Financial Market Activity Research Articles

The role of financial sector competition for monetary policy

Abstract In this paper, we examine the impact of competition in the banking industry on financial market activity. In particular, we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a transactions role for money. Interestingly, we demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy. Under perfect competition, higher rates of money growth lead to lower interest rates and a higher volume of lending activity. In contrast, in a monopoly banking sector, money growth restricts the availability of funds and raises the cost of borrowing.

Using a Leading Credit Index to Predict Turning Points in the U.S. Business Cycle

Financial indicators such as yield curves and stock prices have been extensively used as leading indicators of economic activity due to their forward looking content. Indeed, the Leading Economic Index (LEI) for the United States, a widely used forecasting tool for business cycle turning points, includes several financial components. However, we argue that the coverage of financial and credit market activity in the LEI can be improved to account for some of the structural changes in the U.S. economy (especially in financial markets) and we present evidence that at least one of the existing components, namely real money supply does not perform as well as it used to as a leading indicator in the past several decades. Over the past three decades, many new financial indicators, such as interest rate swaps, credit default swaps, certain corporate-treasury spreads, the Federal Reserve’s senior loan officer survey, etc. have become available, but, since most of these new indicators have not been available for a long enough period, very little research has been conducted to evaluate their utility as leading indicators. In this paper we evaluate the usefulness of a large number of financial indicators according to their ability to predict recessions (i.e. peaks in the business cycle). First, we establish the criteria which are helpful for assessing whether and when such financial indicators generate signals of recessions. We then choose the best ones and aggregate them into a single composite index of financial indicators which we name the Leading Credit Index (LCI). Our approach differs from others in the literature in that we focus on a small, carefully selected set of indicators as index components and, additionally, in our selection criteria we target business cycle turning points rather than financial stability. We argue that this leading credit index can be helpful to estimate recession probabilities better than individual indicators, including some of the existing components of the LEI, especially real money supply. As opposed to other recent financial indexes created to measure financial instability or volatility, the purpose of ours is to signal recessions in the US economy, and as such it could serve as an appropriate new component for the U.S. LEI.

Financial liberalisation and productivity – a sample of countries from SE Asia

Financial liberalisation, which is aimed at removing regulations on financial market activity, has become a central part of the financial globalisation process. The paper econometrically estimates by means of a seemingly unrelated regression (SUR) technique the impact of a comprehensive financial policy, including regulation on the average productivity of capital. Our findings suggest that the effects of the financial policies are not uniform across the sample countries and that some form of financial control or restraints may indeed enhance economic efficiency or progress.

Whole of Government Accounting in New Zealand: A Review of WGA Financial Reports From 1993 to 2010

The purpose of accruals‐based whole of government (WGA) financial reports has been the subject of international debate. Heald and Georgiou (2011) note the U.K.'s emphasis on a macro‐fiscal policy role for WGA and hope that, in addition to facilitating review of fiscal targets, WGA will also help to correct a narrow focus on net debt by providing information about assets and liabilities other than those included in the net debt measure. They also hope that WGA will reveal asset portfolio changes resulting from privatizations. Heald and Georgiou had available only very limited data about the as‐yet‐unpublished U.K. WGA, and proposed that data from countries with a longer history of published accruals‐based WGA may help to understand the usefulness of WGA. In 1992 New Zealand's government became the first sovereign government to publish accruals‐based financial reports for the whole of the central government. This article presents New Zealand's summarized WGA from 1993 to 2010. It identifies the changing mix of assets and liabilities, the tendency for complex WGA financial reports to obscure, rather than to reveal, portfolio changes resulting from privatization, and the growing involvement in financial market activities.

Banking at the crossroads: How to deal with marketability and complexity?

