Global Financial Stability Research Articles

How Does the “Shanghai-Shenzhen-Hong Kong Stock Connection Schemes” Impact the Excess Goodwill?

ABSTRACT Emerging capital markets are critical to global economic development and financial market stability. Therefore, with annual data of 2,701 listed firms from 2012 to 2020, the paper evaluates the effect of “Shanghai-Shenzhen-Hong Kong Stock Connection schemes” (SHSZ&HKSC) on excess goodwill with the quasi-natural experiment. The results show that the SHSZ&HKSC significantly reduces excess goodwill, where the potential paths of influence are analyst attention and foreign ownership. The in-depth analysis suggests that the reducing effect is more pronounced in firms with higher technological innovation and management quality.

Threshold effects of financial inclusion on financial stability: Evidence from BRICS nations

This paper investigates the impact of financial inclusion on financial stability in BRICS countries from 2004 to 2020. Using a panel smooth transition regression model, the results reveal a U-shaped relationship between financial inclusion and financial stability. Financial inclusion reduces financial stability up to a threshold of 44.7%. Beyond this point, financial inclusion contributes to greater financial stability, through gradual transitions. Enhanced financial inclusion supports banks in stabilizing their deposit funding by facilitating access to more stable, long-term funds and alleviating the negative impacts of fluctuations in returns. Furthermore, the study examines the role of institutional quality in shaping the financial inclusion-financial stability nexus, indicating a significant positive effect, especially in the upper regime. These findings provide valuable insights for financial regulatory authorities, highlighting the importance of promoting financial inclusion in BRICS economies and adapting regulations to mitigate potential risks to global financial stability.

Beyond volatility: Systemic resilience and risk mitigation in interconnected commodity markets

In today's interconnected commodity markets, understanding volatility spillover dynamics is crucial. This research builds on Diebold & Yilmaz (2012, 2014) to estimate System Resilience, a vital measure for investors and policymakers. By using connectedness-based estimates, a unique stability score for each system component is constructed and aggregated to estimate overall System Resilience. This concept is applied to three key commodity segments: Energy, Agriculture, and Metals. Results show that most commodities, especially bullion, maintain moderate stability, offering investment alternatives even during periods of heightened systemic risk. The study also examines rolling estimates of System Resilience to identify early warning signals through increased standard deviation in successive resilience series. Tipping points indicate critical slowdowns where recovery to a stable state is hindered. Findings suggest that apart from the Global Financial Crisis (GFC), commodity portfolios remain relatively stable. The implications are significant for energy policymakers, traders, and financial investors. Early detection of warning signals supports strategic risk management. This research contributes to academic discourse and provides actionable insights, highlighting the importance of early warning indicators in enhancing financial resilience in an ever-evolving market landscape. It underscores the value of foresight in navigating global financial stability.

Global banking systems, financial stability, and uncertainty: How have countries coped with geopolitical risks?

The study provides global evidence on the effects of news-based geopolitical risk (GPR), events, and associated risks on the financial stability of banking systems. With extensive large panel data from 179 economies over the past decades, we document strong adverse effects of GPR on financial stability with the predicted decrease (increase) in the bank (non-performing loans) Z-score. Commercial banking systems are heterogeneously exposed to GPR. Possible mechanisms to mitigate the effects of GPR include multidimensional financial development, enhanced world governance, and public finance. Our findings are robust with a battery of econometric approaches controlling for time-varying macroeconomic factors and banking characteristics (e.g., capitalization, concentration, performance) across countries and regions. The impacts of GPR on global financial stability are persistent when we control for systematic banking crises, economic policy, world uncertainty, and global uncertainty spillovers. While higher capitalized banks could secure ample financial stability with substantial military expenditure, the Asia Pacific and emerging economies are sensitive to widespread GPR. The study highlights the roles of institutional quality and world governance factors through times of uncertainty. In The context of global risks, greater global and comprehensive collaborations with mitigated GPR threats are inevitable for our inclusive growth toward Sustainable Development Goals. Our findings are critical to policymakers, advisers, and economists for our global financial stability and sustainable development.

