Global Financial Sector Research Articles

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Financial Technology: Legal Challenges for Indonesia Financial Sector

The global financial services sector is transforming as technology advances. Various types of technology based innovative financial business models or financial technology (fin-tech) are growing rapidly around the world, including Indonesia. The Financial Stability Board (FSB) incorporates the fin-tech progress in its work plan in 2017 in the perspective of financial stability. In Indonesia, the Financial Services Authority has issued the Financial Services Authority Regulation No: 77/FSAR.01/2016 on Technology-Based Lending and Borrowing Services to provide a legal basis for fin-tech activities, in particular services with peer to peer lending models. In practice, fin-tech in Indonesia is not only used to facilitate lending and borrowing, but also used for other business models, especially start-up business, investment and social activities, which are not included in the scope of lending and borrowing. On the other hand, fin-tech development in Indonesia is expected to contribute to economic development, particularly in facilitating micro, small and medium enterprises to gain access to finance. The advantages of fin-tech include cost efficiency and ease of access to finance, but on the other hand there are some obstacles and risks that potentially arise, such as credit risk, insufficient technology, misuse of funds and user/consumer data and protection of national interests such as money laundering as well as disruption to monetary stability. Therefore, in addition to the need for comprehensive regulation, supervisory aspects by the financial services authorities are urgently needed to make fin-tech a part of the financial services sector.

Analyzing asset of bubbles in the housing market with right-tailed unit root tests: the case of Turkey

Purpose- Housing markets are linked to macroeconomic and financial stability. The creation of different financial instruments on residence, the presentation of residence as an assurance, the impact of residence prices on saving and consumption through the wealth effect are some of the housing market and general economic interactions. Developments in the residential sector must be carefully monitored for financial stability. The residential sector has usually played an important role in the global economy and financial sector bubbles. It has been observed that the wealth effect created by the housing bubble surpasses the effect of the stock bubble and that the housing bubble explosion causes more economic devastation compared to the other assets bubbles. While housing markets are increasingly buried in financial markets, the connections between them have strengthened. Such a situation can cause financial crises as a way of extinguishment of a housing bubble. In the case of housing bubbles, bank balance sheets are generally more affected by real estate and it is more likely that the decline in real estate prices are transmitted to the other sectors of the economy with the credit channel. When the housing price bubble burst, the collapse in the financial system is also reflected in the real sector. In this study, with reference to the real housing price index and the real rent price index, it has been investigated whether there is the housing bubble in Turkey. Methodology- Sup ADF and Generalized SADF (GSADF) tests were used to determine the asset of bubbles and to determine when the housing bubbles had occured. The data set obtained in the study extends from January 2010 to November 2017. Findings- The results reveal empirical evidence on the absence of speculative bubbles in the Turkish housing market. Conclusion- There is no data with reference to housing price to say that there is the housing bubble in Turkey during the period under study. Turkey blocked the creation of the housing bubble in the period under review with corrections through its internal dynamics.

Tobacco-Free Investment: Harnessing the Power of the Finance Industry in Comprehensive Tobacco Control

Leveraging the power of the global financial sector is emerging as a powerful, targeted strategy in tobacco control. The tobacco epidemic has been in decline in many high income nations since the 1960s but shows few signs of abating in low and middle income nations, with the tobacco industry offsetting regulatory restrictions and shrinking markets in industrialised countries by actively promoting tobacco use in poorer countries with weaker tobacco control. Lung cancer rates and tobacco-related mortality statistics reflect these changes with levels declining in high income countries but yet to peak in low and middle income countries. This contrast calls for new approaches that can cross borders, transcend the barriers between legislative domains and offer a truly international approach. Tobacco Free Portfolios works collaboratively with the global finance sector to inform, advance and prioritise tobacco-free investment. This initiative aims to encourage finance leaders to reflect on and reconsider commercial relationships with the tobacco industry, urging them to be part of the solution when it comes to addressing one of greatest global challenges of our time.

