Financial Stability Risks Research Articles

Climate-Related Financial Stability Risks for the United States: Methods and Applications

Climate-Related Financial Stability Risks for the United States: Methods and Applications

The Impact of Cross-Border Banking on Financial Stability

The globalization of financial markets has ushered in an era of interconnectedness, where financial institutions increasingly operate across national borders. This phenomenon, known as cross-border banking, has both potential benefits and risks for financial stability. While it can enhance risk diversification and promote economic growth, it also poses challenges such as contagion effects and regulatory coordination issues. This study aims to comprehensively investigate the impact of cross-border banking on financial stability, particularly within the European Union (EU). By examining the costs and benefits, developing metrics to measure optimal integration, and applying these metrics to EU countries, this research seeks to provide policymakers and regulators with valuable insights into the management of cross-border banking activities. The study begins by analysing the costs and benefits of cross-border banking. While it can offer advantages like risk spreading and increased credit stability, it also introduces risks such as contagion and regulatory challenges. The research explores the interplay between these factors and their implications for financial stability. To quantify the optimal level of cross-border banking integration, the study develops forward-looking indicators. These metrics aim to measure the extent to which a country's banking system is integrated into international markets while minimizing risks. By applying these indicators to EU countries, the research identifies which countries are more susceptible to systemic risks and which ones demonstrate optimal practices. Furthermore, the study investigates the systemic risks associated with cross-border banking, particularly the risk of financial contagion. It examines how the interconnectedness of financial institutions can facilitate the spread of shocks across borders and explores the role of regulatory coordination in mitigating these risks. The research also evaluates the trade-off between cross-border banking integration and local financial stability. While integration can provide diversification benefits, it can also increase vulnerability to external shocks. The study seeks to determine the optimal level of integration that allows countries to benefit from international markets without compromising domestic stability. Finally, the study provides policy recommendations based on its findings. By identifying countries with imbalances or low diversification, the research offers guidance on how to improve financial stability through targeted interventions. The recommendations aim to enhance the resilience of cross-border banking systems and contribute to a more stable and efficient global financial landscape.

Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis

Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis

Financial Stability Risks from Commercial Real Estate

Financial Stability Risks from Commercial Real Estate

Bank Competition and Bank Risk: Evidence from an Emerging Economy

This paper investigates the relationship between banks’ competition and nonperforming loans (NPLs), considering GDP per capita, gross savings, and domestic bank credit to the private sector. The study utilizes comprehensive secondary data from 1994 to 2022, scrutinizing diverse banking environments and revealing significant findings. The analysis reveals a significant positive correlation between the number of banks and the NPL ratio, indicating that increased competition leads to higher NPL. Nonetheless, banks' domestic credit to the private sector has little effect on NPLs. The analysis also reveals a significant positive correlation between gross savings and the NPLs. Furthermore, higher NPLs ratio is linked to reduced commercial bank branches, lower capital adequacy ratios, and diminished bank liquidity reserves, posing potential financial stability risks. Even if large NPLs initially lower inflation rates, their long-term impacts depend on successful policy interventions. Additionally, NPLs significantly impact banks' return on assets and net interest margins, necessitating effective profitability and risk management strategies. The study offers crucial insights for regulators, politicians, and banking professionals to understand the complexities of risk management and competition in the banking industry and create plans to lower NPLs.

Assessing the Impact of Non-Performing Loans and Capital Adequacy on Bank Profitability for the Case of North Macedonia

This study investigates the influence of non-performing loans on the profitability of banks operating in the Republic of North Macedonia, providing insights into the specific dynamics of the banking sector. Non-Performing Loans (NPL) represent a critical concern for banking institutions worldwide, reflecting potential credit risk and weakening of financial stability. In the context of North Macedonia, where the banking sector has a significant function in driving economic growth and development, understanding the relationship between NPLs and profitability is of great importance. Also, taking into consideration the importance of the ratio of Capital to Risk Weighted Assets (CRWA), this study also investigates the relationship between Capital to RWA and bank profitability. By employing an autoregressive distributed lag (ADL) model, the study intends to uncover the trends and the relationship between variables, by also considering how past values affect the current values of the bank profitability. The results of the analysis disclose a highly significant negative influence of the NPLs on the bank profitability indicators, such as Return on Equity (ROE) and Return on Assets (ROA). Thus, the findings reveal important insights for the policymakers and the banking industry in North Macedonia, aiding in the formulation of effective risk management strategies and regulatory policies aimed at mitigating the adverse effects of NPLs and capital needs on bank profitability. At the same time, the study is expected to contribute to the existing body of literature on the topic by offering empirical evidence specific for the Macedonian banking sector, thus filling the gap in the research landscape.

