Archive for the ‘Financial Markets/ Finance’ Category

How banks lobby and capture regulations..

August 21, 2019

Superb paper by Deniz O Igan and Thomas Lambert:

In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes.

The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis.

While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.

I think in other sectors regulatory capture is not as straight forward. In financial sector it is blatant. You see central bankers and securities regulators join financial firms pretty freely.


What drives Trump to nominate Judy Shelton at Federal Reserve? Try push countries towards Fixed exchange rates?

August 19, 2019

All kinds of things happening.

Barry Eichengreen writes that Trump wishes to go back to the earlier days when exchange rates were fixed. Why? The idea is to compress US Trade deficit by raising tariffs. However,  other countries allow currencies to depreciate netting out the effects of tariff. This means countries should be pushed to fix their exchange rates which leads to nomination of Judy Shelton who is a major votary of gold standard:


Network Analysis of NEFT Transactions in India

August 16, 2019

Shashi Kant and Sarat Chandra Dhal of RBI in Aug-2019 Bulletin article do network analysis of NEFT transactions in India:

Since the global crisis in 2008, network models have emerged as a tool for analysis of interbank financial exposures. The recent literature has accordingly emphasised the role of network analysis of interbank payment transactions in complementing the existing framework for financial stability analysis (Caccioli et al., 2018). Where central banks are the operators of payment and settlement infrastructure, as in India, a comparative advantage is that it is relatively easier to acquire clean, structured and accurate data that are crucial for network analysis.

Surprisingly, therefore, there has been little research on the interconnectedness of participating entities in the payment system in India. The motivation for
this study is to bridge this gap as a first attempt in the Indian context. We use the National Electronic Fund Transfer (NEFT) system as a case study. Operated by the Reserve Bank of India (RBI), it is India’s largest payment system by volume and a game changer in the retail payments sphere.

We examine the network topology of the NEFT system and analyse financial interconnectedness using network metrics of centrality. Using bilateral transaction information for each participating institution aggregated for March and April months of 2019, we build a network graph depicting the linkages. We use these data to explore the connections between various groups of banks in order to identify patterns. We also seek prominent players in the payment network in order of their systemic importance using a non-parametric methodology (Jaramillio et al., 2014). 

In summary, our findings show that out of the public sector, private sector and foreign banks that constitute around 83 per cent and 87 per cent of the
total transactions by value on NEFT in the month of March and April respectively, the flow from private sector to public sector banks is very large, with public
sector banks being net receivers in the system. We also present evidence of strong connections between public and public sector, and between private sector
banks, nascent role of co-operative banks and newly established payment banks in NEFT. 

Lots of amazing pictures of networks..

A tale of two countries: Cash demand in Canada and Sweden

August 9, 2019

Superb paper by Walter Engert and Ben S. C. Fung (Bank of Canada) and Björn Segendorf (Riksbank). They try and understand why cash demand is different in the two countries.

First, Sweden and Canada economies are quite similar:


100 years of Bank of North Dakota: A rare public sector bank in US

August 8, 2019

I had blogged about how there are two public sector  banks in US: Bank of North Dakota and Territorial Bank.

BND is celebrating its 100 years and has put up a useful website to track its history:


When Central European countries gave loans in Swiss Francs and it backfired..

August 7, 2019

Before the 2008 crisis, certain Central Europeans took loans in Swiss Francs given the stability etc. As Swiss entered the crisis and did their own thing, the CHF appreciated given its safe haven status. This led to problems for these countries as the borrowers had to pay more due to CHF appreciation. Some respite was there when Swiss National Bank decided to target their currency to prevent this appreciation. But once they removed the target, the problems again continues. This led to some of these economies to restructure their loans in either Euro or local currency.

For instance, the Slovenian government has decided to restructure in Euro and asked their central bank to face losses if any. They sent a letter to ECB for its view as per the law. ECB replied raising concerns over this move saying it is the role of the government and not Slovenia central bank.

Andreas Fischer and Pınar Yeşin in this SNB working paper look at evidence from other countries:

This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in
Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period.

Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.


Sweden’s march towards a cashless economy got a slight jolt

August 5, 2019

As one thought Sweden will go cashless in just a few years, there has been some fightback from cashusers.

John Detrixhe reports that notes and coins in circulation has gone up by 7% for the first time in 10 years:

Sweden is at the vanguard of countries embracing digital payments, so much so that the Scandinavian country could go effectively cashless in less than four years. In 2018, however, the amount of banknotes and coins in circulation increased for the first time in more than a decade.

Swedish banknotes and coins in circulation rose 7% last year, to 62.2 billion krona ($6.5 billion), according to the European Central Bank. It was the first yearly increase since 2007; the value of cash in circulation has dropped by around 45% over that period.

