Financial Intermediaries Research Articles

Emergent regime complexity and epistemic barriers in ‘bigtech’ finance

ABSTRACT The rise of ‘bigtech’ finance – the provision of payment services and financial intermediation by large digital platforms – poses significant cross-border regulatory challenges with implications for financial stability. Yet despite steps to strengthen regulation at the domestic level, international cooperation in this area remains very limited. Although geopolitical rivalry over digital technology has hindered progress towards agreement on global rules, we know far less about the technical barriers to standard-setting in this new and complex field. To address this, the paper combines scholarship on international regime complexity and transnational knowledge to understand the epistemic challenges of international standard-setting in an ‘emergent’ regime complex. We argue that regulatory cooperation around bigtech is constrained by two main epistemic barriers: cognitive limits to understanding; and the existence of siloed knowledge. Furthermore, we show how international bodies strive to overcome these barriers by generating new transnational knowledge through processes of inscription and orchestration. The paper makes a wider contribution to the ‘epistemic turn’ in IPE by unpacking the contested meanings and practices of standard-setting in new regulatory fields.

Exploring financial graph literacy: determinants and influence on financial behavior

Purpose Graphs are widely used in the banking and finance domain to support consumers’ decision-making process, but subjects differ in their ability to understand them. This study aims to detect the determinants of the ability to read and process financial information conveyed in the graphical format, i.e. financial graph literacy (FGL) and the relationship between FGL and subjects’ actual financial behavior (FB). Design/methodology/approach Data are collected by administering a structured questionnaire to the Italian adult population (n = 502). The survey includes different sections aimed at collecting information about sociodemographic and socioeconomic variables, financial literacy and FB. The econometric analyses are developed using OLS and Poisson regressions. Findings The results show that gender, geographical area, education, marital status and income are crucial determinants of FGL. Moreover, the analysis reveals that an increase in the FGL indicator is associated with a higher propensity for individuals to purchase banking or financial products or actively manage financial resources; results are robust, even controlling for financial knowledge. Originality/value Although previous research investigates the impact of graphs in financial decision-making, no studies measure the ability of consumers to read and interpret financial information conveyed in the graphical format. This study is the first to investigate the determinants of FGL and link it to actual FB. Implications for policymakers, regulatory and supervisory authorities and financial intermediaries are discussed.

The legal regime for cryptocurrencies in Kazakhstan and impossible control of their circulation

Development of a legal framework for cryptocurrencies in Kazakhstan is described in this article: from very first steps in 2018 when financial intermediaries were just warned from use of Bitcoins and alike in their transactions to prohibition of their circulation established into 2020, with cancellation of the prohibition and strengthening regulation of crypto mining in 2023. Authors show that neither existence nor absence of a legislative restriction of cryptocurrencies’ circulation can help the State to control respective turnover. Respectively, no efficient solution can be said existing to both support a public order and protect individual property rights to cryptocurrencies. Keywords: Republic of Kazakhstan, cryptocurrency, Law on Informatisation, digital assets, AIFC, digital mining, regulation, legal framework.

Harnessing network power: Weaponised interdependence in global tax policy

AbstractFor decades, global tax policy has grappled with the challenge of mobile capital, failing to harness the regulatory potential of network power. This oversight has allowed tax havens to flourish, and multinational corporations and wealthy elites to circumvent state authority, undermining national fiscal policies and democratic capacity to meet grand societal challenges, such as climate change and inequality. But recent regulatory innovations pave a different way forward. This article spotlights the dynamics of ‘weaponized interdependence’, suggesting a critical role for strategically targeting global corporate and financial networks in reinvigorating action against tax havens, tax avoidance and tax evasion. Identifying and exploiting network chokepoints – financial institutions, corporate subsidiaries and expert intermediaries – can empower states to reassert their sovereignty and counterbalance the structural advantages of global capital. This approach helps us understand how and why recent regulatory measures have effectively countered financial secrecy, profit shifting and sanctions evasion, repairing public finances and restoring democratic integrity. In an age where weaponised interdependence is predominantly linked to national security, this recasting of global tax policy highlights a progressive path for using network power to develop effective global economic frameworks, strengthen democratic capacity and address contemporary challenges.