Speaking in riddles: The Panama Papers and the global financial services sector

In 2007, on the cusp of the economic crisis, a paper was published in Growth and Change (June 2007) entitled “Shadow Europe: alternative European financial geographies,” which began to tackle the idea of shadow finance in Europe and the size and inseparability of what was regarded as “shadow” from “normal” financial flows. A number of the observations made have proved remarkably prescient and one particular phrase stands out in the light of the recent revelations about the so‐called Panama Papers in 2016: “Strategically important flows of capital derived from complex underground production systems that have seldom been analyzed in detail move through the European financial networks that connect to offshore tax havens (Christensen, 2003). These havens are not a separate and distinct entity from the financial networks that connect world cities but rather a vital counterpart on which the functioning of the cities connected via those networks depends” (2007, p. 319). The revelation of the Panama Papers constitutes a new critical juncture from which to re‐visit that 2007 paper and to re‐examine the state of knowledge on shadow and formal financial flows.

Cryptocurrencies in Commerce: A Kenyan Perspective

Cryptocurrencies as a form of digital currencies have dominated discourse regarding the future of the global financial sector. Debates abound on whether they really amount to currencies or rather just commodities; the utility that can be derived from their underlying technology; the risks they pose to conventional commerce and finance and more. This paper delves into these key facets of the cryptocurrencies debate, first by providing an understanding of what cryptocurrencies are and the properties of their much-lauded underlying technology: distributed ledgers. Further, a brief analysis of the currencies and payment systems in Kenya shall be undertaken to frame cryptocurrencies’ acceptability in Kenya’s framework. Specifically, this paper interrogates the question of whether cryptocurrencies may be legally recognized as ‘currency’ in Kenya. The paper also provides a conclusive review of cryptocurrencies’ application in commercial transactions in the Kenyan economy, as well as possible avenues for abuse during such use. This paper then concludes with a summary of observations and recommendations for shaping of possible policy and regulatory approaches in Kenya.

Analysis of changing bank services in globalization process of financial business

The process of economic development of every country is closely connected with the functioning of effective infrastructure of financial market, in the carter of which is a bank system. The success of market relations, the provision of intensive economic growth, the increasing country’s competitiveness at the world market and the growth of population well-being are determined by the fact of how much effectively banks are able to act at different segments of bank services. The innovations in the bank field are closely connected with the innovations in the global and world financial sector. The issues about the influence of globalization on bank activities, the development of market of bank services, empirical researches are of great interest nowadays. Special attention is paid to the Ukrainian market of bank services. The analysis of the current state of the bank sector of the Ukrainian economy gives an opportunity to disclose some problems in the bank sphere as: political and financial instability in the country, the low quality of bank assets, the decrease of liquidity of bank assets, the low credit to the bank system among population, unstable legal framework in the state, the high level of vulnerability of the bank system to the country’s currency policy conducted by NBU.

How to Define a Systemically Important Financial Institution (SIFI) A New Perspective

The recent financial crisis has demonstrated that a failure of Systemically Important Financial Institutions (SIFIs) could seriously damage the stability of the financial system. A precise and consistent definition of a SIFI is pivotal to ensure efficient and effective regulation of the global financial sector. This paper proposes a threefold test logic that allows to classify Financial Institutions as systemically important across the various industry segments.

How to Define a Systemically Important Financial Institution — A New Perspective

The recent financial crisis has demonstrated that a failure of systemically important financial institutions (SIFIs) could seriously damage the stability of the financial system. A precise and consistent definition of a SIFI is pivotal to ensure efficient and effective regulation of the global financial sector. This paper proposes a threefold test that indicates which financial institutions are systemically important across the various industry segments.