Financial Stability Implications of CBDC

A Central Bank Digital Currency (CBDC) is a form of digital money that is denominated in the national unit of account, constitutes a direct liability of the central bank, and can be distinguished from other central bank liabilities. We examine the positive and negative implications for financial stability of a CBDC under different design options. We base our analysis on the lessons derived from historical case studies as well as on analytical frameworks useful to characterize the mechanisms through which a CBDC can affect financial stability. We further discuss various policy tools that can be employed to mitigate financial stability risks.

Green transition and financial stability: The role of green monetary and macroprudential policies and vouchers

This paper analyzes a mix of alternative policies in supporting the green transition and the phase-out of fossil fuels, without compromising financial stability. An environmental dynamic stochastic general equilibrium (E-DSGE) model with two sectors (green and brown) and endogenous default is developed to assess potential climate-induced financial stability threats that can be mainly generated through physical and transition risks mechanism. Those risks are evaluated through a compound capital depreciation shock and a carbon tax shock. The paper offers several findings. First of all, a too stringent carbon tax would increase the medium-term default rate in both sectors, harming financial stability due to potentially detrimental effects on banks’ balance sheet. Second, there exists a trade-off in implementing green monetary or macroprudential policies: if a policy can encourage the green transition, financial stability is compromised due to a rise in default rates. In contrast, if a policy aims to reduce vulnerabilities and financial stability risks, then the phase-out of the polluting sector to foster the green sector would be hard to achieve. The model finds that under certain physical and transition risks, a dual interest rate policy, coupled with a fiscal policy in which carbon tax revenues are redistributed to households as vouchers to encourage the consumption of green goods, is able to support the green transition and safeguard financial stability. Therefore, top-down and bottom-up approaches are the keys for sustainability in the whole economy and financial system.

Walking a thin line: a reputational account of green central banking

ABSTRACT In this article, we provide a comparative case study analysis of the differentiated climate change engagement of the Bank of England (BoE), European Central Bank (ECB) and Federal Reserve (Fed). Drawing on semi-structured interviews and a newly composed database of central banker speeches and legislative documents, we argue that climate (in)actions of these central banks are shaped by concerns over their reputation. A broad socio-political consensus on the need for climate change mitigation enabled the BoE and ECB to begin integrating CRFRs into their supervisory frameworks without affecting their socio-political reputation while the carbon bias in their own asset purchase programs compelled both central banks to also start greening their monetary policy to preserve their performative reputation. The Fed’s more cautious moves have been driven by a fear of loss of technical reputation in the face of a growing transnational consensus on the financial stability risks of climate change.

Climate-Related Financial Stability Risks for the United States: Methods and Applications

Climate-Related Financial Stability Risks for the United States: Methods and Applications

From Transition Risks to the Relationship between Carbon Emissions, Economic Growth, and Renewable Energy

Currently, energy consumption has increased exponentially. Using fossil fuels to produce energy generates high shares of carbon dioxide emissions and greenhouse gases. Moreover, financial authorities at the global and European levels have recognized that climate change poses new risks for individual financial institutions and financial stability. The analysis contributes to the literature in two critical ways. First, the research attempts to develop a map of the transition risk of the EU. In detail, it defines an indicator that will identify the transition risk the EU bears. Second, it analyzes any relationships between the CO2 emissions, economic growth, and the renewable energy of each European country from 1995 to 2020, highlighting the short and long-run relationships. The methodology used is the ARDL. The results show the long-run relationship between GDP, renewable energy consumption, and CO2 emissions is evident. Indeed, economic growth may increase environmental pollution in Europe, while an increase in using renewable energy may reduce CO2 emissions. Therefore, this implies the trade-off between economic development and CO2 emissions. Furthermore, the results indicate the difference in the short-run relationship across countries. However, the results demonstrate that the choice of the European Union to increase the use of renewable energies is more than fair.

Public Debt and Economic Growth after Covid-19 in Europe: Challenges and Policy Implications

The Covid-19 pandemic has had a profound impact on European economies, leading to a significant increase in public debt levels. This paper examines the challenges and policy implications of managing public debt and fostering economic growth in Europe post-Covid-19. It provides a conceptual framework by defining and measuring public debt, exploring the relationship between public debt and economic growth, and highlighting the role of public debt in times of crisis. The paper analyzes the impact of Covid-19 on public debt in Europe, including the fiscal response, debt accumulation, and reasons for increased debt levels. It further discusses the challenges posed by high public debt, such as debt sustainability, crowding out private investment, financial stability risks, and constraints on future fiscal policy.
 