The objective of this overview paper is to address some key issues affecting the stability of financial institutions. The emphasis is on the micro-economics of banking: what type of incentives do financial institutions have in the current landscape? And what does this imply for regulation and supervision? The paper is motivated by the proliferation of financial innovations and their impact on the financial services industry. A fundamental feature of more recent financial innovations is their focus on augmenting marketability. Marketability has led to a strong growth of transaction-oriented banking (trading and financial market activities). This is at least in part facilitated by the scalability of this activity (contrary to relationship banking activities). It is argued that the more intertwined nature of banks and financial markets induces opportunistic decision making and herding behavior. In doing so, it has exposed banks to the boom and bust nature of financial markets and has augmented instability.Building on this, the paper discusses the incentives of individual financial institutions. Issues addressed include: frictions between relationship banking and transaction activities that are more financial market focused, ownership structure issues, the impact of the cost of capital, the effectiveness of market discipline, and what configuration of the industry can be expected. We will argue that market forces might be at odds with financial stability. We will point at institutional and regulatory changes that might be needed to deal with the complexity of financial institutions.

Enhancing coverage of financial market activity

In July 2009 a special edition of Economic and Labour Market Review presented a series of articles identifying areas for improvement in the coverage of financial statistics under the ‘Developing financial statistics for policy’ programme. This article focuses on the gaps that exist in current statistical coverage of financial activity, especially as it relates to innovation in the financial sector. It is a precursor to the potential development of appropriate statistical measures that will capture the values of new financial instruments and the behaviour of new institutions. The resulting metrics will improve the depth of understanding of financial markets and provide the foundation for relevant and timely macroprudential indicators that will assist in the prediction of systemic risks to financial institutions.

Banking at the Cross Roads: How to Deal with Marketability and Complexity?

The objective of this overview paper is to address some key issues affecting the stability of financial institutions. The emphasis is on the micro-economics of banking: what type of incentives do financial institutions have in the current landscape? And what does this imply for regulation and supervision? The paper is motivated by the proliferation of financial innovations and their impact on the financial services industry. A fundamental feature of more recent financial innovations is their focus on augmenting marketability. Marketability has led to a strong growth of transaction-oriented banking (trading and financial market activities). This is at least in part facilitated by the scalability of this activity (contrary to relationship banking activities). It is argued that the more intertwined nature of banks and financial markets induces opportunistic decision making and herding behavior. In doing so, it has exposed banks to the boom and bust nature of financial markets and has augmented instability. Building on this, the paper discusses the incentives of individual financial institutions. Issues addressed include: frictions between relationship banking and transaction activities that are more financial market focused, ownership structure issues, the impact of the cost of capital, the effectiveness of market discipline, and what configuration of the industry can be expected. We will argue that market forces might be at odds with financial stability. We will point at institutional and regulatory changes that might be needed to deal with the complexity of financial institutions.

Price Discovery and Profitability: Analysis of Broker Activities in a Nascent Financial Market

Price Discovery and Profitability: Analysis of Broker Activities in a Nascent Financial Market

Primum Non Nocere: The Impact of Dodd-Frank on Silicon Valley

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 in response to the systemic credit crisis of 2008-2009, wisely did not attempt to sweep Silicon Valley venture capital financing activity into its regulatory net. The nature of the investing activities conducted by VC funds were unrelated to the types of financial market activity which gave rise to the credit crisis. Dodd-Frank’s exemption for VC funds from its otherwise universal private fund adviser registration requirement was therefore entirely appropriate.However, SEC implementing regulations under Dodd-Frank contemplated both an affirmative reporting obligation under the Advisers Act on VC funds, and SEC examination authority with respect to VC fund books and records, which the Article argues would impose greater cost and burden on those funds than justified by the nature of their investing activities.As a separate matter, the Dodd-Frank Act mandated that the SEC exclude the value of an individual’s principal place of residence from their net worth for purposes of determining whether the individual qualifies as an “accredited investor.” The Article discusses the implications of this change, arguing that a deleterious impact might perhaps in future be observed with respect to the availability of pre-VC “friends and family” financing for early, seed-stage startups.The Article’s observations and arguments are made on the basis of the Author’s many years of direct experience as a former full equity partner at Silicon Valley’s largest law firm.