The Hedging Channel of Exchange Rate Determination

Abstract We propose the currency hedging channel that connects countries’ external imbalances to their exchange rate behavior. We present a model in which investors increase their currency hedging during periods of financial distress in proportion to their net foreign asset exposure. This behavior coupled with constrained financial intermediation explains observed relationships between gradually adjusting external imbalances and volatile spot and forward exchange rates. We find empirical support for the hedging channel in both the conditional and unconditional moments of exchange rates, option prices, and countries’ uses of Federal Reserve swap lines. (JEL E44, F31, F32, F41, G11, G15)

Risks of generative artificial intelligence in financial intermediation and approaches to their assessment

The subject of the study is the impact of generative artificial intelligence (GenAI) on financial intermediation and associated risks. The purpose of the study is to assess the current state of GenAI adoption in financial intermediation, identify potential risks and challenges, and explore the implications of increased use of these technologies. The relevance of the study is due to the rapid development of artificial intelligence (AI) technologies and their increasing impact on financial intermediation, which requires a comprehensive analysis and understanding of possible risks and benefits. The research methodology is based on the study of existing research on this topic,identification of current approaches to identifying risks, empirical analysis, including collection and processing of lists of risks of using GenAI and associated consequences. It is concluded that the variability of definitions in risk assessment GenAIcan create significant obstacles to consistency and coordination of actions between various market participants. Moreover, the lack of unified assessment criteria can lead to underestimation or overestimation of potential threats, which increases the likelihood of system failures and increases risks to the sustainability of the financial intermediation system as a whole.As part of the preparation of the study, responses generated by ChatGPT about the assessment of the risks posed by GenAI were used.

P2P Lending and Mobile Payments: Disrupting Traditional Banking Systems and Expanding Financial Inclusion

Technological development in the field of finance (FinTech) has sprouted and scaled up rapidly, disrupting the traditional banking system. The rise of new platforms allowing P2P lending and mobile payments has changed the way where and how people receive financial services by replacing professionally-managed financial intermediaries aka banks. This paper explores how P2P lending has enabled decentralised financing by providing flexible loans to borrowers, higher returns to lenders, and alternative credit-scoring methods to assess borrowers credibility. The subsequent development and recent widespread use of mobile payments have brought about transformative changes in finance where users can make payments without using physical cash or relying on banking infrastructure altogether. The combination of these technologies is providing inclusive finance by allowing unbanked and underbanked populations access to necessary financial services. This paper further delves into the challenges emerging from both these innovations, such as assessment of risks, security issues and regulatory uncertainty. The paper concludes by emphasising that new technology-based lending and payments have the potential to foster inclusive economic growth in rural, remote and low-income regions of the world, and by highlighting the challenges that needs to be tackled for FinTech to succeed.

Asymmetrical Monetary Relations and Involuntary Unemployment in a General Equilibrium Model

Abstract This article aims to model Keynesian involuntary unemployment within the framework of Walrasian general equilibrium, incorporating an additional hypothesis: the possibility of credit restrictions by banks or financial intermediaries. Keynes’s theory of involuntary unemployment is based on the rejection of the “second classical postulate,” which leads to the idea that entrepreneurs alone decide the level of employment. This is what some Keynesians call the asymmetry of the wage relationship. The result is a restriction of Walras’ law, which no longer includes the labor market. However, the problem is that entrepreneurs themselves may find themselves constrained by financial intermediaries. If there is a second type of asymmetry, i.e., between banks/financial intermediaries and entrepreneurs, Walras’ law will be doubly restricted since it will also exclude the credit market. I set out to identify the consequences of the properties of involuntary unemployment in a general equilibrium model.

