International Financial Stability Research Articles

Monetary Smurfing Analytics Model using ML

The act of taking money obtained from illegal operations, such as drug trafficking, and disguising it as profits from a legitimate business venture is known as money laundering. The money obtained through illegal action is regarded as dirty, and to make it appear clean, it is "laundered." Money laundering is a major concern to the country these days, as well as financial institutions. The sophistication of this illegal activity is growing; it appears to have beyond the tired old trope of drug trafficking to include financing terrorism and, of course, personal benefit. Research on anti-money laundering is crucial since money laundering is a global issue that seriously jeopardizes international security and financial stability. Furthermore, it's estimated that the banking system seizes only 0.2% of the money that has been laundered. The crime itself is growing more sophisticated and intricate, and banks are becoming more vulnerable as a result of its ongoing volume amplification. Considering the role that banking institutions play in the money-laundering industry, practitioners and researchers are becoming more interested in creative ways to solve problems and enhance anti-money-laundering efforts. Researchers are starting to look into the viability of artificial intelligence methods in this setting. A systematic knowledge deficit concerning a thorough study that meticulously examines and combines artificial intelligence methods for countering money laundering in the banking industry was discovered, though. To combat investment fraud, the majority of global financial institutions have been putting anti-money laundering measures into place. Data mining tools have emerged recently and are thought to be effective methods for identifying instances of money laundering.

Implementation of Aaoifi Standard No.35 by Saudi Islamic Banks: Opportunities and Challenges

Purpose of the study: The research aims to study and analyze the reality of reserves in Islamic banks in light of Financial Accounting Standard No. 35 issued by AAOIFI in 2018. In addition to determining the accounting irregularities or errors, in the practice of accounting and disclosure related to reserves in Saudi Islamic banks. Theoretical Framework: The research is based on the financial standards of the Islamic banks. Recent financial crises have prompted increased attention from the international community on the need for domestic financial institutions to be strengthened in order to better withstand subsequent emergencies. To ensure national and international financial stability, standards have been developed and implemented to encourage better policies and stronger institutional and market foundations. The international standards community's initiatives provide a comprehensive approach to promote the financial standards of the Islamic banks. It is crucial that self-assessments be supplemented with an impartial external check on conformity with standards. Design/Methodology/Population: The researchers applied the inductive analytical approach for evaluating the financial standards of the Islamic banks. The study population consists Islamic banks In Saudi Arabia: Bank Albilad, Al-Rajhi Bank, and Alinma Bank. The research analyzed the financial statements of three Islamic banks. Findings: The research concluded that all Saudi Islamic banks do not apply the accounting standards issued by AAOIFI. These bank's financial statements do not reflect the reality of their financial position, because they only apply traditional accounting standards. The Saudi Islamic banks do not apply the accounting standard issued by AAOIFI Standard No.35. The reasons behind the non-application of Islamic accounting standards issued by the AAOIFI in Saudi Islamic banks are the Saudi Banking Law and the instructions of the Saudi Central Bank. In addition, shareholders in Islamic banks bear all reserves and provisions. Research, Practical and Social Implications: The research suggests that banking supervisory authorities in the Kingdom of Saudi Arabia have to take the necessary measures to amend the laws and instructions related to Islamic banks., and to follow up efforts by AAOIFI with central banks in the countries in which Islamic banks operate to oblige Islamic banks to the accounting standards issued by AAOIFI. Originality/Value: The research is unique in identifying the importance of the AAOIFI standards in improving the financial standards of the Islamic banks.

IMF and Global Public Goods: seeking a new role in the global economy

Current global economic challenges have stimulated public demand for coordinated activities at a transnational level (as evidenced by the impact of the COVID-19 pandemic crisis). In this context, academic discourse and the forums of various multilateral organizations have invoked the concept of global public goods (GPGs). This paper explores the practical realization of the GPGs concept within the global structures of the International Monetary Fund (IMF), assessing the extent to which the wealth of services provided by the Fund may actually be considered GPGs. Approaching the subject from a theoretical perspective, the paper draws on analytical evaluations of relevant documents and IMF data sources, as well as empirical findings derived from semi-structured in-depth interviews (IDI) with representatives of international organizations (including the IMF) in Washington, DC. The findings suggest that the IMF provides a diverse array of products supportive of international financial stability (particularly ‘best-shot public goods’), and may therefore be regarded as exemplifying the GPGs concept. During times of relative global economic stability, IMF expenditure shifts toward technical support and monitoring, placing the organization in a role more akin to a provider of pure public goods. However, despite the IMF enjoying a number of competitive advantages (and resources) that would seem to preordain a role as a major GPGs provider, the GPGs concept is only marginally evoked in the organization’s publications and activities. Moreover, certain elements of the IMF’s model of operation drastically reduce the organization’s current operating capability as a GPGs provider.