Understanding the New Institutional Architecture of EU Financial Market Supervision

Most of the big decisions about the rules governing financial market activity in Europe are now taken at the EU level. This has not been matched by a simultaneous centralisation of supervisory responsibility. Yet, notwithstanding that frontline supervision remains mostly a Member State responsibility, with a layer of EU-wide structural co-ordination added on top, the longstanding process of step-by-step assumption of supervisory functions by bodies that have a pan-European remit has undoubtedly accelerated in the aftermath of the financial crisis. This article examines the recent EU institutional developments with respect to financial market supervision against the background of arrangements at Member State level, and assesses their significance. It contends that whilst the recent EU institutional reforms are at the boundaries of current legal, political and practical feasibility, they include some key breakthroughs that bring the prospect of the European scene becoming dominated by euro-authorities with direct supervisory power across significant swathes of financial market activity considerably closer.

Trading Places: Securities Regulation, Market Crisis, and Network Risk

The rising power of traders has fundamentally transformed financial market networks and risks. Further, the increased complexity of traded securities and trading strategies within financial networks has magnified shortcomings of existing industry risk management practices as well as dominant regulatory regimes. Financial markets are ultimately places where people trade. Broader social and technological changes have altered the nature of trading activities in financial markets. Innovations in technology, financial instruments, and trading strategies have increased financial market efficiency but have also transformed sources of financial market risks. Financial market networks heighten the need for fundamental rethinking of financial market regulation and reassessment of ways both regulators and market participants can better manage risk. This article evaluates the importance of financial networks and related factors such as globalization, complexity, and secrecy for financial markets. This article argues that, as recommended in a recent Department of Treasury Blueprint for future financial market regulation, U.S. adoption of a modified Twin Peaks model of regulation may provide for more efficient and effective regulation of financial market activities and risk and help avoid future market crises. This model would move portions of regulatory oversight of existing functional regulators such as the Securities and Exchange Commission into new regulatory bodies that regulate by objective and would establish a separate regulatory function for market risk and market stability oversight. Adoption of this model, combined with the establishment of specific core financial market regulatory principles, should enable regulators and market participants to manage risk more effectively.

Global Roles of Currencies

This paper presents a new concept - the global roles of currencies. The concept combines the domestic and international (cross-border) use of currencies and therefore captures the overall importance of different currencies in a globalised economy. The measure of a currency's global role is based on the size and stage of development of the underlying economy, as well as the size and stage of development of its financial markets and the scope of financial instruments available in this currency. The paper applies the concept to 22 currencies of advanced and emerging economies. The results confirm the well-known ranking for the leading currencies - in particular the US dollar and the euro - but give considerably greater weight to currencies of emerging economies than the results obtained from the international debt market, which has so far been used as the basis for measuring the international role of currencies in capital markets. The paper also discusses this established measure in detail, arguing that in view of financial globalisation, an indicator based on currency shares in the international debt market alone represents a decreasing share of international financial market activity, as this market excludes government debt, other domestic debt and equities, which are increasingly of interest to international investors. The paper also presents an empirical application of the new global concept to examine cross-border portfolio holdings in debt and equity markets across advanced and emerging economies. It finds that the global role indicator is positively correlated with such holdings and, especially for emerging economies, fares better than the established international debt market indicator. The findings suggest a positive relationship between domestic financial development and international financial integration.