 The study then presents policy implications for balancing public debt and economic growth, including fiscal consolidation measures, long-term debt management strategies, prioritizing public investments, implementing structural reforms, considering monetary policy, and fostering international cooperation. Additionally, the paper provides case studies of selected European countries, evaluating their approaches, assessing policy effectiveness, and drawing key lessons and best practices. Finally, the paper concludes with a summary of key findings, policy recommendations for European governments, and suggestions for future research directions.

EU financial market regulation a decade from the financial-crisis-era reforms: crisis, uncertainty, and capacity

Abstract This article reflects on the effectiveness of European Union (EU) financial market regulation, a decade or so after the closure of the EU’s massive financial-crisis-era reform programme. To do so, it considers the first significant test of the financial-crisis-era reforms: the March 2020 period of acutely elevated financial stability risk as the COVID-19 pandemic intensified, global markets roiled, and the investment fund sector experienced large-scale disruption. It relates the EU’s broadly successful management of this period to, first, the resilience of the legislative choices made and refined over the financial crisis era as regards investment fund regulation and, secondly, to technocratic action, by the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board (ESRB), that facilitated rule amplification, risk monitoring, supervisory coordination, and supervisory convergence and thereby supported the earlier legislative choices. Drawing on the March 2020 experience, the article goes on to consider the capacity of EU financial market regulation more generally to manage what are increasingly dynamic risks to financial market stability. It identifies a strengthening of the EU’s capacity in this regard, but also persistent and intractable risks to this capacity, including as regards legitimation.

Is the time ripe for helicopter money? Growth impact and financial stability risks of outright monetary transfers

We study the effectiveness of helicopter money, once a thought experiment that is now a feasible option given new digital technologies. We consider the effects of central bank digital currencies (CBDC) from a theoretical point of view, by means of a stock-flow consistent model of a growing open economy. We compare the effectiveness of this tool with that of traditional fiscal and monetary policies. We find that issuing a CBDC by expanding the central bank's balance sheet can have a durable impact on GDP and crucially, it allows for the activation of a new transmission channel, which depends on the sensitivity of investment and of the interest rate to firms’ leverage. But it might reduce the demand for bank deposits, and even more crucially for bank loans, thus creating challenges for financial stability.

Financial management of socially responsible enterprises in the service sector in competitive conditions of innovative entrepreneurship

The article is devoted to implementing the financial management of socially responsible enterprises in the service sector in competitive conditions of innovative entrepreneurship. Based on the research, it was proposed to streamline the adaptation tools of financial management of socially responsible enterprises in the service sector. The study aims to study the financial management of socially responsible enterprises in the service sector in the competitive conditions of innovative entrepreneurship. It is substantiated that managing financial stability involves considering the main risks that lead to the loss of financial stability and are the result of uncertainty. Their possible causes and factors are also revealed. Such risks include inefficient capital structure, a decrease in the company's liquidity, credit risk, tax risk, investment risk, operational activity risk, and risk of inefficient organizational structure of socially responsible enterprises in the service sector. It is proposed to divide all financial stability risk management methods into external and internal. The system of internal risk management mechanisms for reducing the financial stability of socially responsible enterprises in the service sector involves the use of the following methods of optimization: avoidance, limitation, minimization, and diversification of risk, as well as self-insurance and hedging of financial risks. External methods of reducing the risk of loss of financial stability of socially responsible enterprises in the service sector include insurance and risk sharing. It has been proven that the primary goal of financial managers is to choose such a capital structure that, at the lowest cost of capital, will contribute to maintaining stable dividends and income and enrich shareholders. In other words, the optimal capital structure should minimize the WACC and, at the same time, maintain the credit reputation of the enterprise at a level that allows attracting new capital on acceptable terms. Achieving the set goal is possible using different approaches. Next, we will successively consider the peculiarities of establishing the optimal ratio of the company's own and borrowed capital by each financial management approach of socially responsible enterprises in the service sector in the competitive conditions of innovative entrepreneurship. Keywords: financial management, socially responsible enterprises, service sector, competitive business conditions, innovative entrepreneurship.

