small place like Hawaii, on the other side of the planet, was nevertheless affected through tourism, its principal export and channel of transmission for external disturbances. Other external "jumps" in the last decade--typhoons, earthquakes and wars--had notable effects inside Hawaii. Whether physical or financial, jumps spare few today.

Academic economists remind us not to infer uniformity from these prior experiences. Uncertainty about the amplitude of the initial shock and duration and extent of the subsequent recovery ultimately is only resolved in the event itself. But these patterns at least can inform forecasting exercises or stress-scenario development.

A common pattern, a sort of benchmark trajectory, has an initial, sharply precipitous decline (or increase!) followed by a gradual--sometimes not fully convergent--return to prior values. This trajectory is illustrated for a number of Hawaii tourism shocks in the accompanying graph. Relative to the benchmark, the recent "Iraq" event was largely anticipatory. …

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