Financial Intermediaries Research Articles

Evolution of financial intermediation and performance consequences in China’s commercial banks

PurposeThis study evaluates the evolution from traditional to nontraditional financial intermediation (NTFI) in Chinese commercial banks from 2006 to 2021, analysing its impact on bank performance and risk.Design/methodology/approachAccounting measures are used to construct granular activity data, and factor analysis is employed to develop a financial intermediation evolution (FIE) index. The fully modified OLS (FMOLs) estimator is used for nonstationary data analysis, and difference-in-differences (DID) analysis is used for robustness check.FindingsChinese banks exhibit unique evolution in financial intermediation compared to developed economies, with greater inter-bank variations over time than intra-bank differences. From 2006 to 2017, three paths were identified: Investment, Fee and Repo models, with a fourth path (the Investment2 model) emerging post-2017. Only the Repo model enhances bank returns (ROA & ROE), while shifts towards NTFI increase liquidity and leverage risks across all models. The evolution of bank business models and their consequent implications on performance and risks are influenced by regulatory objectives and banks’ endeavours in regulatory arbitrage.Practical implicationsMajor stakeholders in the banking sector can gain a better understanding of financial intermediation and associated market behaviour, performance and risks, with significant implications for banking regulations and crisis management.Originality/valueThis study provides the first comprehensive overview of the evolution of Chinese commercial banks’ financial intermediation activities over an extended period, uncovering the unique characteristics distinct from the developed economies.

Financial Development and Private Investment

This paper finds that financial sector growth is key to boosting private investment in Pakistan. Banks, as financial intermediaries, enhance private investment by lowering risks and supporting decision-making through strong accounting standards. A broader financial system—measured by the ratio of commercial bank assets—positively impacts private investment. Financial deepening, or increasing liquid liabilities, also plays a critical role, as a developed banking system reduces transaction costs and improves fund access. Increasing private sector credit drives investment, so aligning the credit system with Pakistan's investment needs is essential. Strengthening financial intermediaries, enforcing contracts, and managing risks are necessary steps to support Pakistan’s financial sector growth and stimulate investment.

Paths for the development of financial intermediation in industry 5.0: Opportunities for developing economies (On the example of former USSR republics)

Currently, there is a unique situation in the global economy, industrial eras coexist together, there is interaction and transformation of financial systems simultaneously within the framework of Industry 4.0 and Industry 5.0. New, digital resources are entering the economy, intellectual capital is becoming virtual, artificial intelligence is increasingly finding its application in the structure of financial support. Financial intermediation in developing countries is also subject to global trends, the active development of new instruments for developing economies is especially important. The aim of the study is to identify effective ways to develop financial intermediation in Industry 5.0 for the economies of developing countries. Based on the results of the study on the development of financial institutions mediation revealed a problem related to the lack of reasonable tools that could be used to improving the efficiency of the financial intermediaries market, proposed the main directions of such a process: mobilization of savings, distribution financial assets, payment system, risk management and control over market agents involved in financial operations.

MODELING COMMERCIAL BANKS' KEY DRIVERS FOR FUND MOBILIZATION IN NIGERIA USING ARTIFICIAL NEURAL NETWORKS

This study explores the core role driving the willingness of commercial banks to mobilise funds for economic development based on the Multilayer Perceptron (MLP) of the artificial neural network (ANN) technique. This approach allows for a nuanced understanding of interdependencies that traditional linear models may overlook, making it particularly suited for analyzing intricate financial systems in emerging economies like Nigeria. This study is critically supported by the Financial Intermediation Theory, which explains the role of financial institutions as intermediaries that facilitate the flow of funds from savers to borrowers. Data used for the analysis and prediction is purposively obtained from 10 commercial banks in Nigeria. The results show that financial institutions are mostly driven to mobilize funds because of their commitment to ensuring an adequate flow of money to serve the deficit sectors of the economy compared to any other underlying reasons. The prediction performs optimally with an r2 value of 86.5% with a cubic predictability model of ????. ???????????????? +????. ???????????? + ????. ???????????????? − ????. ???????????????? − ????. ???????? = ????.????????????????, and the Sum of Square Error (SSE) of 0.002 is minimal based on practice. This study is significant as it could enable financial institutions to make future role predictions relating to this concept in Nigerian settings or other settings analogous to Nigeria using the derived ANN model. These insights provide a basis for banks in Nigeria and similar economies to make strategic financial decisions, supporting the application of ANN models to predict and enhance financial institutions' roles in economic development.

Digital Economy and Platform Economy Governance: A Study of Challenges and Countermeasures in Public Policies - Based on the Perspectives of China and EU

Abstract: Platform economy has become an important force in promoting the high-quality development of China's economy. Commercial transaction, financial intermediation, sharing economy and entertainment all depend on the development of the platform economy. This article provides an in-depth discussion on the governance of the digital economy and the platform economy, aiming to provide guidance for current and future policymaking by analyzing the main challenges faced by the two countries (China and Europe) in policymaking and proposing practical responses. At the same time, this article will outline the basic concepts, main features and far-reaching impacts of digital economy and platform economy on the global economy, and combs through their development history and key features. By comparing the differences between China and Europe in the governance of digital economy and platform economy, it adopts SWOT analysis to systematically assess the countermeasures taken by the two countries in addressing the governance challenges and their effectiveness.