Revisiting Financial Services Sector Transparency through Whistleblowing: The Case of South Africa and Switzerland

AbstractThe recent global financial crisis has demonstrated the ineffectiveness of traditional regulation in averting financial crime. Consequently the supervision of financial institutions has been increasingly re-evaluated and such endeavours have resulted in the reregulation of the sector in many jurisdictions. This article argues that, much as these strategies can be said to be laudable, until they emphasize engagement with the people who work in those institutions through making it possible for them to report corporate misconduct, these legislative paradigms will not avail much. As such, this article argues for the increased use of insiders through whistleblowing as a mechanism to support the exposure of illegal activities. By comparing the whistleblowing approaches adopted in South Africa and Switzerland, this article attempts to contribute to the standardization of approaches that can be used to enhance global financial sector transparency and minimize financial crime.

Asset servicing at a second-tier financial centre: Framing embeddedness through mechanisms of the firm-territory nexus

The integration of regional economies within multi-location firm networks, and the development effects stemming from such integration, is recognised as a critical but deeply complex research area (Dicken and Malmberg, 2001). In this paper, with Edinburgh’s asset servicing activities providing an empirical context, a conceptual framework is developed that points to an initial suite of mechanisms that may underpin the firm-territory nexus. By doing this, a revised perspective on how territorial and network embeddedness overlap, is given. Recognising the heterogeneous nature of head office-branch and subsidiary relationships - which asset servicing functions are ultimately inscribed in - this paper shows how the local economic and institutional contexts present in Edinburgh mesh and jostle with the co-ordinating dynamics of the global financial services sector.

Analysis of macroeconomic factors causing non-performing loans in India

In last six years after the global financial crises Indian banking sector is seeing a phenomenal rise in the level of non-performing loans. It has moved back to the level of 2004-2005 from the lowest level of 2008-2009. In this perspective, this paper investigates the trends in NPL in Indian banks and main macroeconomic factors that may be causing the surge in the level of NPL. The correlation analysis along with pairwise Granger causality test followed by panel regression allows evaluating the impact of selected macroeconomic variables on the NPL. The result indicates that the GDP growth, change in exchange rate and global volatility have major effects on the NPL level of the Indian banking sector. The paper has been organised in four parts: introduction and literature review, methodology, results and conclusion and policy implication. The first section looks at the different studies undertaken at different countries and specifically in India for non-performing loans. The methodology section deals with the different statistical methods used for the analysis of data and the rationale behind choosing those methods. The next section shows and analyses the results. The last section provides the conclusion derived from data analysis and some policy implication.

The IMF, its mandate and influence in prevention of financial sector abuse

Purpose The purpose of this paper is to articulate the mandate of the International Monetary Fund (IMF) not least in promoting a sound legal regulatory environment for markets to operate globally and its inherent challenges. While acknowledging the plausible work done by the IMF in supporting countries to achieve their macro-economic stability, the paper articulates some of its shortcomings as a global institution. It is evident that the post-war climate in which the World Bank and IMF were created has drastically changed – which presupposes that these institutions now need to reposition themselves to reflect on contemporary global challenges accordingly. The author has argued in the past that a robust regulatory system should be devised taking into account the dynamic challenges in the market environment but also to prevent them from happening again. Design/methodology/approach The paper has utilized empirical evidence to evaluate the mandate of the IMF in addressing its dynamic challenges such as the global financial and debt crises in Europe and the USA and prevention of financial sector abuse globally. The IMF is one of the Bretton Woods Institutions charged with the oversight responsibility to enforce policies and enable countries to manage their macro-economic challenges efficiently. Findings The findings demonstrate that the IMF is as relevant and important as it was when it was created in 1945. However, there is a need for intrinsic and structural changes within this institution to continue discharging its mandate in a changed global regulatory landscape. The IMF is still crucial in fostering a fundamental stabilization function to fragile global economies in areas of financial and technical assistance, and developing requisite legal and supervisory infrastructure within fledging member countries. Research limitations/implications The paper was written by analysis of both theoretical and empirical data largely based on secondary data sources. It would have been better to first present the findings in an international conference to solicit wide views and internalize them accordingly. Practical implications While acknowledging the plausible work done by the IMF and its counterpart the World Bank in facilitating global financial markets regulation and prevention of financial sector abuse, as oversight institutions, they need to constantly review their mandate to respond robustly to their dynamic challenges such as the global and debt crises and financial sector abuse. Oversight institutions need to constantly review and adapt their mandate accordingly, if they are to discharge their varied responsibilities efficiently. They cannot stand still in the face of challenges because they will be superseded and kept at a back foot. Social implications Markets and states are embedded in each other, and the way they are regulated is of a significant importance to varied stakeholders and people. Originality/value This paper is one of its kind, is unique in its character and evaluates embedded issues using empirical evidence in a way not done in its context before. Secondary data sources have been evaluated to achieve a thoughtful analysis of the objectives of the paper.

