Banking Regime Research Articles

Commodity Money, Free Banking, and Nominal Income Targeting

Some have argued that nominal income targeting is desirable because it would replicate characteristics of a free banking regime. However, the degree to which this is true and desirable depends on the properties of commodity-based monetary regimes. In this paper, I provide a model of commodity money. I find that a pure commodity money regime can only generate an efficient stationary equilibrium by divine coincidence or by giving policymakers control over the supply of the commodity. The introduction of bank notes makes it much more likely that the economy will achieve an efficient equilibrium. In particular, in a commodity-based system, bank notes are equivalent to call options on the commodity, and the commodity holdings are equivalent to a put option on the commodity. Assuming that there is no risk-free arbitrage in equilibrium, then both bank notes and the commodity will have an expected rate of return equal to the risk-free rate. If the risk-free rate is equal to the rate of time preference, then this commodity regime is efficient. A free banking system would therefore not only minimize deviations between the supply and demand for money, but it would also (potentially) implement the Friedman rule. Both market-based and more conventional nominal income targeting regimes are unlikely to replicate both features of a free banking system unless the nominal income target has a deflationary bias.

Move your money? Sustainability Transitions in Regimes and Practices in the UK Retail Banking Sector

We present and test a new conceptual framework for understanding sustainable transitions in co-evolutionary sociotechnical systems. We apply this in the first study of sustainable transitions in UK retail banking. This system has suffered recently from banking crises, and links to environmentally-sensitive industries such as fossil fuels. Sustainability-focused values-based banks are a potential solution, but have had little impact on mainstream banking systems. We aim to understand the constraints on a potential transition and how to overcome them. Our new approach identifies the intersections between transitions in regimes (using the multi-level perspective MLP) and transitions in practices (using social practice theory SPT), two competing conceptual frameworks in the literature. We ask: what are the intersections between transitions in the banking regime and banking practices, and how may critical points of constraint be unlocked to become points of opportunity, thereby aiding a transition to more sustainable banking systems? We present new empirical findings from a mixed-method case study of the UK banking sector and two values-based banks in particular. Interventions for growing sustainable banking are identified and we demonstrate the added-value of the combined approach through indicating strategies for unlocking the transformative potential of sustainable innovations.

Commodity Money, Free Banking, and Nominal Income Targeting: Lessons for Monetary Policy Reform

Some have argued that nominal income targeting is desirable because it would replicate characteristics of a free banking regime. However, the degree to which this is true and desirable depends on the properties of commodity-based monetary regimes. In this paper, I provide a model of commodity money. I find that a pure commodity money regime can only generate an efficient stationary equilibrium by divine coincidence or by giving policymakers control over the supply of the commodity. The introduction of bank notes makes it much more likely that the economy will achieve an efficient equilibrium. In particular, in a commodity-based system, bank notes are equivalent to call options on the commodity and the commodity holdings are equivalent to a put option on the commodity. Assuming that there is no risk-free arbitrage in equilibrium, then both bank notes and the commodity will have an expected rate of return equal to the risk-free rate. If the risk-free rate is equal to the rate of time preference, then this commodity regime is efficient. A free banking system would therefore not only minimize deviations between the supply and demand for money, but it would also (potentially) implement the Friedman rule. Both market-based and more conventional nominal income targeting regimes are unlikely to replicate both features of a free banking system unless the nominal income target has a deflationary bias.

HOUSEHOLD INCOME DYNAMICS IN A LOWER-INCOME SMALL OPEN ECONOMY: A COMPARISON OF BANKING AND CROWDFUNDING REGIMES

This paper examines asset price and household income/consumption dynamics in a small open economy subject to terms of trade shocks, under two financial regimes. The first is a pure banking regime, in which firms borrow from banks for financing costs of labor, investment and intermediate goods for both the relatively riskless natural-resource traded sector and the non-traded sector. The second regime is more financially-inclusive banking/crowdfunding (BCF) regime, in which the households directly receive returns to capital from pooled lending to home-goods firms. Simulation results show that the banking regime better insulates the economy from negative shocks but limits the upside gain from positive shocks which would take place in the banking-crowdfunding regime.

