De Nederlandsche Bank Research Articles

Poverty Reduction and Growth Trust—2023 Borrowing Agreements with the Government of Australia, the People’s Bank of China, the Bank of Finland, the Banque De France, De Nederlandsche Bank NV, the Norwegian Ministry of Finance Representing the Kingdom of Norway, Sveriges Riksbank, and the Government of the United Kingdom

Poverty Reduction and Growth Trust—2023 Borrowing Agreements with the Government of Australia, the People’s Bank of China, the Bank of Finland, the Banque De France, De Nederlandsche Bank NV, the Norwegian Ministry of Finance Representing the Kingdom of Norway, Sveriges Riksbank, and the Government of the United Kingdom

The Nationalisation of the South African Reserve Bank: a Legal-Historical Perspective of Three Central Banks

The debate continues about whether the South African Reserve Bank should be nationalised or not. This contribution looks at the evolution of central banks, as well as at the origin and historical background of the central banks in three countries, namely the South African Reserve Bank, the Reserve Bank of Australia and De Nederlandsche Bank. The shares in the South African Reserve Bank belong to private shareholders; the Reserve Bank of Australia has been the property of the government of Australia since its inception; and De Nederlandsche Bank was nationalised in 1948. The potential nationalisation of the South African Reserve Bank will come with a hefty price tag, as the shareholders will have to be compensated for the value of their shares. Section 224 of the Constitution of the Republic of South Africa, 1996 determines that the South African Reserve Bank should “protect the value of the currency in the interest of balanced and sustainable economic growth”. The constitutional power of the Bank to be responsible for monetary policy will not change if it is nationalised. This contribution recommends that the South African Reserve Bank not be nationalised due to the big cost thereof to South Africa and because not much will be achieved by such a step.

Exploring household financial strain dynamics

Rising energy and food prices are causing living standards to fall across Europe and straining household budgets. The longer-term outlook for households is unclear as the dynamics of financial strain are not well understood. We address four important research questions on financial strain dynamics by applying a dynamic random coefficients probit model with duration and occurrence dependence to De Nederlandsche Bank (DNB) Household Survey panel data. We find no evidence that households become habituated or sensitised to financial strain over time unlike in studies of responses to stress. Entry into household financial strain is less likely when the household can cope by increasing earnings from work or by borrowing from family and friends but not by the economically inactive entering employment. Our third result is that the persistence of financial strain can be explained by a mutually-enforcing negative cycle through worse health but not through marital conflict or more short-sighted and risk averse decision-making. Finally, we find that neither income or wealth shocks affect financial strain in contrast to other studies. Further research into understanding the experience of financial hardship is warranted in the light of the economic challenges caused by the current cost of living crisis.

Zimbabwe: Technical Assistance Report-Undertaking Supervisory Examinations Remotely Due to COVID-19 Operational Restrictions

The RBZ is in the process of recommencing on-site examinations, but due to COVID-19 operational restrictions, these will need to be undertaken remotely. The RBZ has developed a draft remote examination framework document to guide this work and requested AFS assistance to review the framework, and also provide information on how other supervisors are undertaking examinations remotely. The mission provided training on international practice of remote examinations, which was presented by supervisors from the Bank of Ghana (BOG), Bank of Thailand (BOT) and the De Nederlandsche Bank (DNB) and reviewed the draft remote examination framework document. The training covered adjustments to examination framework and operational issues and key points of consideration when undertaking examinations remotely. The mission also reviewed the RBZ consolidated examination manual, to provide feedback to the RBZ on the feasibility of undertaking supervisory examinations remotely, as described in the manual and provide points for consideration for undertaking such examination remotely.

Both insurers and supervisors will have to evolve : Interview with Petra Hielkema, chairperson of EIOPA

Petra Hielkema is the Chairperson of EIOPA and is leading the Authority since September 2021. She is also member of the ESRB Steering Committee and member of the IAIS Executive Committee. Besides that she is the Champion of the IAIS Fintech Forum. In 2022 Petra Hielkema is also chairing the Joint Committee of the three ESA’s (EIOPA, EBA and ESMA). Prior to this role she was Division Director Insurance Supervision at De Nederlandsche Bank (DNB, the Dutch Central Bank) and Alternate Member of the EIOPA Board of Supervisors. She was also the Chair of the EIOPA Policy Committee. Petra Hielkema has a European Masters in Law & Economics and a Masters in Russian Studies. She is married and proud mother of three children.