Impact of Monetary Policy on Stock Market Volatility

Purpose: The general objective of the study was to analyze the impact of monetary policy on stock market volatility. Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library. Findings: The findings reveal that there exists a contextual and methodological gap relating to the impact of monetary policy on stock market volatility. Preliminary empirical review revealed that monetary policy exerts significant influence on stock market volatility through various channels such as interest rate adjustments, quantitative easing, and forward guidance. It highlighted that the timing and clarity of policy announcements play a crucial role in shaping market reactions, with unexpected shifts often leading to heightened volatility. Global interconnectedness amplified these effects, underscoring the need for coordinated policy responses. Behavioral factors also contributed, as investor sentiment and market psychology could magnify volatility independently of economic fundamentals. Understanding these dynamics is crucial for effective policy design and market stability amidst evolving financial landscapes. Unique Contribution to Theory, Practice and Policy: Efficient Market Hypothesis (EMH, Rational Expectations Theory and Keynesian Economics may be used to anchor future studies on monetary policy on stock market volatility. Recommendations from the study included integrating behavioral finance models into economic frameworks to enhance predictive accuracy. It advocated for clearer and more consistent central bank communications to align market expectations with policy actions, reducing uncertainty-driven volatility. Collaborative efforts among central banks were emphasized to manage international spillovers and enhance global financial stability. Adaptive policy frameworks were proposed to respond flexibly to changing market conditions while promoting regulatory measures to safeguard against excessive risk-taking. These recommendations aimed to foster a stable financial environment supportive of sustainable economic growth and market confidence.

Theoretical Analysis of the Effectiveness of the Sharia Financial System in Facing the Global Economic Crisis

This research theoretically examines the effectiveness of the Islamic financial system in dealing with the global economic crisis. This study discusses economic theory, principles, characteristics, influence, comparison, experience, innovation and challenges in the Islamic financial system. Through a qualitative approach by conducting theoretical analysis of literature related to the Islamic financial system and the global economic crisis. The results of this research show that the Islamic financial system has great potential to become an attractive option in facing global economic challenges. By strengthening the foundation of sharia principles, developing appropriate innovations, and overcoming existing challenges, the sharia financial system can continue to develop and make a significant contribution to global financial stability and inclusion. This research confirms that the Islamic financial system, with its basic principles such as the prohibition against usury and excessive speculation, as well as the emphasis on real asset-based transactions, offers a more stable and fair alternative compared to the conventional financial system. The profit sharing principle shows the ability to reduce systemic risk by distributing risk more fairly among the parties involved in financial transactions.

International Organisations' Contributions to Establishing and Safeguarding Global Legal Standards and Financial Stability

This article explores the roles and distinctive characteristics of major global institutions, including the United Nations (UN), European Union (EU), Council of Europe (CoE), Organization for Security and Cooperation in Europe (OSCE), North Atlantic Treaty Organization (NATO), and World Trade Organization (WTO). It offers a concise overview of international organisations as collaborative partnerships among states with defined objectives while also analysing the underlying motivations for their establishment. The study employs diverse investigative methodologies, including thorough literature reviews and statistical analyses, to examine core concepts such as “legal order”, “international legal order”, “international security”, and “global security”. It takes a historical perspective to trace the evolution of international organisations and utilises generalisation and diagnostic techniques to offer practical recommendations and reach conclusions. The article differentiates between “international security? and “global security”, underscoring the latter’s broader scope. Furthermore, it underscores the pivotal role of the United Nations (UN) in safeguarding global peace, fostering amicable ties among nations, advancing international collaboration, and acting as a forum for coordinating various national endeavours. International organisations, spearheaded by the United Nations (UN), are pivotal in upholding the international legal framework and safeguarding global security in the face of ever-evolving challenges and threats.

The non-linear impact of monetary policy on shifts in economic policy uncertainty: evidence from the United States of America

A stochastic volatility estimation of VIX index’s latent volatility is used for the United States of America, as a proxy for the adjustments in the levels of investors’ uncertainty related to current and future economic policies. The impact of monetary policy stance on such measure is examined in the framework of the distributed lag non-linear models (DLNM). We place this analysis in the literature stream emphasizing the various sources of heterogeneity concerning investors’ expectations. The main finding is that the monetary policy does impact non-linearly the adjustments in investors’ predictions. While a tighter monetary policy does generally contribute to an increase in VIX’s latent volatility, the shape of such effect varies across different GLM and GAM specifications of DLNM. This outcome remains robust, even if: (1) we control for the global price of Brent crude and consumers’ confidence; (2) we use, instead of the stochastic framework, a Markov-switching GARCH-based estimator; or (3) we replace the monetary policy instrument with monetary policy uncertainty. We argue that accounting for its nonlinear effects on financial markets is of critical importance for the design of a monetary policy pursuing global financial stability.