Are Swedes falling back in love with cash? Probably not. Groups that represent seniors and other vulnerable people have pushed backagainst the country’s rapid shift to digital payments, but last year’s uptick in cash circulation is due, in part, to technical factors. Namely, there was a currency overhaul in which old banknotes and coins could be exchanged for new ones (pdf).

Some Swedes may also have boosted their personal holdings of banknotes and coins in case of a crisis. The Swedish Civil Contingencies Agency recently recommended that Swedes put aside some cash in case of an emergency, such as a data center glitch that causes payments systems to go offline, or terrorism or a cyber attack.

However, at best this has halted the march a bit:

These factors are probably one-off instances, as Swedes continue to switch to card payments and mobile payment apps like Swish. This puts government officials in a tough position, as not everyone is ready for digital transactions. Poorer people and the elderly tend to rely on cash. As more and more payments take place through smartphones (even going to the toilet in Sweden can require an app), it can be difficult for people who aren’t digitally savvy to keep up. Others want to preserve their privacy, or simply want to keep their payment options open.

All eyes on Sweden..

The structure of global trade finance: Evolution from market based to bank based

August 5, 2019

Olivier Accominotti and Stefano Ugolini in this piece look at evolution of global trade finance.

Trade finance is the oldest domain of international finance. From the very beginnings of the history of international commerce, merchants and firms have been in need of working capital in order to finance their commercial transactions and have looked for methods to reduce the risks involved in long-distance trade. However, relatively little is known about how trade finance evolved over the very long run. In a recent study, we review the main developments in international trade finance from the Middle Ages to today and compare its structure and governance across time (Accominotti and Ugolini 2019). Our goal is to understand whether alternative structures existed in the past that might provide regulators with insights on how to design more resilient trade finance.

They say that earlier trade finance was mainly through bills of exchange and was more market driven. Now it is mainly driven by Letters of Credit via banking system:

The 2008 crisis has revealed how banking and liquidity problems can have far-reaching consequences on global trade. This column reconstructs the evolution of global trade finance from the Middle Ages until today. Just like in medieval times, today’s global trade is predominantly financed through banks so that banking problems automatically transmit to international trade. In contrast, from the 16th to the 20th century, trade finance was mostly market-based. The decline of market-based trade finance was triggered by major geopolitical shocks.

However, much of this market was centralised in London. Now this bank-based system is widely spread:

The long-run evolution in the structure of international trade finance has implications for its governance. In the 19th century, the global trade finance market was highly centralised and regulation was exercised by the leading political and economic power of the time – the UK. London’s monopoly over the trade finance market was criticised by potential competitors as it granted UK financial institutions a significant rent. By contrast, the more decentralised structure that prevails nowadays makes international control over the trade finance market less feasible. While this market structure clearly has advantages, it also makes exporting and importing firms more dependent on local credit conditions and pushes back the governance of the trade finance market into a sort of anarchy.


Analysing capital flows: Push factors, pull factors and pipes

August 2, 2019

Missed pointing to this speech by Mark Carney, Governor Bank of England.

He gave the speech in June-2019 and says we need to lower volatility in capital flows:

Today, I want to examine what drives capital flow volatility and, in the process, sketch an agenda for sustainable capital flows in the new world order.

Specifically, what should be the priorities to increase sustainable cross border capital flows? How many are the responsibility of the receiving country? What about the advanced economies who set the tone for the global financial cycle? And to what extent does the structure of the international monetary financial system itself, including the global safety net, determine safe flows?

To begin to answer these questions, the Bank of England is developing a holistic “Capital Flows-at-Risk” framework that assesses the relative contribution of the three drivers of Capital Flows-at-Risk:
 ‘Pull factors’ – domestic conditions and institutions that affect the relative attractiveness of investing in an individual country.
 ‘Push factors’ – that determine global risk appetite and financial conditions, particularly the level and prospects for US monetary policy and financial stability.
 ‘The Pipes’ – the structure of the global financial system itself, particularly the degree to which it dampens or amplifies shocks.

How these three Ps drive capital flows and their volatility plays a crucial role in macro and financial markets stability.

Do closer political ties with a global superpower improve sovereign borrowing conditions?

August 1, 2019

Everything humans create is basically gamed.

Gene Ambrocio and Iftekhar Hasan of Bank of Finland in this paper look at how friends can be bought at world stage for an exchange: (more…)

Constitution of South Africa includes mandate for its central bank..

August 1, 2019

Mr Lesetja Kganyago, Governor of the South African Reserve Bank was recently reappointed as Governor of South Africa Reserve Bank. The central bank has been under pressure as it is one of the few banks which is held privately.