Global financial crisis, international capital requirement and bank financial stability: an international evidence

PurposeFinancial crises (FC) remain a global threat to the financial stability of financial institutions and international bank regulatory capital requirement (IBRCR) by the Committee on Banking Supervision provides mechanism for curbing the adverse effect of FC on financial stability. Hence, the purpose of this study is to provide, evidence on how IBRCR tones down the adverse FC effects on bank financial stability (BFS).Design/methodology/approachThe study uses 102 economies between 2006 and 2016 in a two-step dynamic generalized method of moments model.FindingsThe results show that while FC and IBRCR negatively and positively impact BFS, respectively, it is observed that under the increasing presence of IBRCR, the negative effect of FC on BFS declines. Additionally, the results show that economies that maintain minimum IBRCR above 10.5% recommended by BASEL III are able to reinforce a significant reduction in the negative effect of FC on BFS.Practical implicationsThese findings imply that in as much as financial crisis is injurious to BFS, regulators and policymakers can rely on IBRCR to avert the injurious effects of FC on BFS. Clearly, while IBRCR is necessary for reinforcing BFS through FC, bank managers who maintain IBRCR above the recommended 10.5% stands a better chance to taming the avert effect of FC on BFS. Additionally, economies that have not full adopted the BASEL minimum capital requirement may have to do so given its potential of dampening the adverse effect of FC on BFS.Originality/valueThe study presents an international perspective of how BASEL capital requirements can help tame global financial crisis using a global sample of 102 economies.

Empirical Determinants of Derivative Markets in Asia, Latin America and Sub Saharan Africa

The paper examined the relationship between the derivative markets and financial markets depth, efficiency, stability and access in Asia, Latin America and Sub-Sahara Africa. A panel logit model was applied from the period 2009 to 2017 on the financial market development data collected for countries in Asia, Latin America and Sub-Sahara Africa. The results of the panel logistic regression model positively revealed that derivative markets are influenced positively by the improvement to financial access (measured by stock market capitalization to GDP) and financial efficiency (measured by net interest margin) of the financial markets of the regions studied. However, an examination of financial depth and financial stability were observed to have an adverse propensity for the derivative market development. Therefore, countries in Asia, Latin America and Sub-Sahara Africa are recommended to significantly focus on improving financial efficiency and financial access within their respective financial markets. Further a document review was carried on the publications of the Committee of Global Financial System (CGFS) and Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlement (BIS). It is recommended that policy makers must promote greater respect for market autonomy, strengthen legal and judicial systems, boost regulatory independence and effectiveness, deepen the domestic investor base, pursue bi-directional international participation while preparing for spill overs and develop robust financial market infrastructure to facilitate the establishment of vibrant derivative markets. Keywords: Bank for International Settlements (BIS), Derivative markets, financial access, financial depth, financial efficiency, financial stability and panel logit model. DOI: 10.7176/RJFA/13-18-03 Publication date: September 30 th 2022

A Decade after the Global Financial Crisis: New Regulatory Challenges to Financial Stability

Since the global financial crisis in 2008 regulatory measures have been taken to strengthen the international financial sector. There are however regulatory challenges that have the potential to destabilise the international financial sector. This article examines three of these challenges: Fintech, Brexit, and Emerging Markets Economies. There is currently no significant analysis of these issues in relation to their effect on global financial stability. This article addresses this gap and analyses why these issues form a threat to financial stability. Fintech is modest but growing exponentially and there is little regulation in place, Brexit is characterised by prolonged uncertainty and potentially significant negative effects on the economy, and Emerging Markets Economies now occupy a far larger part of the international financial sector than in 2008 and their potential effects on global financial stability are also significantly stronger. The analysis leads to the conclusion that the common threat emerging from these challenges is policy uncertainty which leads to increased wariness from investors, which in turn leads to sudden changes in capital flows. This can potentially affect international financial stability. To mitigate these effects a more internationally harmonised approach to policy and regulation is key. Financial law, financial stability, systematic risk, financial regulation reforms, fintech, brexit, emerging markets, financial crisis, global financial market