Capital market liberalization and systemic risk of non-financial firms: Evidence from Chinese Stock Connect scheme

This paper examines the causal effect of capital market liberalization on the systemic risk of non-financial firms (NFFs), a topic that has received little attention in the literature. We exploit the launch of China's Stock Connect scheme as a quasi-natural experiment to identify the causal effect and find that capital market liberalization significantly raises the systemic risk of NFFs in China, especially for those with more concentrated supply chains and more reliance on trade credit. We explain this result by three main channels: increased market concentration, interfirm connectedness, and exposure to financial shocks. We also provide evidence that the inquiry letter and the Stock Connect Northbound Investor ID Model system, two regulatory measures implemented during the liberalization of China's capital market, mitigate the adverse effect of liberalization on the systemic risk of NFFs. Our findings offer new insight into the nexus between financial liberalization and instability and highlight the importance of strengthening regulations of capital markets to enhance the benefits of liberalization and reduce its risks for economic and financial stability.

The increased interest in Bitcoin and the immediate and long-term impact of Bitcoin volatility on global stock markets

Recently retail and institutional investors have begun to include Bitcoin in their portfolios, creating a transmission channel for Bitcoin volatility and therefore increasing regulatory concerns. Using intraday data from 2013 to 2022, I propose a dynamic econometric model to examine the extent to which Bitcoin volatility is transmitted to stock markets in North America, Europe, and Asia-Pacific at different frequencies: contemporaneous and long-run. My findings challenge previous literature which has found Bitcoin volatility risk minimal and not long-lasting. I provide evidence that, since March 2020, there was a substantial increase in contemporaneous volatility transmission in all regions. However, the long-term effect of Bitcoin on North American and three European markets diminished, while it remained significant in most Asia-Pacific markets. Hence, policymakers should coordinate actions at the regional level to mitigate financial stability risks. Likewise, Bitcoin volatility is relevant for investors when deciding on the sizes and timing of their investments.

Investment risk-taking and benefit adequacy under automatic balancing mechanism in the Japanese public pension system

The automatic balancing mechanism introduced in 2004 aims to re-establish the financial equilibrium of the Japanese public pension systems. The non-linear functions for benefits embedded in the automatic balancing mechanism make it challenging to analyse the impact of market fluctuations on the adequacy of benefits and the sustainability of the pension system. Using a stochastic simulation model applied to the government’s public pension verification programmes, the risk of benefit levels and financial stability according to risk-taking in pension reserve funds for the Japanese public pension system is investigated. The Japanese public pension system is characterised by a pay-as-you-go system with substantial reserve funds. Benefit adequacy is measured by the replacement rate and financial sustainability by the reserve-to-expenditure ratio. The results show that for a high level of risk-taking in the reserve fund, the risk of benefits increases because the automatic balancing mechanism reduces benefits until the pension system recovers solvency. In addition, the risk of reserve funds increases because of the possibility of sizeable negative investment returns. In contrast, when risk-taking is low, the benefit level is locked in at a low level because investment returns are insufficient. Therefore, moderate risk-taking of reserve funds should be adequate.

From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico

From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico

Dark side whitewashes the benefits of FinTech innovations: a bibliometric overview

Purpose The current study focuses on many risk categories that have emerged in the digital ecosystem of the financial technology industry, which has dramatically changed traditional financial systems as a result of innovations in financial technology.Design/methodology/approach The Web of Science Core Collection database was used to find a data set of 719 pertinent papers on the subject encompassing the year 2015–2023. The sample procedure was carried out utilising the PRISMA approach. The keywords were first gathered relating to technological risks in banking sectors and after confirming the keywords, the authors performed the search by the “topic” which covers “title” in the search bar. On February 15, 2023, the Web of Science database was searched using the terms “Cyber security risk OR data theft OR financial crimes OR financial stability risk OR operational risk OR default risk OR money laundering OR financial terrorism AND FinTech AND banking sector”. Two-step approach is applied in this study. First, descriptive analysis is applied using RStudio to highlight prominent authors, countries and affiliations. Furthermore, relationship among authors, countries and keywords is shown by using three fields plot. Second, using VOSviewer, co-occurrence of keyword analysis is used to determine the most influential themes.Findings The findings show that 2,611 documents have been published from 2016 to 2023. Year 2021 is the most productive year in terms of number of publications. The results also show that WANG XC is tied for the position of most prolific contributing author. In a similar vein, the United States leads the world in publication output. Furthermore, Southwestern University of Finance and Economics in China is leading the list with 15 articles. The results from the co-occurrence of keywords reveal that “default risk”, “operational risk”, “money laundering”, “credit risk”, “corporate governance”, “systematic risk”, “financial stability risk”, “risk management” and “crises” are the frequently keywords.Originality/value The results of this study are beneficial to academia and industry in order to advance their current understanding of FinTech and associated concerns. This work expands the understanding of the technology hazards facing the banking industry from a broad perspective.