Liquidity Preference, Interest Rate Spread, and the Transformation of the US Financial System

This article examines empirical patterns of interest rate spreads between yields on long-term corporate bonds and the Federal Funds Rate (FFR) in the United States over the period from 1960 through 2023. Since the early 1980s, discernible patterns of interest spreads have emerged, revealing marked deviations in corporate bond yields from the FFR. We focus on financial market forces particularly arising from financial intermediaries in analyzing these patterns. To this end, the article develops a theoretical framework based on the concept of liquidity preference in Keynes’s 1937 papers and the works of Hyman Minsky and Victoria Chick. We also conduct cointegration analyses for corporate bond yields, the FFR, and financial intermediaries’ leverage ratios. Overall, our empirical results indicate that the relationship between the FFR and corporate bond yields—particularly with respect to their long-run relationship and interest rate markups—has markedly changed since the 1980s and is significantly affected by financial intermediaries’ asset/capital leverage ratios. As a policy implication, regulatory reforms aimed at enhancing the Federal Reserve Bank’s capacity to steer long-term rates and contain intermediaries’ balance sheet leverage, particularly those centered on risky asset trading to increase gains from price differentials, are required JEL Classification: B26, E11, E43, E52

Accessing Private Markets: What Does It Cost?

This paper provides the first empirical analysis of the costs of financial intermediation across private markets and a framework to estimate ex-post costs using observed fund terms. I access a proprietary dataset, develop a novel model, and estimate that it costs investors $0.05 to $0.26 per dollar committed over funds’ lifetimes. The corresponding fee drag on gross-to-net total value to paid-in capital is 0.1x to 0.7x and 5% to 8% in annualized terms. The results demonstrate cost economies of scale in which larger funds cost less in management fees. Finally, the fraction of costs attributable to non-performance fees is 53% to 75%.

Trust in context: The impact of regulation on blockchain and DeFi

AbstractTrust is a key resource in financial transactions. Traditional financial institutions, and novel blockchain‐based decentralized financial (DeFi) services rely on fundamentally different sources of trust and confidence. The former relies on heavy regulation, trusted intermediaries, clear rules (and restrictions) on market competition, and long‐standing informal expectations on what banks and other financial intermediaries are supposed to do or not to do. The latter rely on blockchain technology to provide confidence in the outcome of rules encoded in protocols and smart contracts. Their main promise is to create confidence in the way the blockchain architecture enforces rules, rather than to trust banks, regulators, and markets. In this article, we compare the trust architectures surrounding these two financial systems. We provide a deeper analysis of how proposed regulation in the blockchain space affects the code‐ and confidence‐based architectures which so far have underwrote DeFi. We argue that despite the solid safeguards and guarantees which code can offer, the confidence in DeFi is still very much dependent on more traditional trust‐enhancing mechanisms, such as code governance, and antifraud regulation to address some of the issues which currently plague this domain, and which have no immediate, purely software‐based solutions. What is more, given the risks of bugs or scams in the DeFi space, regulation and trusted intermediaries may need to play a more active role, in order for DeFi to gain the trust of the next generation of users.

Alternative finance in the international business context: a review and future research

AbstractFirms increasingly rely on alternative finance (AF) in addition to banks and equity markets, and its usage across countries differs significantly. We conceptualize AF as financing that operates within social, business, and virtual networks that generate informational, collateral, and incentive advantages compared to finance relying on traditional financial intermediaries. Examples of AF include family loans, microfinance, trade credit, community credit cooperatives, person-to-person (P2P), and crowdfunding. While AF is not a new phenomenon, technological development continues to facilitate its increasing prominence. We review the evolution of AF theories, summarize key empirical findings, and describe how AF intersects with international business (IB) research. Specifically, we review how AF feeds into the analysis of comparative financial systems, financial development, comparative corporate governance, and national culture. We conclude that AF has shaped comparative research in IB in important ways, but cross-border research in IB has hardly considered the role of AF. Globalization and technological development and adoption in the financial industry generate rich fields where AF and IB intersect; these have yet to be understood. We describe how IB research, specifically addressing the cross-border dimension, could benefit from integrating insights from AF research, and propose approaches to integrate theories on AF, IB, and internationalization.