An Appraisal of the Central Bank of Nigeria’s Approach to Resolution of Skye Bank Plc

On 21 September 2018, the Central Bank of Nigeria (CBN) revoked the banking licence of Skye Bank Plc on the ground that it was significantly undercapitalised. The CBN also claimed that Skye Bank’s shareholders were unable to recapitalise the bank. CBN’s first regulatory intervention in Skye Bank was on 4 July 2016 when the CBN replaced some board members and injected N350 billion into the bank. Polaris Bank Ltd (a bridge bank) has been established to take over the assets and liabilities of Skye Bank. The CBN and the Nigerian Deposit Insurance Corporation (NDIC) have turned over Polaris Bank to the Asset Management Corporation of Nigeria (AMCON). AMCON has injected N786 billion into Polaris Bank and is expected to source for a credible investor. This write-up examines Skye Bank’s resolution and key issues arising therefrom such as the special insolvency regime for banks, the bridge bank approach, bail-outs and bail-ins, the too-big-to-fail principle and moral hazard, and the treatment of Skye Bank’s shareholders.

Reviewing the Issues and Challenges of Electronic Banking Regime in Iran

Technological advances have transformed the face of the world. Over the past two decades, the banking industry has been investing heavily in using Information Technology (IT). In response to new laws, the growth of global networks and rising incomes, the banking industry employs new technologies called e banking to achieve and maintain strategic benefits. Electronic banking refers to financial activities that are carried out using electronic technology. Electronic banking gives banks the opportunity to respond to the different needs of customers in different locations simultaneously. In recent years, with the growing spread of information technology and the benefit of the Internet, banks and financial institutions are seeking to provide more different and diverse services for their customers. The emergence and development of e-banking is facing serious challenges, which responding to them is inevitable. The challenges that the e-banking system will face include financial, regulative and legal issues, organizational culture and process issues, infrastructures and systems. One of the challenges of developing electronic banking in Iran is the legal challenge. One of the most important legal challenges for the e-banking system seems to be whether the general rules of contracts provide sufficient guarantees for the validity and necessity of electronic contracts. The purpose of this paper is to examine the legal challenges for the advancement of the electronic banking system and provide solutions for solving them.

Central Bank or Monetary Authority? Three Views on Money and Monetary Reform

AbstractThe global financial crisis triggered profound changes in the conduct of monetary policy, with ultra‐low interest rates and asset purchases becoming the main policy tools. This represents a major shift towards interventionism that even ten years after the global financial crisis has not been reversed. In this article, I assess three views on money and monetary reform. I argue that a central bank regime with a narrow focus on refinancing property at market interest rates remains an attractive alternative to the current regime and provides an essential benchmark to assess the progress of monetary normalisation.

Compliance meets human resources: Monitoring competence and integrity

The financial crisis has created a new interest among regulators in the individual responsibilities of senior managers of financial institutions. In the UK, this has led to the creation of a new senior management regime for banks and insurance companies in which managers can face individual sanctions, including fines, if they have not taken reasonable steps to prevent regulatory breaches. This has led in turn to an interest in using human resources (HR) documentation and techniques to further compliance. It is unlikely, however, that firms will use HR documentation such as appraisals as the basis of compliance monitoring and sanctions against individuals. This is partly because of privacy rules and other legal safeguards for individuals, and partly because such monitoring can lead to a culture of fear and suspicion that encourages secretive behaviour. Instead, firms are more likely to support senior management responsibility through the more positive use of HR techniques, including: ●● creating clear lines of individual accountability; ●● testing these lines through the use of regulatory case studies and root cause analysis; ●● reinforcing these responsibilities through established appraisal processes; ●● promoting better culture through better incentives, enhanced corporate governance, and the use of more sophisticated approaches to analysing and understanding behaviour within organisations and ●● promoting a greater capacity for compliant and ethical behaviour through a recruitment policy that is more focused on diversity and social sensitivity within the workforce.