Global Roles of Currencies*

AbstractThis paper presents a new concept – the global roles of currencies. The concept combines the domestic and international (cross‐border) use of currencies, and therefore captures the overall importance of different currencies in a globalized economy. The measure of a currency's global role is based on the size and stage of development of the underlying economy, as well as the size and stage of development of its financial markets and the scope of financial instruments available in this currency. The paper applies the concept to 22 currencies of advanced and emerging economies. The results confirm the well‐known ranking for the leading currencies – in particular the US dollar and the euro – but give considerably greater weight to currencies of emerging economies than the results obtained from the international debt market, which has so far been used as the basis for measuring the international role of currencies in capital markets. The paper also discusses this established measure in detail, arguing that in view of financial globalization, an indicator based on currency shares in the international debt market alone represents a decreasing share of international financial market activity, as this market excludes government debt, other domestic debt and equities, which are increasingly of interest to international investors. The paper also presents an empirical application of the new global concept to examine cross‐border portfolio holdings in debt and equity markets across advanced and emerging economies. It finds that the global role indicator is positively correlated with such holdings and, especially for emerging economies, fares better than the established international debt market indicator. The findings suggest a positive relationship between domestic financial development and international financial integration.

Competing for a Share of Global Derivatives Markets: Trends and Policy Choices for the United States

This is a preliminary study on the status of the U.S. in the global market for derivatives-related services. We include some of the policy choices available to enhance this status. We begin with a review of the importance of active and efficient derivatives markets for the U.S. economy. We then analyze the status of U.S. derivatives-market service providers in both over-the-counter and exchange-based markets. We then discuss factors that play a role in determining where a provider of derivatives services is located. By far the dominant factors are the regional concentration of customers and overall financial market activities. We also consider regulatory and legal factors, and access to specialized human resources, among other factors. We recommend the development and maintenance of a dataset bearing on the co-location advantages of financial services firms within the U.S., particularly in and near New York City, along with data pertinent to related human resources. Our analysis departs from the view expressed in some 'competitiveness' circles as to a presumed wholesale migration of financial activity from New York and London and as to the dominant role of regulatory differences in such migration.

The evolving landscape of banking

The structure of the financial services industry is in flux. Liberalization, deregulation, and advances in information technology have changed the financial landscape dramatically. Interbank competition has heated up and banks face increasing competition from nonbanking financial institutions and the financial markets. The predictability of the industry with low levels of financial innovation, little innovation in distribution channels and well defined and rigid institutional structures is gone. Product innovations, new distribution channels, and emerging new competitors are in abundance. Moreover, the subprime crisis that has hit the financial sector in 2007–2008 appears to have a major impact on the structure of the industry. This article emphasizes the importance of understanding the economics of banking for assessing the changes in the industry. In particular, we point at relationship banking as a prime source of the banks’ comparative advantage. The proliferation of transaction-oriented banking (trading and financial market activities) does however seriously challenge relationship banking. In order to focus on these issues in a rigorous way, we will evaluate the key insights from the relationship banking literature, including the potential complementarities and conflicts of interest between intermediated relationship banking activities and financial market (underwriting, securitization, etc.) activities. We also address the issue of the optimal conglomeration of bank activities, including the empirical evidence on scope and scale economies. We analyze the strategic positioning of banks in the currently highly uncertain competitive arena, and link this to the theory of the firm and particularly firm boundaries and learning.

Financial structure change and banking income: A Canada–U.S. comparison

Data suggest that the Canadian financial structure, and particularly indirect finance (e.g., banking), have become more market-oriented. We associate this financial trend in part with the regulatory changes that have occurred in Canada since the 1980s. Financial intermediaries are increasingly involved with financial market activities—e.g. off-balance sheet (OBS) activities such as underwriting securities. In this article we analyze the noninterest income attributable to these financial market activities. We find that the variance of Canadian banks’ aggregate operating-income growth is rising because of the increased contribution of noninterest income. Overall, our analysis corroborates the U.S. findings of Stiroh and Rumble (Stiroh, K., 2006. A portfolio view of banking with interest and noninterest assets. Jounal of Money, Credit, and Banking 38, 1351–1361; Stiroh, K., Rumble, A., 2006. The darkside of diversification: the case of U.S. financial holding companies. Journal of Banking and Finance 30, 2131–2161): by contributing to banking income volatility, market-oriented activities do not necessarily yield straightforward diversification benefits to Canadian banks.