Еволюційний розвиток фінансової системи України

The article is aimed at studying the evolutionary development of the financial system of Ukraine. The sustainability of a well-regulated and well-controlled financial system is essential for both domestic and international economic and financial stability. The study examined the development of Ukraine’s financial system, reflected important links between financial stability, financial depth, financial accessibility and the importance of managing the financial system in Ukraine. Problems in financial systems can affect the efficiency of monetary policy, reduce economic downturn, require capital financing and influence the exchange rate, as well as create significant financial costs associated with saving troubled financial institutions. Moreover, with the increasing interrelations between financial institutions, as well as the emergence of financial companies along with more developed financial and trade relations between financial structures in one jurisdiction, it is possible to quickly block the movement of funds across national borders. Prospects for further explorations in this direction are the study of the development of innovative technologies in accordance with changes in the preferences of financial services consumers; distribution of virtual service channels, personalized financial services and mobile solutions; development of open banking and expanding cooperation between traditional financial institutions and FinTech companies, which will facilitate provision of better satisfaction of clients’ needs. Adoption of comprehensive changes to regulations on depository activities, securities, as well as the activities of stock exchanges will give professional stock market participants more opportunities to introduce innovations in the provision of financial services.

Regulating Digital Currencies: Towards an Analytical Framework

Digital currencies have the potential to improve the speed and efficiency of payments and to broaden financial inclusion. The principal goal is to facilitate payments among consumers on a day-to-day basis as an alternative to cash, both domestically and across national borders. This Article begins by critically examining and critiquing the ongoing progress to try to develop retail digital currencies, focusing on the two most feasible approaches: central bank digital currencies (CBDC), and privately-issued currencies that are backed by assets having intrinsic value (stablecoins). The Article then analyzes how these digital currencies should be regulated and supervised, exploring their similarities and differences. Both CBDC and stablecoins raise innovative legal issues as well as the types of legal issues normally associated with payment systems, although in novel contexts. If widely used, stablecoins also could impair central banks’ ability to control monetary policy and possibly undermine confidence in the value or operational continuity of currencies, which could threaten international monetary and financial stability. Stablecoin regulation must also address that potential threat.

International Financial Regulation: Why It Still Falls Short

While recent reforms are welcome in many ways, there are still significant reasons to doubt that the post-crisis tightening of international financial regulation guarantees future financial and economic stability. The most important reason is that the reforms have focused too narrowly on ensuring that an unstable financial sector will not aggravate downturns by restricting the supply of credit. More attention needs to be paid to ensuring that an overly exuberant financial system does not weaken other parts of the economy by encouraging a rapid buildup of debt during upturns. Some combination of time-varying monetary and regulatory policies (a macrofinancial stability framework) will be required to do this. In addition, many of the individual regulatory measures taken to date, both macroprudential and microprudential, have shortcomings. Their coherence as a package has also been questioned.

The IMF's Financial Catch-22: Global Banker or Lender of Last Resort?

The International Monetary Fund (IMF) has dual institutional roles: a steward of international financial stability and a global banker safeguarding the resources of its sovereign shareholders. But, how does the IMF behave when its balance sheet becomes exposed to higher-than-usual credit risk, creating a financial catch-22? We expect the IMF varies its lending behavior, based on the nature of sovereign credit crises. When there is high contagion risk, the IMF aims to preserve global financial stability as a lender of last resort by extending large loans, notwithstanding its balance sheet strains. The IMF employs policy conditionality to hedge its lending risk, but prioritizes alleviating global market turmoil over program compliance. When market contagion is contained, however, the IMF is more likely to act as a traditional banker, suspending programs for non-compliance. Ironically, given its tendency to forgive non-compliance as a lender of last resort, our theoretical framework suggests that the Fund intensifies its moral hazard problem. We test our theoretical priors by conducting a comparative case study analysis of IMF decision-making over time for two of its largest borrowers: Argentina and Greece. Leveraging volumes of hundred-paged minutes from IMF executive board meeting archives and extensive field research interviews, we illustrate the lending stances of IMF directors evolve in response to changes in global contagion risk. By examining the IMF’s own institutional agency under high financial risk, this study offers new insights for the study of international political economy and international organizations.

Depreciation and Trade Deficits in India: Problems of Foreign Exchange and Domestic Industrialisation Base

The present article develops an argument in which depreciating Indian rupee is basically due to underdeveloped status of domestic production base that is reflected in continuing trade deficits. It argues that price theoretic policies not only manage trade imbalances but also completely neglect the revival of domestic production base that can induce a tendency towards exports-led correction of the trade imbalances, that is, it neglects the importance of exports to make a transition towards strong production base, manageable trade balances and strong foreign exchange status; if so, the continuing Indian deprecation negates international financial stability status. The present article provides an alternative policy focus that is on finance-led initiations of broader Youngian–Kaldorian division of labour that favourably shapes demand-based market mechanism (and growth of aggregate demand) and results in sophistication in industrial differentiation, that is, increased specialisations in intermediate goods production. It is argued that such transition confers a developed status with respect to the (BBoP basic Balance of Payments i.e., trade and foreign direct investment [FDI] inflow prospects), which in turn is crucial to achieve financial balance of payments (BoP) stability. All in all, the price theory is inapplicable when trade is based on absolute cost disadvantages and Keynesian policies provide the solutions.