In a recent speech, Kganyago talks about the mandate of the central bank. It is interesting to note that it is mentioned in South Africa’s constitution (Like Swiss):


From Market to Exchange: Early regulation and social organisation on the Johannesburg Stock Exchange, 1887-1892

July 30, 2019

Mariusz Lukasiewicz (Lecturer in African History at the Institute of African Studies, University of Leipzig) writes a fab post:

This investigation provides new insights on the early local, regional and global development of Africa’s oldest existing stock exchange. Founded in November 1887, the Johannesburg Stock Exchange (JSE) was not an isolated stock exchange in the South African Republic (ZAR), but an increasingly global financial institution attracting members and capital from beyond southern Africa’s expanding colonial frontier. Confronted by an uncertain political environment, the JSE’s first five years of operation tested the institution’s ability to balance the needs of regulation and promoting access to its international capital market.
Although the basic structure of the JSE’s corporate organisation resembled the LSE in many ways and principles, the early JSE pioneers did not intend to replicate London’s stock exchange system in an understandably very different financial climate. Unlike in London, where the powers of the proprietors were already separated from the powers of the subscribers in the early 1830s, the development of the JSE was guided by the rivalry for influence over governance between the General Committee and the JSE’s landlords, the Johannesburg Estate Company. The division between ownership and operation, facilitated the emergence of the JSE’s regulatory sub-committees, investigating disputes and controversies over the rights and obligations of members. Woollan’s JECC was the owner, operator and regulator of the JSE until the formal takeover by Barney Barnato’s Johannesburg Estate Company in April 1889, unleashing a new era of ownership and regulation. Despite having its own General Committee, the JSE was fully dependent on the fixed assets and capital of the Estate Company, leaving it exposed to the regulatory dictatorship of Barney Barnato. Far more interested in membership fees and rent income from offices inside the JSE building, Barnato’s dominance came in direct conflict with the General Committee’s vision of growing the market for JSE-listed securities.
With different stakeholders advocating competing visions of institutional development, the first five years of the JSE’s existence tested the financial institution’s ability to balance the needs of regulation and promoting access to Africa’s largest capital market. Although a number of stock exchanges were already in operation on the African continent in the final quarter of the 19th century, the JSE emerged as a financial industry leader in what soon became the largest and wealthiest city in southern Africa. For all the eagerness and enthusiasm displayed by many Johannesburg-based speculators in expanding the volume and value of securities on the Official List, the development of the Exchange was constrained by the power struggle between the JSE’s General Committee and the Estate Company. By analyzing the JSE’s early rules and social organization, this study contributes to the better understanding of early stock exchange operation and organization in colonial South Africa.

Are some dictators more attractive to foreign investors?

July 29, 2019

Abel François, Sophie Panel and Laurent Weill in this Bank of Finland working paper:

Since political uncertainty is greater in dictatorships than in democracies, we test the hypothesis that foreign investors scrutinize public information on dictators to assess this risk. In particular, we assume they use five suitable dictators’ characteristics: age, political experience, education level, education in economics, and prior experience in business. We perform fixed effects estimations on an unbalanced panel of 100 dictatorial countries from 1973 to 2008 to explain foreign direct investment (FDI) inflows.

We find that educated dictators are more attractive to foreign investors. We obtain strong evidence that greater educational attainment of the leader is associated with higher FDI. We also find evidence that the leader having received education in economics and prior experience in business is associated with greater FDI. By contrast, the leader’s age, and political experience have no relationship with FDI. Our results are robust to several tests and checks, including a comparison with democracies.



Inflation targeting in era of low inflation: Australia edition

July 26, 2019

Philip Lowe, Governor of RBA in this speech looks at two qs: Why is inflation low in world economy and Australia? Is inflation targeting appropriate for this low inflation era?

First why is inflation low?


Every era’s monetary and financial institutions are unimaginable until they’re real

July 25, 2019

Tyler Cowen in a Bloomberg piece reflects on the 75 years of Bretton Woods. He sums up the key idea on his MR blog:

That is the column subtitle, the actual title is “The Lesson of Bretton Woods.”  Note that yesterday was the 75th anniversary of the signing of the final agreement.  Here is one excerpt:

The Bretton Woods arrangements also seemed highly unlikely until they were in place. They involved a complicated system of exchange rate pegs, capital controls and a “gold pool” (and other methods) to control gold prices and redemption ratios. What’s more, the whole thing was dependent on America’s role as global hegemon, both politically and economically. The dollar still was tied to gold, and the other major currencies tied to the dollar, but as the system evolved it required that no one was too keen to redeem dollars for gold (the French unwillingness to abide by this stricture was one proximate cause of the collapse of Bretton Woods).