Globalization of International Financial Markets

Global financial market activity refers to the transactions and financial flows that occur within bond, equity, derivatives, banking, and exchange rate markets around the world. The importance of the globalization of financial markets lies in the fact that the financing process is an integral part of both commercial and non-profit making activities. The surge in financial market activity during the last years may be attributed to deregulation and technological improvements, which now allow access to worldwide markets at reasonable transaction and information costs. The trading activity taking place on organized exchanges and over-the-counter (OTC) markets is undertaken by participants who differ in terms of their foreseen investment horizons, return objectives and tolerance to risk. Globalization of financial markets has brought about higher efficiency and competition, yet one should not overlook the fact that the potential for the spreading of financial crises is higher in a global market place. It is therefore important to ensure that adequate systems are in place to deal with such eventualities, both at international and national levels as well as in individual organizations. Other concerns about the globalization of financial market activity, center on whether the current system is in fact channeling long-term funds to finance real business activities, especially in the case of less developed countries.

Local Control, Resources and the Nova Scotia Steel and Coal Company

Financial market activity indicates that Maritime interests lost control of the Nova Scotia Steel and Coal Company in 1915 and 1916. Production and financial records of the firm suggest that poor profitability contributed to the change of ownership. The firm's weakness is traced to its resource base and the resulting high costs of production. The causation implicit in conventional accounts is reversed: control and ownership changes were a result of, rather than a cause of, production difficulties and weak profitability.

Die Stabilität von Finanzmärkten:Wie kann die Wirtschaftspolitik Vertrauen schaffen?

Abstract From Theresia Theurl’s point of view financial markets exhibit certain features that turn them inherently unstable. Therefore, economic policy measures were necessary and advisable, but they should not take the shape of isolated and selected interventions. Rather, these measures of financial market supervision and regulation had to be integrated into a comprehensive concept of micro- and macroeconomic policy in order to allow the creation of stabilizing trust. In his contribution, Jan Pieter Krahnen maintains, that the systemic risk of banks and financial institutions has changed and risen in recent years. According to his view, this is due to a more widespread use of credit derivatives. Although they may cause a more efficient distribution of credit risk in the banking sector, at the same time they could mean a higher vulnerability of the banking sector to system-wide contagion effects of credit risk. As such, financial market supervision as well as the Basel II rules on Capital Standards should take into account not only the credit risk exposure of individual financial institutions, but also correlation measures of their share prices. For Thomas Gehrig, empirical anomalies demonstrate the relevance of awareness and trust in financial markets. This note would argue in favor of social policies that enhance public awareness in financial markets as a basis for trust. And so naturally, these policies need to be complemented by a strong financial order that aims at minimizing behavioral risks. He says, trust requires a regulatory framework that reduces manipulation by private as well as public interests. A competitive order complemented by strong regulatory oversight may go a long way towards generating liquid financial markets and the creation of trust. Trust by individuals, however, would be most strongly encouraged when individuals are entrusted in managing their own financial market activities including their own pension arrangements.

Republic of Belarus: Financial Sector Assessment Program - Detailed Assessment of Observance of CPSS Core Principles for Systemically Important Payment Systems - Belarus Interbank Settlement System: BISS: RTGS Service

This Detailed Assessment of the Observance of Core Principles for Systemically Important Payment Systems (CPSS), Belarus Interbank Settlement System (BISS): RTGS Service on the Republic of Belarus reviews the core principles for systematically important payment systems. BISS offers the possibility to reserve funds in view of being used for certain specific purposes. Financial market activities in Belarusian rubel are limited, but potentially emerging. Although the Belarus Bankers Association in principle provides a forum for cooperation between banks, in payment system issues, it currently does not play an important role.