The role of the private sector in resolution for banks

The recent financial crisis in the Euro area has shown the close and negative relationship between the balance sheets of some Member States and their banks. The EU, in order to interpose in such a relationship, has taken several measures. One of the most important is the institution of a resolution regime for banks which provides a specific role for the private sector. This paper is aimed at analysing the EU legal framework on the matter. Firstly, it grasps the original setting of the question with the purpose of understanding why sovereign risk and bank risk are strictly linked. Successively, it examines the EU rules defining resolution for banks. Within this ambit, it focuses on the bail-in and the limits on its application as well as on the Single Resolution Fund. Furthermore, it evaluates the role at issue in the light of the right to property. Finally, it analyses the assessment of the Court of Justice on whether, and to what extent, the involvement of the private sector in resolution for banks is lawful.

Shadow banking regime: assessment of investment funds

PurposeTo explain the shadow banking regime that will be enforced in the European Union by local regulators starting in January 2017.Design/methodology/approachRecognising the regulatory-induced difficulties in the process of identifying certain types of clients (investment funds) as shadow banking entities, this article provides a decision tree for the shadow banking classification process in order to aid the impacted institutions with the assessment of their clients. With this in mind, the article advises the impacted institutions on the specific steps that should be taken when assessing investment funds for shadow banking flags. Furthermore, the article provides insights into the information required to conduct the shadow banking classification process.FindingsThe regime requires the impacted institutions to assess their clients for shadow banking flags in order to impose limits on credit lines to clients classified as shadow banking entities. The US regulatory jurisdiction will be impacted over a longer term.Originality/valueThe recommendations in this article will be especially useful for investment funds to ensure that the relevant information is clearly stated in their prospectuses in order to avoid being classified as shadow banking entities.

Bitcoin: Order without Law in the Digital Age

Modern law makes currency a creature of the state and ultimately the value of its currency depends on the public’s trust in that state. While some nations are more capable than others at instilling public trust in the stability of their monetary institutions, it is nonetheless impossible for any legal system to make the precommitments necessary to completely isolate the governance of its money supply from political pressure. This proposition is true not only today, where nearly all government institutions manage their money supply in the form of central banking, but also true of past private banking regimes circulating their notes under the shadow of public law. However, Bitcoin represents a potential third currency regime far more resistant to state control, because it is minted in no physical place, operates under encryption, and places a numerical ceiling on the number that can be created. The trust required is not in any government but in the decentralized order of those who verify Bitcoin transactions. This Article explores the fundamental structure of Bitcoin, first by demystifying it as a technology, and second by showing how its decentralized order contrasts with currency regimes. Unlike governments that use power of law to compel action, Bitcoin relies on a system of built-in incentives to encourage behavior that benefits not only those seeking to use Bitcoin, but also Bitcoin miners — those who voluntarily undertake the task of maintaining the payment network. The qualities of this system may give Bitcoin a long-term advantage over other currencies. As the Bitcoin ecosystem continues to grow, its non-legal order can help it climb the rungs of stability created by distrust in government. Bitcoin is already less volatile than some currencies and is starting to approximate gold in this respect. The technology underpinning Bitcoin is the next point of innovation in the digital age — the same era that has already seen software create institutional disruption from Amazon, Facebook, and Uber among many others. As Bitcoin gains in popularity it offers a platform for other kinds of technological alternatives to traditional legal regimes, like smart contracts. Bitcoin’s order without currency law will facilitate other forms of order with less law.

Contingent Convertibles: Can the Market Handle Them?

The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.

Contingent Convertibles: Can the Market Handle Them?

The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.