Impact of Financial Intermediation and Regulatory Frameworks on Financial Deepening and Economic Growth: Insights from Lesotho

Purpose: The purpose of this study is to analyse the impact of financial intermediation and regulatory frameworks on financial deepening and economic growth in Lesotho, utilizing data from 2003 to 2022. The objective is to explore the relationships between selected financial and economic indicators and assessing their influence on financial deepening. Methodology: This study utilized secondary time series data, which poses challenges regarding authenticity and reliability since it was collected by external parties. However, these concerns were addressed by using data from reputable global agencies like the IMF, World Bank, and the Central Bank of Lesotho’s annual report from 2003 to 2022. The analysis was conducted using the Ordinary Least Squares (OLS) regression method. Findings: The findings highlight the complex role of financial intermediation and regulatory frameworks in shaping financial deepening and economic growth. Higher cash reserve ratios and treasury bill rates negatively affect financial deepening by reducing liquidity and increasing credit costs. However, increased commercial bank deposits with the central bank positively contribute to financial stability and deepening. Moderate inflation also fosters financial deepening by raising the nominal value of financial assets. While ATMs per capita enhance financial access and growth, an increase in bank branches per capita shows inefficiencies, underscoring the need for effective infrastructure and service delivery. Unique Contribution to Theory, Policy and Practice: The study suggests that policymakers should adjust cash reserve requirements, monitor credit expansion to avoid over-lending, and improve banking infrastructure. It highlights the need for careful interest rate management and promoting financial innovation to enhance market depth.

Asset bubbles and financial frictions in small open economies☆

Financial cycles involving asset bubbles frequently coincide with the cyclical expansion and contraction of credit conditions. The collapse of asset and credit bubbles frequently precedes financial crises and economic recessions. We develop a small open economy DSGE model that incorporates asset bubbles and banking frictions. Credit-constrained firms trade in intrinsically useless bubble assets. Financial intermediaries, constrained by their balance sheets, introduce banking friction into financial markets. The static analysis suggests that increases in foreign interest rates unfavorably impact the formation of domestic bubbles. Dynamic analysis indicates that asset bubbles amplify macroeconomic fluctuations, with banking leverage constraints intensifying this effect. Therefore, asset bubbles amplify and propagate economic fluctuations. Unconventional monetary policy, macroprudential policy, and bubbly bailout policy could mitigate the amplification effects of banking leverage constraints and asset bubble bursts on macroeconomic fluctuations, which are mediated through reducing risk premiums, curbing capital outflows, and sustaining asset bubble channels, respectively. Finally, combining unconventional monetary policies with bubbly bailout policies and macroprudential policies yields superior outcomes.

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.

The Financial Inclusion Question in Zimbabwe’s Post-COVID -19, New Normal: Implications for Adoption of Financial Technology (FinTech) on Service Providers

Financial inclusion will be accelerated by the technological opportunities for online financial transactions brought forth by the COVID-19 outbreak. As a result, because there were fewer digital financial transactions, the threats to COVID-19 that were present previously are now more substantial. The aim of this article is to assess the dangers, challenges, and opportunities for financial inclusion brought forth by the use of technology by COVID-19. According to the article, the inherent characteristics of financial technology (FinTech) in connection to financial inclusion allow it to reduce the negative economic and social effects of the ongoing COVID-19 situation. Under COVID-19, the introduction of digital financial transactions has sped up corporate operations and cut expense on doing business. As a result, women now have greater access to transactions involving financial technology (FinTech). The growth of digital financial transactions has made contactless and cashless purchases possible throughout the COVID-19 crisis. The expansion of digital financial inclusion makes it easier to swiftly and effectively implement public assistance programs, such as those for epidemic-affected women. Financial inclusion is being boosted by digital finance, which may eventually replace or improve traditional banking institutions. Working from home has undergone a "revolution" in a number of industries during COVID-19, including banking. Businesses should identify the optimal operating model mix for the future and make sure they have the infrastructure to support widespread, mass flexible working. This calls for reevaluating the function and application of corporate real estate. Since the labor force is likely to become more automated at the same time, resilience is essential. Conceptual Framework of this study is based on the financial inclusion and FinTech concepts which are the main variables guiding the study and it is underpinned by the theories of diffusion of innovation and the Financial Intermediation.

The Determinants of Financial Development: Evidence from Bayesian Model Averaging

We examine the determinants of financial development using our global sample and employing different measures of financial development that assess the degree of depth and efficiency of financial intermediaries. We use instrumental variable Bayesian model averaging to test competing theories with this unifying framework. After examining nearly 20 potential determinants of financial development, we find that the rule of law, as well as some of its components, is the most important. In addition, our results suggest that wealth inequality is irrelevant to banking sector development but positively associated with stock market development.