Financial literacy and entrepreneurial risk aversion

ABSTRACT We explore the interaction effects of financial literacy and risk aversion on becoming an entrepreneur. We use two independent datasets to provide evidence that the difference in risk aversion between entrepreneurs and wage earners is conditional on their financial literacy. First, we use the De Nederlandsche Bank’s Household Survey and find lower risk aversion only for entrepreneurs with lower financial literacy. The difference disappears for entrepreneurs with higher financial literacy. Second, we show that the results are robust in a fully incentivized field experiment with high-tech startups from three European countries. The results reveal a potential channel of how financial literacy can promote entrepreneurship.

The Challenges of Client Tax Integrity Testing for Banks in the Netherlands (and Soon Elsewhere?)

In this article, the authors consider the issues and problems that the new Dutch client tax integrity testing procedures of De Nederlandsche Bank (the Dutch Central Bank) will raise for financial institutions that operate in the Netherlands. They expect other central banks to follow this Dutch development with great interest.

Childhood Financial Socialization and Debt-Related Financial Well-Being Indicators in Adulthood

The purpose of this study was to explore the potential influence of childhood financial socialization on financial well-being in adulthood. Using a sample (N = 2,213) from De Nederlandsche Bank Household Survey (DHS) we modeled the likelihood of household debt/asset ratio less than or equal to 40%, and the likelihood of a household reporting a current ratio (liquid asset /short-term debt ratio) greater than or equal to 100%. Consistent with predictions of social learning theory, being encouraged to save during childhood had a positive association with meeting the financial planning industry benchmarks for these financial ratios in adulthood. The key implication is that the path to financial well-being does not begin with financial knowledge attained in adulthood, but instead begins with experiential learning and socialization during childhood.

Innovative yet robust supervision in a rapidly changing payments landscape

The payments landscape is constantly changing, and developments are accelerating. One of the main driving forces is technological innovation. Although it is a source of opportunities, technological innovation poses challenges to the robustness and efficiency of the payments system and financial stability in general. This paper describes how De Nederlandsche Bank (DNB) facilitates the positive contribution of technological innovation in payments, while ensuring the risks are properly monitored and addressed. It highlights how DNB endeavours to promote an innovative climate through an InnovationHub and Regulatory Sandbox, and dives into the challenges of the growing complexity and fragmentation of the payments landscape and increased vulnerability to cyberattacks. The paper further discusses DNB’s role in finding a right balance between innovation, safety and privacy, especially given the expected changes arising from the new Payment Services Directive (PSD2). Finally, the paper demonstrates how DNB takes advantage of technological innovation by employing advanced innovative techniques in its daily work.

Future Orientation and Household Financial Asset Liquidity

This study explored one aspect of household financial resilience by analyzing factors related to financial asset liquidity. Given that assets are classified on the balance sheet according to when their economic benefits are expected in time, we extend the asset allocation literature by modeling the allocation of financial assets to cash as a function of intertemporal motivations (i.e., future orientation). A sample of respondents was extracted from De Nederlandsche Bank Household Survey. Fractional logistic regression was used to model the proportion of financial assets held in cash. Consistent with theoretical predictions, future orientation was negatively associated with the proportion of financial assets held in cash. Implications for practice are discussed.

Introduction to Retail Payments: Mapping Out the Road Ahead

This article introduces four papers that were presented at a payments conference “Retail Payments: Mapping Out the Road Ahead,” which was held at De Nederlandsche Bank in Amsterdam in April of 2016. These papers focus on various behavioral aspects of consumers and merchants in their choice and acceptance of payment instruments and payment activity. End-user behavior has implications for how the retail payment landscape is likely to evolve and, therefore, will need to be considered by policymakers charged with overseeing the development of retail payments.

Book Reviews

Wilko Bolt of De Nederlandsche Bank and Vrije Universiteit Amsterdam reviews “Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction,” by Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder. The Econlit abstract for this book begins: “Textbook for undergraduate or graduate students in computer science provides an introduction to the technologies of Bitcoin and other cryptocurrencies, covering the history, design, applications, security, and regulations.”

Poverty Reduction and Growth Trust

The IMF, as Trustee of the Poverty Reduction and Growth Trust (PRGT or Trust), has entered into a new borrowing agreement with the Government of Canada (Canada), and has entered into amendments to the 2010 borrowing agreement with De Nederlandsche Bank NV (The Netherlands) and the 2011 borrowing agreement with the Bank of Korea (Korea). The new borrowing agreement with Canada and the amendments to the borrowing agreements with The Netherlands and Korea will each provide new resources of SDR 500 million to the General Loan Account of the PRGT, for a total amount of SDR 1.5 billion in new PRGT lending resources. Except for the increase in amount for drawings, all other elements of the borrowing agreements with The Netherlands and Korea remain unchanged.