Article: Balancing Digitalization and Proportionality: The Progress of the FASTER Initiative*

The European Commission’s proposed directive ‘Faster and Safer Relief of Excess Withholding Taxes’ (FASTER) aims to standardize, modernize, and digitalize the EU-wide withholding tax procedure to enhance efficiency and fraud resistance. The Council of the EU, through Economic and Financial Affairs Council (‘ECOFIN’), has agreed on a revised directive that retains the core objectives but introduces significant modifications. The initiative focuses on simplifying tax relief procedures, introducing a digital EU tax residence certificate, and implementing fast-track refund systems. The Council’s adjustments include extended deadlines for issuing certificates and fast-track refunds, as well as expanded obligations for financial intermediaries to report transactions and prevent fraud. The directive emphasizes digitalization and proportionality in its implementation. However, concerns about the proportionality of imposed liabilities on financial intermediaries and data protection remain critical issues. The revised directive is pending further consultation with the European Parliament and formal adoption by the Council, with an anticipated implementation deadline extended to 31 December 2028, and national application starting 1 January 2030.

Clean innovation, heterogeneous financing costs, and the optimal climate policy mix

Access to finance is a major barrier to clean innovation. We incorporate a financial sector in a directed technological change model, where research firms working on different technologies raise funding from financial intermediaries at potentially different costs. We show that, in addition to a rising carbon tax and a generous but short-lived clean research subsidy, optimal climate policies include a clean finance subsidy directly aimed at reducing the financing cost differential across technologies. The presence of an endogenous financing experience effect induces stronger mitigation efforts in the short-term to accelerate the convergence of heterogeneous financing costs. This is achieved primarily through a carbon price premium of 39% in 2025, relative to a case with no financing costs.

Ambiguity, information processing, and financial intermediation

This paper incorporates ambiguity and information processing constraints into the He and Krishnamurthy (2012) model of intermediary asset pricing. Financial intermediaries possess greater information processing capacity than households. In response, households optimally choose to delegate their investment decisions. The contractual relationship between households and intermediaries is subject to a moral hazard friction, which results in a financial constraint. We show that ambiguity aversion not only amplifies households' incentives to delegate but also tightens the financial constraint. The calibrated model can quantitatively explain both the unconditional and time-varying moments of observed asset prices while endogenously generating an empirically consistent crisis frequency.

Analysis of the foreign direct investment, oil palm expansion, and food security in Indonesia: Sumatra and Kalimantan case studies

The continuing oil palm expansion on food security has prompted fierce debate. On one side, analysts argue that local community incorporation in the oil palm sector can increase food purchasing in the market. However, the expansion has also brought unprecedented consequences of losing highly nutritious food due to forest conversions. This study aims to analyze oil palm expansion and local food security in various regions in Indonesia by tackling the following questions: (a) Which factors influence palm oil expansion, and does foreign investment play a role? (b) How does palm oil expansion affect food security in Indonesia? Socioeconomic methods have been applied in this study, including a systematic literature review and qualitative interviews with key stakeholders from various domestic and international organizations. These two methods help us triangulate the academic literature findings with real-world situations as perceived by the actors in the related field. Results indicate that, firstly, foreign investors have not only made a direct investment to facilitate oil palm expansion, but also indirect financial intermediaries are held without holding financial equities to upstream oil palm companies (e.g., supply chain financing contracts, channeling using local financial institutions such as credit union). Secondly, while large corporations asserted monoculture oil palm expansions, some smallholding farmers use mixed cropland expansion to share food and oil palm crops in their own smallholding terms. With the oil palm expansion, farmers can secure a cash flow from palm oil, but an unintended outcome is less nutrition diversification, and often because of the distance to markets, some commodities are favored over a more diverse diet. The outcomes of oil palm development vary and are multifold, as some stakeholders report that some studies show improving cash flows at the farm level, but other studies insist that food insecurity still prevails.