Can swap line arrangements help solve the Triffin dilemma? How?

AbstractThe recent massive rise in the currency reserves of emerging countries has once again brought the Triffin dilemma to the fore, albeit different to the past. At all the events, new tools for the creation of international liquidity emerged during the global financial crisis of 2007–08, including bilateral swap line arrangements (BSAs). These arrangements ultimately constitute a form of lending of last resort. Therefore, for emerging countries, they can substitute currency reserves and help resolve the Triffin dilemma. In this manner, the stipulation of BSAs by advanced countries, although motivated by domestic reasons, contributes to international financial stability. Providing access to these arrangements automatically would contradict the principle of constructive ambiguity and the discretion that should be at the base of the lending of last resort also at the international level.

Central Bank Reserve Management and International Financial Stability-Some Post-Crisis Reflections

Motivated by the tension first revealed during the global financial crisis between the domestic and international financial stability obligations of central bank reserve managers, this paper offers some reflections along four main lines. First, the paper highlights how official reserve management has evolved to mirror important aspects of private institutional investor behavior over time, and addresses the policy relevance of this convergence. Second, evidence is documented of procyclical portfolio behavior by reserve managers during the crisis, which added to the stabilization burden shouldered by central banks in reserve currency-issuing countries. Third, in appraising the evolution of related vulnerabilities since the crisis, the paper finds grounds for both cautious optimism and lingering concern, the balance of which points to an uncertain future resolution. Fourth, some potential remedies are presented to help dampen the procyclical impulses of reserve managers in future periods of international financial turbulence.

Macroeconomic flaws in the IMF’s ‘New’ Institutional view: The case of Brazil

In 2012, the IMF issued its ‘New’ Institutional View which endorsed using capital controls for international financial stability, given certain prerequisites. We argue this ‘View’ will be no more successful than the Fund’s other policy predecessors because it mandates solving capital flow-induced macroeconomic imbalances through ‘market-based’ adjustment measures rather than by using capital controls, thus relegating the latter to a secondary role. To present our argument, we use Brazil’s recent history as a proxy for the IMF’s current platform. This is because, despite explicitly not taking advice from the Fund, its actions have been, ironically, nonetheless consistent with the ‘New’ View’s updated prescriptions- which still culminated in crisis. As a result, regardless of the revisions it made in the wake of the Great Financial Crisis, the Fund’s new stance is incapable of averting and stabilizing a crisis; indeed, the case of Brazil suggests it is instead a recipe for creating and amplifying financial macroeconomic fragility.

The G20

As I prepared this editorial, the G20 Summit was taking place in Germany. The G20 was founded in 1999, and consists of a group of influential countries and Governors of Central Banks to collaborate to discuss international financial stability. For a while I kept wondering what this year’s AGENDA would be. I wondered whether it would include anything about world hunger and the suffering of so many women and children who continue to go hungry each day, year in year out. The world today faces enormous challenges and fairly serious problems: yes, financial stability is always and the very reason why G8, which then became the G20, was established in the first place; terrorism and cyber-attacks are now taking centre stage. Climate variability and the environment cannot be left out. Energy issues and how to continue to power the world in an environmentally sustainable way, is a major issue of concern. The United Nations was created in 1946 after both the 1st and 2nd World Wars, to bring nations together to address the issues facing the globe then, which could not be solved by any one nation or organization.

Macroeconomic Rebalancing in China and the G20

AbstractThe principal challenge facing the world economy is the risk of recurrent financial crises. Global macroeconomic imbalances create the conditions for boom‐and‐bust cycles that are extremely costly for the countries that experience them, and that can affect other nations and the entire world economy as well. The G20 recognizes the importance of these trends, and has committed itself to cooperative measures to reduce imbalances. However, progress has been limited and halting. There are major political obstacles to global macroeconomic policy cooperation, both within countries and among countries. China's attempts to rebalance its economy are crucial to broader international financial stability. Its G20 presidency gives China the opportunity to demonstrate that it is willing and able to advance its cooperation with economic partners, and to help lead the rest of the world in this direction.