A Study of the Financial Crisis and Relevant Monetary Policies

This essay examines several pivotal moments in recent economic history in order to demonstrate the significant influence of monetary policy on global financial crises. Exploring the complex relationship between central banks, particularly the Federal Reserve, and the various crises that occurred, the study navigates through the consequences of monetary policy interventions. Beginning with an overview of the Federal Reserve's roles and mechanisms, the narrative unfolds into critical periods, including the stagflation of the 1970s, the subprime crisis in the 2000s, and the unprecedented challenges posed by the COVID-19 pandemic. Each crisis serves as a crucible for evaluating how well monetary policies can stabilize the economy in turbulent times. The examination centers on the application of diverse financial tools, encompassing interest rate modifications, open market operations, and non-traditional actions like asset acquisitions. Through meticulous examination, this paper seeks to explain how monetary policies, often evolving in response to economic paradigms, have shaped and reshaped the global financial landscape during times of crisis. By identifying the commonalities across these different crises, the study highlights the evolution of the Federal Reserve's strategies, underscoring its adaptability and resilience. These monetary interventions have broad implications for global financial stability, emphasizing the critical role of central banks in navigating the complexities of a rapidly evolving economic environment.

Reducing the number and the size of sovereign defaults in the world: Long-term trend or temporary phenomenon?

The paper explains the current global trends, which consist in a decrease in both the number and the size of defaults. For this purpose, a new approach to modeling the probability and the size of defaults based on nonlinear models (generalized additive models) has been applied. The obtained empirical estimates confirm the significant nonlinearity of the relationships between factors. Based on the proposed approach, it is possible to detect the disciplinary effect of the rate of increase in interest expenses and confirm the significance of the rate of debt accumulation as a development of previous works. We have found that the main contribution to this trend is made by the institutional factor — government efficiency: the more effective the government is, the better it ensures debt sustainability, reducing both the number of defaults and their size. Another important factor is the soft monetary policy of developed countries. It affects the default size, reducing it, but is not the reason for the decrease in the number (probability) of defaults in the world. Thus, the current trend is long-term and shows the progress of some countries and international organizations in reducing risks to global financial stability.

Geopolitical Dynamics and the Adoption of International Financial Reporting Standards: Implications from the Conflict between Ukraine and Russia

This study explores the potential implications of geopolitical dynamics surrounding the conflict between Ukraine and Russia on the adoption and implementation of International Financial Reporting Standards (IFRS) in affected countries. Analyzing the interplay between political tensions, economic sanctions, and domestic instability, the research sheds light on the challenges and opportunities for regulatory harmonization and financial transparency in regions affected by geopolitical conflicts. Key findings highlight the impact of regulatory uncertainty, economic sanctions, and security concerns on businesses' compliance with IFRS, as well as the influence of policy shifts and government agendas on the trajectory of regulatory reforms. The study underscores the importance of adaptive regulatory strategies and international cooperation in promoting financial stability, transparency, and resilience amid geopolitical uncertainty and conflict. By addressing these challenges, stakeholders can navigate the complexities of geopolitical dynamics to advance the adoption and implementation of IFRS, fostering global financial standards and stability in the face of geopolitical challenges.

Are financial sanctions truly “smart”? Evidence from the perspective of cross‐border capital flows

AbstractFew studies are found to examine the impact of financial sanctions on cross‐border capital flows. Using a panel data from 48 countries from 2000 to 2019, this paper aims to examine the impact of financial sanctions on the volatility of cross‐border capital flows. We employ difference‐in‐differences (DID) and spatial DID (SDID) models, showing the result that financial sanctions lead to an exacerbation of the volatility of cross‐border capital inflows and outflows in the targeted country, with the channel of negative impact on the financial sector in the targeted country. The subsample regressions indicate heterogeneous impacts of financial sanctions depending on economic structure and capital account openness. Additionally, the result of the SDID model shows that financial sanctions cause cross‐border transmission of financial risks, and that the spatial spillover effect of financial sanctions will also have negative economic impacts on other countries in addition to the target country. The significance of this study lies in emphasizing that international financial sanctions affect the economy of target countries through cross‐border capital flows. Meanwhile, we confirm that financial sanctions pose a certain threat to global financial stability.