I don’t think a monetary economist from, say, 1890 could have imagined that such an arrangement would prove possible, much less successful. Yet the Bretton Woods arrangements had a wonderful track record, as the 1950s and 1960s generated strong economic growth for both the U.S. and Western Europe.

At the same time, once Bretton Woods ended in the early 1970s, few people thought it was possible to turn back the clock. The system required the U.S. to be a creditor nation, to hold much of the world’s gold stock, and for countries such as France to defer to American wishes on gold convertibility. Once again, the line between an “imaginable” and “unimaginable” monetary arrangement proved to be a thin one.

As I point out in the piece, today’s arrangements of fiat currencies and (mostly) floating rates were unimaginable to most previous thinkers, including Keynes.  Here is the column’s closing bit:

So as you consider the legacy of Bretton Woods this week, remember that core lesson: There will be major changes in monetary and institutional arrangements that no one can even imagine right now. Assume the permanency of the status quo at your peril.

So true! I mean take the case of digital currency, fintech and so on..

Bretton Woods @ 75: A few surprises here, some similarities there

July 22, 2019

My new article in Moneycontrol on the 75th anniversary of Bretton Woods.

Why and how geographic differences matter in economic well-being?

July 22, 2019

Superb interview of University of California, Berkeley economist Enrico Moretti.

He explains why despite the internet people continue to work in select concentrated locations:

EF: During perhaps the first decade or so of the World Wide Web, there were numerous predictions that geography would disappear or almost disappear as an issue in knowledge work. It seemed as if white-collar workers, if one believed the predictions, would be able to work from anywhere.

Moretti: Yes.

EF: What happened?


Names of new digital banks: N26, 86400!

July 19, 2019

Australia has licenced a new digital bank names 86400 which draws its name from 86400 seconds in a day. Move over 24*7 banking, we are talking about banking every second. What next?

In Germany, we have a bank number N26 which has been shortened from Number 26. In a rubric cube, we have 26 number of small cubes. The idea is a rubric cube is complex but if you the correct combination, one can move quickly.

I wrote this piece which tracked how names of banks have changed in India over the years. It is interesting how banks were named based on the times. Thus most earlier banks were named either on the place name or the family name which was prominent. Bank names based on community were also important. The idea was to build trust.

Now bank names are based on digital technology and the idea is to show it will be fast and always connected.

The Banco de España and its promotion of economic history research

July 18, 2019

Spain’s central bank has been actively promoting research in economic history.

Governor Pablo Hernández de Cos in a speech lists the steps take to promote history:

Firstly, the Banco de España regularly organises conferences focusing on the discussion of aspects relating to economic history. This year, for example, on the occasion of the sixtieth anniversary of the Stabilisation Plan, the Banco de España will, next October, be organising
a conference in Barcelona focusing on the analysis of the Plan. It will likewise pay tribute to the figure of Joan Sardà. I trust you will be able to join us at this conference.

Also, since 2015 the Bank has organised annually a top-level international economic history conference aimed at academia. In recent years, both our central bank researchers and external researchers financed by us have been selected to present their papers. In this year’s edition, the conference has been jointly organised with the CEPR’s Economic History section.

Secondly, since 2009, the Banco de España has had a biannual programme in place for economic history research grants. Under the programme, universities commit themselves, following an agreement signed with the Bank, to pursuing the research selected and to
presenting and publishing their findings. The possibility of collaboration between researchers from both institutions is also envisaged.

Since 1980, under the initial backing of Luis Ángel Rojo, the Bank has published a collection of monographs relating to monetary and financial history, Spanish and international alike, under the name “Economic History Studies” (more familiarly known as the “Red Series”). To
date, this collection had solely included papers prepared or financed by the Banco de España. Currently, however, with a view to extending and maintaining its continuity, we are assessing opening it up to other research not necessarily financed by the Bank.

Lastly, allow me to stress another of the grounds for a publication such as that we are presenting today. It is a question of transparency, understood as the possibility of sharing information with society as a whole. As I pointed out in one of my early public appearances
as governor of the Banco de España, I consider making high-quality statistical information available to researchers as absolutely crucial for sound analyses and research enabling better-founded economic policy decision-making. In this respect, we intend in the coming years to pursue various projects that allow these researchers to have access to our statistical information, thereby enabling different avenues of analysis and research of benefit to society as a whole.  

Sebi chief questions Budget plan for transfer of surplus funds to govt

July 18, 2019

The markets are buzzing with the story of Jalan Committee asking RBI to transfer its surpluses in 4-5 tranches. This is on expected lines but we still have to wait for the final report to figure the details.

Meanwhile, we should also be focusing on how Government has even asked SEBI to transfer its reserves . The employees of the regulator have protested against the decision.

Now it seems SEBI chief has written to the government questioning the move:


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