Reforms under the World Bank Procurement and the Policy Implications for Developing Countries

The World Bank is undergoing a major reform of its procurement policy which regulates the procurement of projects financed by the Bank. This reform represents a major shift from how the Bank used to operate, where it intends to move away from the current one-size-fits-all approach to a more fit-for-purpose approach. The Bank usually provides financial assistance for development projects and its procurement policies are significant for the general development community, especially those developing countries that rely on the Bank for financial assistance to implement major development projects. This paper examines the policy implications of the World Bank procurement reforms for developing countries, based on doctrinal and empirical research. It analyses the interaction between the World Bank regime and national systems, and highlights the implications for development policies in national systems. The research concludes that the Bank’s reforms represent a significant improvement in the way it used to operate and has the potential to support national development policies in certain limited respects. Largely however, the Bank’s procurement policies remain significantly complex and also limits policy space for the implementation of domestic policies. Keywords: Donors; Foreign Aid; Africa; Anti-Corruption; Development Aid; World Bank.

Payment Bank: A Catalyst for Financial Inclusion

The study investigates how newly licensed payment banks can favourably achieve inclusion goals of the Indian banking regulator by engaging with marginalised and migrant groups within the population pie, as envisaged by the banking regulator. The role of digitisation in making basic financial services available to such excluded groups has been explored within the study. In addition, the article attempts to critically assess the competitive implications such a new financial institution will have on the existing full-service banks. The study is grounded on the concept of payment banks as a crucial cog in a differentiated banking regime. Secondary information extracted from occasional reports/working papers of Reserve Bank of India (RBI) has been used to gauge the efforts towards realising inclusion goals. Perspectives of CEOs and banking practitioners have provided valuable inputs as to how the banking fraternity views payment banks and perceives them as a competitive threat. As the payment banking business model necessitates forging alliances with full-service banks, implications of such strategic alliances warrant research. The present study is an initial attempt to fill this gap in the extant literature.

Comparative Efficiency Study between Islamic and Traditional Banks

Islamic banking caught attention due to its resilience to the significant shocks that hit the economy in late 2008. This research aims to evaluate the efficiency of a sample of 66 banks including both Islamic and traditional banks in various countries ranging from Egypt, Pakistan, Bangladesh, Saudi Arabia, Kuwait, Qatar, Iraq, Emirates, Sudan, Turkey, Bahrain and Jordan throughout 2009-2014. This research aims at identifying which banking regime proves to be more efficient and its significance using Financial Ratio Analysis (FRA), composed of cost efficiency, revenue efficiency and profit efficiency ratios along with the One-way ANOVA test. The impact of efficiency of the performance of the banks in terms of Return on Assets (ROA) and Return on Equity (ROE) is also evaluated through multiple regression analysis. Lastly, inflation’s effect on the different banking efficiency measures will be tested using regression analysis. The findings indicate that the traditional banking system is superior in terms of cost, revenue and profit efficiencies, furthermore, the results of the multiple regression analysis on the banks’ return on assets and return on equity imply that the efficiency of Islamic banks have more influence on their profitability compared to their traditional counterparts. Inflation had minimal effect on the efficiency of both banking system. The overall results imply the superiority of traditional banks to the relatively new banking system.

Should cross-border banking benefit from the financial safety net?

Using bank-level data from 84 countries, we find that a higher degree of bank internationalization is associated with higher interest expenses. Internationalization is proxied by a bank's share of foreign liabilities in total liabilities or a Herfindahl index of international liability concentration. Bank interest expenses rise relatively more with internationalization if the bank is underperforming or headquartered in a country with weak public finances, and especially at times of weak world output growth. These results suggest that liability holders of distressed internationalized banks expect less from the financial safety net since lack of an efficient recovery and resolution regime for international banks can make their insolvency very costly to deal with.