Leveraging natural capital accounting to support businesses with nature-related risk assessments and disclosures.

Nature loss threatens businesses, the global economy and financial stability. Understanding and addressing these risks for business will require credible measurement approaches and data. This paper explores how natural capital accounting (NCA) can support business data and information needs related to nature, including disclosures aligned with the Taskforce on Nature-related Financial Disclosures recommendations. As businesses seek to measure, manage and disclose their nature-related risks and opportunities, they will need well-organized, consistent and high-quality information regarding their dependencies and impacts on nature, which few businesses currently collect or track in-house. NCA may be useful for these purposes but has not been widely used or applied by businesses. National NCA guided by the U.N. System of Environmental-Economic Accounting may provide: (i) a useful framework for businesses in conceptualizing, organizing and managing nature-related data and statistics; and (ii) data and information that can directly support business disclosures, corporate NCA and other business applications. This paper explores these opportunities as well as synergies between national and corporate natural capital accounts. In addition, the paper discusses key barriers to advancing the wider use and benefits of NCA for business, including: awareness of NCA, data access, business capabilities related to NCA, spatial and temporal scales of data, audit and assurance considerations, potential risks, and costs and incentives. This article is part of the theme issue 'Bringing nature into decision-making'.

Heterogeneous dependence of the FinTech Index with Global Systemically Important Banks (G-SIBs)

This paper aims to investigate the Granger causality relationship in quantile between the FinTech Index and globally systemically important banks (G-SIBs). The result was observed that at the median and under conditions of extreme quantiles in the FinTech Index, there was no Granger causality relationship between the FinTech Index and the vast majority of systemically important banks. Our research offered vital insights to regulatory agencies, highlighting the importance of monitoring market conditions at higher or lower quantiles to prevent the impact of financial technology on G-SIBs and to maintain global financial stability.

SYSTEMIC ENDOGENOUS AND EXOGENOUS HAZARDS TO MODERN GLOBAL MONETARY AND FINANCIAL STABILITY

This article explores the systemic endogenous and exogenous threats facing global monetary and financial stability amidst escalating geo-economic fragmentation. It critically examines the evolving dynamics in the dominance of traditional currencies, particularly the US dollar, in light of the emergent roles of the euro and the yuan, contextualised by global financial interdependencies and rapid advancements in digital technology. The study underscores the traditional criteria for an international currency – including economic stability, openness to trade and capital, and the depth and liquidity of financial markets – and supplementsthese with the contemporary necessity for institutional robustness. A thorough literature review reveals vulnerabilities within the global banking system exposed by recent stress tests, highlighting the fragility of banking liquidity. It also examines the impacts of geopolitical tensions and rapid technological transformations, such as the effect of social media on financial markets and the swift movement of capital. The discussion extends to the implications of geopolitical fragmentation on global liquidity and economic stability, emphasising the critical need for robust preventive measures and a regulatory framework adaptable to evolving financial threats. The core findings of this research emphasise that effective regulatory reforms aimed at enhancing financial stability could alleviate the volatility of capital flows and diminish systemic risks, thereby reinforcing the status of certain currencies as international reserves. The paper posits that for a currency to qualify as an international reserve, it must possess assets that ensure value stability and exhibit minimal price impact during financial disruptions. Methodologically, this study employs a blend of theoretical and empirical approaches, merging quantitative and qualitative analyses to address its research objectives comprehensively. Given the current global financial uncertainties and shifts in the international currency arena, this paper is crucial for policymakers, financial analysts, and academic researchers engaged in the discourse of international finance.

Pursuing responsible finance in a world of risking risks

Pursuing responsible finance in a world of risking risks Marc Brightman and James Christopher Mizes, from the University of Bologna, explore the importance of responsible finance in a world of rising risks. For over a decade, experts have been sounding the alarm about the new risks that crises like climate change, political unrest, and pandemics pose for global financial stability. Financial investors worldwide have joined a chorus of economists, analysts, and central bankers focused on harnessing financial markets’ power to prevent the worst effects of today’s planetary “polycrisis”. (1) And yet, these professionals have long run up against an enormous obstacle: how can the future effects of these crises be anticipated? And who exactly is responsible for preventing them? At the University of Bologna, our team of anthropologists at the Hau of Finance research project is pursuing answers to these pressing political questions by observing what we call “the moral turn” in global finance.