Governance and bank characteristics in the credit and sovereign debt crises – the impact of CEO power

The global financial sector recently suffered from two interrelated crises: the credit crisis and the sovereign debt crisis. A common question is whether the recent experience with the credit crisis has helped in dealing with the sovereign debt crisis. We study more specifically whether banks with powerful CEOs perform better or worse than other banks, and if there is any difference in this relationship between the two crises. Using unique hand-collected data for 378 large global banks, we find that CEO power has a significant positive relation to bank profitability and asset quality, but also to insolvency risk, during the sovereign debt crisis. Thus, strong CEOs do not appear to be detrimental to bank performance. Our results also support the idea that deposit insurance may have contributed to the credit crisis.

From High Frequency Trading to Self-Organizing Moral Machines

Technology is responsible for major systemic changes within the global financial sector in general and particularly in the trade in financial products. The global financial sector has already developed into a comprehensive network of mutually connected people and computers that are constantly evaluating and approving millions of transactions. Algorithms play a crucial role within this global financial network. An algorithm is in essence merely a set of instructions developed by one or more people with the intention of having these instructions performed by a machine such as a computer, a software robot or a physical robot in order to realize an ideal result. As part of a development in which we as human beings have ever higher expectations of algorithms and these algorithms become ever more autonomous in their actions, we cannot avoid including possibilities in these algorithms that enable ethical or more considerations. To develop this ethical or moral consideration, we need a kind of ethical framework which can be used for developing algorithms. With the development of such a framework we can start to think about what we as human beings consider to be moral action by machines within the financial sector based on such a framework.

Systemic Risk: Time-Lags and Persistence

Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, in this article we show that daily tail stock returns exhibit substantial persistence, auto-serially and cross-serially. In particular, lower tail returns can trigger downward spirals of tail returns. The vulnerability towards downward spirals increases with the institution's size. To quantify the systemic risk related to tail return spillovers, we develop the Conditional Shortfall Probability (CoSP). We show that CoSP exhibits a substantially smaller estimation error than other systemic risk measures. Our empirical results indicate that a substantially larger fraction of financial companies triggers significant tail return spillovers to the brokerage and American non-financial sector than to the global financial sector. Still, the aggregate spillover risk is larger with respect to the financial markets than with respect to non-financial markets. In particular, banks exhibit the smallest exposure to systemic spillovers, while the exposure of brokers and insurers is substantially larger. Moreover, the impact of systemic spillovers lasts particularly long for spillovers to the insurance market.

Vulnerabilities to agricultural production shocks: An extreme, plausible scenario for assessment of risk for the insurance sector

Climate risks pose a threat to the function of the global food system and therefore also a hazard to the global financial sector, the stability of governments, and the food security and health of the world’s population. This paper presents a method to assess plausible impacts of an agricultural production shock and potential materiality for global insurers. A hypothetical, near-term, plausible, extreme scenario was developed based upon modules of historical agricultural production shocks, linked under a warm phase El Niño-Southern Oscillation (ENSO) meteorological framework. The scenario included teleconnected floods and droughts in disparate agricultural production regions around the world, as well as plausible, extreme biotic shocks. In this scenario, global crop yield declines of 10% for maize, 11% for soy, 7% for wheat and 7% for rice result in quadrupled commodity prices and commodity stock fluctuations, civil unrest, significant negative humanitarian consequences and major financial losses worldwide. This work illustrates a need for the scientific community to partner across sectors and industries towards better-integrated global data, modeling and analytical capacities, to better respond to and prepare for concurrent agricultural failure. Governments, humanitarian organizations and the private sector collectively may recognize significant benefits from more systematic assessment of exposure to agricultural climate risk.