Shadow Banking in Advanced and Emerging Market Economies: Need for Better Regulation

The ongoing financial crisis that started in the summer of 2007 has been a crisis not only of traditional banks but also of shadow banks. In response to the crisis, the G20 created the Financial Stability Board (FSB) – successor of the Financial Stability Forum established by the G7 in 1999 – in 2009 to coordinate at the international level the work of national financial authorities and international standard-setting bodies so as to promote international financial stability. Since then, the FSB has identified a number of priority reform areas with shadow banking being one of them. The FSB describes the shadow banking system broadly as “credit intermediation involving entities and activities outside the regular banking system” or nonbank credit intermediation in short. Shadow banking is important because it might create systemic risks which may lead to a reduction in credit availability with the potential for adversely affecting the real economy. With this in mind and focusing on the FSB member countries, we compare and contrast the shadow banking systems in the Advanced Economies (AE) and Emerging Market Economies (EME), document what have been accomplished so far at the regulatory front, and critically analyse the ongoing reform attempts and proposals. In our comparison, we pay special attention to three economies, namely, the United States (US), China and India, as examples of different forms the shadow banking systems may take. In the case of the US, we mainly focus on the US repo market because of the fundamental role it plays in the US shadow banking system.

FINANDEBT International Conference 2014: “Debt Crises and Financial Stability: Global Issues and Euro-Mediterranean Perspectives”

The article offers information on the 2nd FINANDEBT International Conference Debt Crises and Financial Stability: Global Issues and Euro-Mediterranean Perspectives that was held in Toulon, France, from April 15-16, 2014. Topics discussed include the prudential regulation and monetary policy, postcrises, and financial development and growth.

Sink or Swim: It is Time Ripe to Move in for an International Monetary Policy and Financial Stability Policy Coordination Mechanism

A new debate on revisiting global surveillance architecture follows every financial crisis. A new ‘system’ surfaces and fast transforms itself to a ‘non-system’ or even an ‘anti-system’ as it fails to pass the fundamental test of taking care of every sect - the powerful and the hapless. The mighty minority (the powerful and the rich), attempt to hijack the fate of the miserable majority at each turn. With the inherent resentment remaining within the whole of society, such ‘Top-Down’ approach of decision making is evidently not succeeding. It is hence time ripe as ever to test the efficacy of a newer configuration – the “Bottom-UP” structure of international policy making, in which the concept of hegemony – whether regional or global – benign or malign - would not have any place. It will be based on the emerging ideas of Financial Stability Councils being set up nationally, comprising of national authorities overseeing the Monetary Policy, Financial Sector regulation and Fiscal Policy. This ‘group’ would take a holistic view of issues of potential vulnerabilities and varying secondary and tertiary economic consequences which could be generated out of intra-sector, inter-sector and inter-economy connectedness. It would be macro-financial by nature and would rely on a ‘Committee Approach’ to address financial stability in a democratic, effective and legitimate manner. The idea would consider financial stability to be a ‘Public Good’ and its delivery being a sovereign responsibility. The national central bank supervenes as the pivot of this architecture which inspires confidence to be a possible solution to this ever-elusive problem of finding an appropriate design to address regional and international issues. Regional and Global Financial Stability Councils –a hierarchical enhancement over this ‘national system’ could be a possible solution for more coordinated global monetary policy and financial stability in the hope that it can reduce or even neutralize, the foreign externalities stemming from emerging markets in the regions. The idea here is a revised version of the concept of a Global Super Central Bank mooted by the Author in 2006 when the financial crisis was brewing in the US. The suggested ‘coordination mechanism’ remains bereft of hegemonic arrogance and would help improve mutual trust as a result, which is currently at a deficit. With ‘economic progress’ progressively replacing ‘political poles’ the idea sound very plausible. The World has no appetite for newer paper tigers. It is thus appropriate time to attempt a design of ‘new multilateralism’ backed by the notion that interconnection among nations will cure the evils to which it has given birth. However, the interconnection needs to be synergistically hierarchical in a ‘Bottom-Up’ manner. This is paramount. Nations may connect themselves as sub-regions, subregions as regions and eventually regions as global. US Fed tapering (instead of being seen or shown as a tantrum of a hegemon) could prove to be a facilitator of ushering in a decisive mandate generated out of collective wisdom of all. The “Chairs and Shares” mode of global governance should give way to a “CARE and SHARE” mode backed by the voice of all – of the majority and the minority alike. Let the chronology of monetary history (which has been) driven by “warfare” be steered in future by “welfare” of the human race.

Bank Regulation and International Financial Stability: A Case against the 2006 Basel Framework for Controlling Tail Risk in Trading Books

Bank Regulation and International Financial Stability: A Case against the 2006 Basel Framework for Controlling Tail Risk in Trading Books