Implementing Symmetric Treatment of Financial Contracts in Bankruptcy and Bank Resolution

Financial contracts, such as swaps, repos, and options, are excepted from the Bankruptcy Code’s automatic stay by the so-called derivative “safe harbors.” The bankruptcy of Lehman Brothers in 2008 provides a graphic illustration of how these safe harbors make it almost impossible for a non-bank financial firm, or other firm with significant derivative exposure, to restructure in chapter 11. Without the restraint of the automatic stay, non-debtor counterparties enjoying safe harbor protection may exercise early termination rights, demand payment, and offset obligations. The effect mimics a bank run, where value is drained from the struggling debtor in a destructive rush.The resolution regime for banks takes a different approach. It does not include such safe harbors. Instead, it imposes a short stay on financial contract termination to permit the orderly transfer of a failed bank’s derivative portfolio intact to a solvent bank. This approach has been used for decades to preserve the value of financial contracts and to minimize the systemic disruption occasioned by a bank failure.In this Article, we offer a road-map for translating and generalizing the “short-stay” regime used for banks into chapter 11. The key to this synthesis is the bankruptcy concept of “adequate assurance of future performance,” and the mechanism for providing that assurance is bankruptcy’s commonplace debtor-in-possession financing. This financing can backstop the debtor’s timely performance of its financial obligations. We note that our approach would facilitate the “Single Point of Entry” strategy for restructuring financial firms contemplated by the Dodd-Frank Act. Our approach also would, we contend, bring greater stability to financial markets, preserve otherwise evaporating value for insolvent debtors with a significant book of derivatives, and ultimately make it possible for many more firms to restructure in bankruptcy.

Winding Up of Banks Pursuant to the Provisions of the NDIC Act 2006: The Legal Challenges and the Way Forward

Banks carrying on business in Nigeria are primarily companies incorporated under the Companies and Allied Matters Act (“CAMA”), which are licenced to carry on banking business by the Central Bank of Nigeria (“CBN”) pursuant to the Banks and Other Financial Institutions Act (“BOFIA”) . Upon incorporation, a company becomes an artificial person with perpetual succession and until its liquidation and dissolution, the company exists as a legal entity. The pivotal roles of banks in the economic structure of nations and the systemic risk posed by bank failures necessitate the special regime for the insolvency of banks. The special insolvency regime for banks exists, primarily in the interest of the public- to maintain confidence in the banking system and the stability of the financial system. A key essence of the special insolvency regime for banks is to promote the efficient, expeditious, and orderly liquidation of failed banks.The Nigeria Deposit Insurance Corporation (“NDIC” or “the Corporation”) Act 2006 establishes the special legal regime for the winding up of failed banks. The scheme of the NDIC Act for the winding up of banks combines special provisions contained in the Act itself with CAMA by incorporating certain provisions of CAMA on the winding up of companies.The objective of this paper is to examine the salient provisions of the NDIC Act and CAMA with a view to explaining the new regime for the winding up of failed banks, foregrounding the challenges associated with it and positing ideas on how to make the process work better.

Evaluation of post-GFC policy response of New Zealand

Purpose – The paper aims to evaluate the role played by a recent banking and macro-prudential regime in addressing the financial crisis in New Zealand (NZ). Design/methodology/approach – The basic methodology used in this paper is the “documentary research method”. For this study data have been collected from various published sources. Findings – We find that the NZ government is one of the first few countries to implement Basel III to ensure the robustness of its banking sector while calibrating it to the unique needs of the economy and is in the process of phasing in several macro-prudential instruments (e.g. countercyclical capital buffer ore funding ratio sectoral capital requirement and loan-to-value ratio) to smooth the credit cycle of the economy. However implementing different requirements of a new policy has some challenges. Research limitations/implications – Further research may be carried out to investigate the policy responses of the government from corporate governance and other regulatory perspectives. Practical implications – This study identifies the effectiveness as well as some challenges faced when implementing different requirements of the new policy that may facilitate the policy makers to take appropriate action as required. Originality/value – This study provides a unique insight into the post-GFC scenario with regard to the government policy response in the banking sector and macro-prudential system that may provide the world with a financial-system warrant of fitness. It is one of the very few studies that showcase a global perspective and to our knowledge it is the first of its kind in NZ in the post-global financial crisis period.