Governance and Bank Characteristics in the Credit and Sovereign Debt Crises What is Different?

The global financial sector recently suffered from two interrelated crises: the credit crisis and the sovereign debt crisis. A common question is whether there, for the sovereign debt crisis, has been any lessons learnt from the credit crisis. One interesting specific question is the relationship between bank performance and CEO power: do banks with powerful CEOs perform better or worse than other banks, and do we see any difference in this relationship between the two crises? We study the relationship between CEO power and bank performance, measured by bank risk, profitability, and asset quality, while controlling for bank and bank governance characteristics, as well as country and regulatory characteristics. With unique hand-collected data on 378 large global banks, we find that CEO power is positively related to bank profitability and asset quality, but also positively related to insolvency risk, during the sovereign debt crisis. Thus, strong CEOs do not appear to be detrimental to bank performance. Our results also support the idea that deposit insurance may have contributed to the credit crisis.

Risk Control versus Risk Management in the Context of an Active Management: The Emerging Market Alternative

The regulatory environment to which financial institutions and specially banks are subjected has been evolving over the years. However, global financial sector stability has remained elusive with the global economy experiencing more financial crises in the past decade than the preceding decades. These financial tremors have had their epicenters in the advanced economies triggered by events in the banking industry. Further, economic growth in the developed economies has been very low and sometimes negative with close to 50 percent of the stock market value having been wiped out by the 2007/2008 global financial crisis. Against a backdrop of improved bank supervision and regulation courtesy of the Basel frameworks the Eurozone economies are reeling in recession. On the other hand the emerging and transitional economies have for the past close to a decade and a half showed resilient and outstanding performance with less stringent supervisory regimes enabling commercial banks to earn high profits. The profitability of the industry bolsters investment and recurrent expenditure all of which have the effect of fueling inflation and volatile exchange rates which accelerate economic growth, high interest and lending rates as well as market liquidity. These conditions provide opportunities for arbitrage trading that gives above average returns on investment as exemplified by the trend analysis. The high economic growth comes with attendant high inflation, lending rates and returns on government securities. The study set out to determine whether the high return environment within developing economies provides arbitrage investment opportunities and influences foreign investment by attracting foreign investment participation in government securities trading. The specific objectives were to demonstrate the adverse effects including the systemic vulnerabilities imposed by excess competition occasioned by thorough regulation and to empirically determine whether higher high exchange, lending, Tbill and Tbond rates attract foreign investment to developing economies with focus on Kenyan government securities. The study adopted secondary time series data analysis to establish whether or not lending rates, USD exchange rates, Tbond and Tbill rates affect foreign investment in government securities. The time series data analysis confirmed that in the long run, Tbond, USD exchange and lending rates all significantly influence the foreign investment in Kenya vide the Treasury bonds avenue. Based on these findings we conclude that emerging and transitional economies offer a perfect arbitrage investment opportunity for low return advanced economies.

Global Economic Shock Spillovers to the Saudi Economy: An Assessment Framework

This paper introduces a framework for assessing global shock spillover specifically address the global financial spillovers to the Saudi economy by exploring the main fundamental determinants of creditworthiness including key global factors, Macroeconomic and Financial Sector vulnerability. Finally highlights the extent to which the Saudi financial system have been able to regain a sound standing in the aftermath of the recent financial crises to which they have been subjected. The main conclusion is that global financial crisis has had limited direct impact so far on domestic financial markets but, the country was and still effected through trade, reflected in high inflation rate, tighter liquidity and weak investor confidence. Government generous spending has been successful in reducing the impact of the global crisis, but Saudi Arabia should adopt alternative venue to the current high spending levels. In light of anticipated fall in oil prices, the current strategy is not sustainable.