The collateral link between volatility and risk sharing

We show that the effect of aggregate volatility on idiosyncratic risk sharing depends on the nature of collateral sustaining insurance. While volatility increases the value of public assets—more useful for consumption smoothing—it decreases the value of private assets—more exposed to aggregate variation. Hence, a more volatile economy weakens risk sharing when collateral composition is biased towards private assets. When applied to financial intermediaries that rely heavily on private collateral to share risks, aggregate instability is more likely to induce financial instability. We empirically show that the sensitivity of risk sharing to aggregate volatility indeed depends on the collateral composition as predicted by the theory.

Testing how banks generate credit in the USA under the Basel III framework

This paper revisits the determinants of the loan generating process as it is revealed through the idiosyncratic role of banks, in the case of the United States. Specifically, if banks are primarily mainstream “financial intermediaries”, then their financial role is expressed through a credit growth process emanating from the reserves of banks, in the period before Basel requirements, and from banks' equity during the era of Basel I, II & III restrictions. On the other hand, if banks are primarily “credit and money creators”, as an heterodox point of view would have it, then every proxy of the aggregate demand (AD) needs, is expected to play a leading role in the credit creation process. The innovative liquidity risk ratios, like LCR & NFSR, brought new instruments in this debate thus, extending the alternatives between the two extremes. Hence, the combination of a predominant role for AD needs along with acknowledgment of liquidity restrictions as drivers of credit growth, characterises an eclectic approach. According to our empirical results, credit to both US firms and households, is primarily driven by aggregate demand (AD) factors. Solvency and liquidity risk ratios do play a role, during the examined period but the overall results are closer to the eclectic approach, concerning the role of US banks, which seems to be more encompassing and realistic.

The role of legal system in SME bank credit in ASEAN

This study aims to investigate the role of legal system in the access to bank credit of small and medium enterprises (SMEs) and explores the measures to improve legal system among the Association of South-East Asian Nations (ASEAN). By applying the ordinary least squares (OLS) method, the study examines the bank credit accessibility of over 12,000 firms across eight ASEAN countries, using the data collected from the World Bank’s Business Environment and Enterprise Performance Survey (BEEPS), in relation to each country's contract enforcement indicators. The estimated results reveal a significant positive relationship between contract enforcement and SMEs’ access to bank credit. Furthermore, the results show that long time consumption and large costs for contract enforcement reduces financing opportunities of SMEs. Additionally, the study finds that a country’s legal tradition does not impact the effectiveness of its contract enforcement. Implementing electronic filing systems and limiting times and costs for legal processes can enhance contract enforcement. Consequently, strong contract enforcement appears to encourage banks to increase SME lending, leading to higher SME bank credit in countries with efficient contract enforcement mechanisms. Enhancing contract enforcement can increase SME financing and consequently, will improve a country’s financial intermediation. These findings underscore the importance of contract enforcement including its duration and cost, in the context of SME financing and suggest ways to improve a country’s legal system to foster SME access to bank credit.

Socially Responsible Finance: How to Optimize Impact

Abstract Can a socially responsible fund (SRF) improve social welfare while maximizing assets under management? We consider a two-sector model integrating financial intermediation, emissions’ negative externalities, and investors’ social preferences with regard to value alignment and impact. In scenarios with a high proportion of value-aligned investors, the SRF invests in clean sectors and compels recipients companies to use low-emission suppliers from the polluting sector, which appeals to both investor types. Alternatively, the SRF adopts a dual-fund approach, with one fund targeting clean sectors for value-aligned investors and another focusing on reducing direct emissions in polluting sectors to attract impact investors. (JEL:G11, G23, M14, O44, Q51)