The threat of privacy

This issue collects selected papers from the Financial Market Infrastructure Conference II: New Thinking in a New Era, hosted and organized by De Nederlandsche Bank with support from the Bank of Canada, the Bank of England, the Bank of Mexico, the Law Department of the London School of Economics (LSE Law) and The Journal of Financial Market Infrastructures. The following is the text of a keynote address by Charles M. Kahn, presented at the conference.

Central counterparties and systemic stability

This issue collects selected papers from the Financial Market Infrastructure Confer- ence II: New Thinking in a New Era, hosted and organized by De Nederlandsche Bank with support from the Bank of Canada, the Bank of England, the Bank of Mexico, the Law Department of the London School of Economics (LSE Law) and The Journal of Financial Market Infrastructures. The following is the text of a keynote address by Marc Bayle de Jessé presented at the conference.

Assessing the impact of mobile wallet services from a central bank perspective

De Nederlandsche Bank (DNB) has developed a framework for assessing the impact of innovations on the functioning of the payment system. This framework is used to determine whether action needs to be taken to mitigate risks or remove barriers for the successful introduction of innovative products. Application of this framework to mobile wallets shows a number of issues that deserve further attention from both authorities and market participants, including security and privacy, standardisation and legal ambiguities.

Present-Biased Preferences and Money Demand

Participants in the De Nederlandsche Bank Household Survey were asked questions allowing to elicit subjective discount factors over different time horizons. The answers of most participants indicate present-bias as they show a higher annualized nominal rate of return for a 3-month delay than for a 12-month delay. One way to deal with one’s present-bias problem is to impose limits on future spending by holding wealth in non-liquid assets. We therefore predict that agents with more severe present-bias problems hold a lower share of their wealth as money. Our data provide statistically significant evidence in support of this prediction.

Does Banknote Quality Affect Counterfeit Detection? Experimental Evidence from Germany and the Netherlands

Counterfeit prevention is a major task for central banks, as it helps to maintain public confidence in the currency. It is often maintained that a high quality of the banknotes in circulation helps the public detect counterfeits. However, there has not been any scientific evidence in support of this assertion so far. The present study is a first attempt to fill this research gap. To investigate whether banknote quality affects counterfeit detection, De Nederlandsche Bank (DNB) and the Deutsche Bundesbank (DBB) conducted a field study in 2014 and 2015 amongst 250 consumers and 261 cashiers in the Netherlands and Germany. Participants received a set of 200 banknotes with either a high or a low average soil level, based on the actual circulation in two different countries. Real-life circulation in both Germany and the Netherlands is in between these values. Each set contained 20 counterfeit notes, which testees were asked to detect. On average, untrained consumers detect 79% of the counterfeits, whereas retail cashiers detect 88%. Cashiers are found to detect more counterfeits when the set is clean, even after controlling for a wide range of personal characteristics in a regression. The estimated effect of cleanliness on the cashiers' detection rate is an additional 0.87 out of 20 counterfeits (4.4%) For consumers, the quality of the sets does not change the hit rate in a statistically significant way.

Does Banknote Quality Affect Counterfeit Detection? Experimental Evidence from Germany and the Netherlands

Counterfeit prevention is a major task for central banks, as it helps to maintain public confidence in the currency. It is often maintained that a high quality of the banknotes in circulation helps the public detect counterfeits. However, there has not been any scientific evidence in support of this assertion so far. The present study is a first attempt to fill this research gap. To investigate whether banknote quality affects counterfeit detection, De Nederlandsche Bank (DNB) and the Deutsche Bundesbank (DBB) conducted a field study in 2014 and 2015 amongst 250 consumers and 261 cashiers in the Netherlands and Germany. Participants received a set of 200 banknotes with either a high or a low average soil level, based on the actual circulation in two different countries. Real-life circulation in both Germany and the Netherlands is in between these values. Each set contained 20 counterfeit notes, which testees were asked to detect. On average, untrained consumers detect 79% of the counterfeits, whereas retail cashiers detect 88%. Cashiers are found to detect more counterfeits when the set is clean, even after controlling for a wide range of personal characteristics in a regression. The estimated effect of cleanliness on the cashiers' detection rate is an additional 0.87 out of 20 counterfeits (4.4%) For consumers, the quality of the sets does not change the hit rate in a statistically significant way.

Board Evaluations in Practice

Board evaluations are taking place in The Netherlands, but the goals, possibilities and results are yet unclear. This is the main motive for this research. Board evaluations are a relatively new phenomenon, which is why this research has an explorative character. My first goal is to describe what the opinions of board members, external facilitators, experts and scientists are of the goals, possibilities, results and methods of board evaluations, optionally with an external facilitator. My second goal is to look at the (added) value and practical take-out of board evaluations for De Nederlandsche Bank as financial supervisor.