Exploring Factors that Affect the Performance of Financial Intermediaries in the Insurance Sector

This article evaluates the prominent factors affecting financial intermediaries’ performance in the insurance industry. It is widely accepted that the performance of financial intermediaries in the insurance industry contributes to both industrial expansion and an increase in the market value of financial service providers. Surprisingly, there is not much research on financial intermediaries’ ability to identify obstacles that hinder their effectiveness. This study thus sought to provide strategies for financial services providers, insurance conglomerates, and senior management to gain a broad understanding and thorough review of the important influential factors that should be considered to enhance the performance of financial intermediaries in the insurance sector. To investigate the factors that enhance the performance of financial intermediaries, a close-ended questionnaire was developed in which 300 responses were collected at a market conduct authority. A quantitative approach was judiciously selected to analyse the data and identify the relationship between several factors. Using logistic regression models, key socioeconomic characteristics impacting the performance of financial intermediaries were identified including organisation, gender, education, level of education, and experience. By examining the interplay of regulatory frameworks, market conditions, and managerial practices, the study identified key drivers and barriers to success in this industry. It is recommended that future researchers adopt the strategies to further explore the complexities surrounding hedge funds and collective investment schemes. The findings of the study may aid in the development of future innovative product designs for financial intermediaries in the insurance sector. Keywords: Financial Intermediaries, Financial Intermediation, Financial Sector, Financial Services Providers

Does state affiliation create information advantage to financial analysts

PurposeRecent studies have documented the significant influence of investment bank relationships on the forecast accuracy of affiliated analysts. However, the literature primarily focuses on investment bank-firm relationships, such as whether the investment bank has underwriter or lending relationships with firms. Little attention has been paid to the impact of investment bank-state relationships. To fill this gap in the literature, this paper investigates whether investment bank-state relationships create an information advantage for affiliated analysts.Design/methodology/approachWe empirically test the information advantage of state-affiliated analysts using a large sample of analyst forecasts from China spanning the period 2008 to 2020. Specifically, we investigate whether state-affiliated analysts issue more accurate and timely forecasts around macro events. To address endogeneity concerns, we examine instances where analysts move between state-affiliated and non-affiliated banks, as well as changes in the controlling structure of investment banks.FindingsWe find that state-affiliated analysts demonstrate greater accuracy in forecasts driven by macro events, indicating their information advantage. This effect is more pronounced under conditions of heightened economic policy uncertainty and closer ties between investment banks and the state. After transitioning to a non-state-affiliated investment bank, analysts no longer maintain the ability to make superior macro-event-driven forecasts. Conversely, when the investment bank's affiliation changes from non-state to state, financial analysts gain an information advantage following the establishment of new state affiliation. Additionally, state-affiliated analysts tend to issue more assertive forecasts in response to macro events, which are subsequently echoed by their peers. Furthermore, this information advantage is recognized by investors, enhancing stock price informativeness.Originality/valueFirstly, we contribute to the literature on the economic implications of state ownership in financial intermediaries. Secondly, we enrich the existing literature on financial analysts by acknowledging the pivotal role of investment bank relationships in shaping analysts' behaviors. Lastly, unlike existing literature that treats forecasts driven by macroeconomic events and those influenced by firm-specific events as a homogeneous category, this study contributes to the literature by innovatively categorizing analyst forecasts into two distinct types.

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.

Moral Hazard and the deposit insurance cap: a case study of Northern Rock and Silicon Valley Bank

ABSTRACT The main contention of this article is that government insurance for bank deposits should be unlimited. In spite of claims made in the literature concerning the moral hazard dangers of deposit insurance schemes, I argue that these claims are unconvincing; indeed, the empirical record - discussed here in relation to Northern Rock and SVB - demonstrates that uninsured depositors exhibit similar behaviour to their insured counterparts, undermining the claim that limiting insurance induces risk-monitoring. In contrast, there is strong evidence that in developed jurisdictions with established, mature regulatory institutions, deposit insurance does not result in excessive risk-taking on the part of banks. The significant financial stability benefits accruing to insuring bank deposits include the elimination of depositor runs, a reduction in the incentives for unregulated bank-like financial intermediation (shadow banking), and heightened competition. Activity restrictions and other measures can reduce any heightened risk-taking which emerges as a result of wider insurance coverage.

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.

Real Consequences of Shocks to Intermediaries Supplying Corporate Hedging Instruments

Abstract I show that shocks to financial intermediaries supplying hedging instruments to corporations have real effects. I exploit a quasi-natural experiment in South Korea in 2010, where regulations required banks to hold enough capital for taking foreign exchange derivatives (FXD) positions. Using variation in exposure to this regulation across banks, I find that the regulation caused a reduction in FXD supply, leading to a significant decline in exports for firms contracting derivatives with more exposed banks. Results indicate the crucial role of intermediaries in allocating risks through derivatives provision and establish a causal relationship between financial hedging and real economic outcomes.