15 years of research on systemic risk across the globe: The evolution of the field and its drivers

This study examines the evolution of research on systemic risk during the 2007–2021 period, encompassing the Global Financial Crisis, European financial crisis, the outbreak of the COVID-19 and a number of other notable episodes undermining global financial stability. Our research goal is two-fold. First, based on Scopus-indexed publications, we identify the most impactful countries, institutions and scholars in the field, revealing a gradual but notable decline in the annual shares of publications on systemic risk associated with major advanced economies. This is offset by the increasing role of emerging markets, primarily, China, which makes this research field more competitive. Second, we are also concerned with the drivers of research on systemic risk in a vast sample of countries during the observation period. By applying a combination of variable selection techniques to 33 indicators that can potentially incentivize research on systemic risk, we find that low bank profitability as well as the general productivity of economic research are the most robust factors stimulating such publications. A higher country’s score on the global innovation index also spurs the research in this field. Conversely, countries with a higher power distance index, i.e favoring hierarchy and low risk-taking, tend to produce less research on systemic risk.

GREY FLOWLESS, OR PREDICTING CAPITAL OUTFLOWS IN CRYPTOCURRENCY

Globalization and irrational capital distribution have fuelled global financial crises. Illicit transactions on a global scale worsen financial challenges, limiting government spending on public services. Amid these challenges, blockchain technology and cryptocurrencies have emerged as potential solutions. Due to anonymity public identification through “keys”, some scholars argue that cryptocurrencies create an opportunity for misuse as an easy tool for money laundering, tax evasion and illegal activities. This study investigates the relationship between illicit finance flows and cryptocurrency markets, utilizing grey systems theory and grey relational analysis. Drawing samples from 41 states with the highest cryptocurrency trade volumes, the research reveals nuanced dynamics within the cryptocurrency market, shedding light on the connections between cryptocurrencies, shadow activities, and capital outflows. The findings contribute valuable insights to the ongoing discourse on the impact of cryptocurrencies on global financial stability. The intricate exploration of these interconnections underscores the need for a comprehensive understanding of the role cryptocurrencies play in shaping the contemporary financial landscape.

Implementation of Sustainable Finance Regulation for Financial Institutions in Indonesia

The interaction between people and the environment are very vital because functioning ecosystem services are important resources for people. Economy is a subsystem of human society, which is also a subsystem of life on earth and its ecosystem. The issue of environmental change has shifted from a peripheral concern of scientists and environmentalists to being a central issue in global policymaking. To ensure global long-term financial stability and economic development, financial institutions need to significantly change their performance to promote more responsible and sustainable business practices. The Financial Services Authority of Indonesia has unveiled a roadmap, which sets forth the end goal of sustainable finance in Indonesia by the financial services industry and determines the benchmark for improvements in sustainable finance. This paper explains the reasoning and implementation of sustainable financing policies under the term of Environment, Social, and Governance concepts. This paper explains the complementarities of the Islamic worldview and sustainable financing policies by opening up the topic of the scientific nature of heterodox Islamic economics in particular. The term sustainable financing conveys the fact that society and economics, finance, environment, governance, polity, institutions, etc. cannot be independent of a unique and common set of moral and ethical values. The ESG concept is completely in line with the Maslahah concept under shariah law. It embeds moral and ethical values in the body of heterodox Islamic economic thought aligned with the shariah ruling.

The Rise of Digital Finance and Systemic Risk: Implications, Challenges, and Coping Strategies

With the continuous development of Internet technology, digital finance has become increasingly popular. The digital transformation of finance has brought huge shocks to the traditional financial industry. This paper aims to examine the interrelationship between digital finance and systemic risk and explore in depth its implications for the global financial system's stability. This paper examines key areas such as digital payments, P2P lending, and virtual currencies. Due to the rapid development of digital finance, while bringing great efficiency improvements, new systemic risks also follow. This study attempts to suggest a range of regulatory and risk management strategies. These strategies are designed to deal with the systemic risks brought about by digital finance so as to ensure the stability and sustainable development of the financial system. This study is expected to provide strong references and recommendations for the financial industry and policymakers to realize the potential value and impact of digital finance while protecting financial stability.