Financial regulation and banking

Thorsten Beck, Stephen Cecchetti, Magdalena Grothe, Malcolm Kemp, Loriana Pelizzon, Antonio Sánchez Serrano, 19 January 2022

New technologies are changing how banks produce and provide financial services. These changes have implications for traditional banks, creating novel sources of systemic risk which could in turn pose regulatory and policy challenges. This column introduces a new report by the Advisory Scientific Committee of the European Systemic Risk Board that discusses the impact that digitalisation may have on the structure of the European banking system. Based on three scenarios for the future development of European banking, the authors derive an array of macroprudential policy recommendations.

Ulrich Bindseil, Patrick Papsdorf, Jürgen Schaaf, 07 January 2022

Bitcoin’s market capitalisation reached new peaks in November 2021. This column suggests it is hard to find arguments supporting the cryptocurrency’s current valuation. Even if the financial stability risks of a Bitcoin collapse could be contained, the burst of the bubble would imply painful losses for many retail investors and society at large. The authors conclude that public authorities should refrain from taking measures supporting additional investment flows into Bitcoin and should treat it as rigorously as the conventional financial industry to combat illicit payments, money laundering, and terrorist financing. 

Julia Fonseca, Adrien Matray, 14 December 2021

Access to finance is a crucial component of economic development. This column studies the effects of Brazil’s ‘Banks for All’ programme, which targeted underbanked cities not served by government-owned banks. It finds a strong positive effect of the policy on the number of bank branches and on the overall amount of credit and deposits, particularly for cities located in banking ‘deserts’. Additionally, treated cities experienced increases in the number of firms, higher demand for labour, and higher wages, confirming the link between financial and economic development. 

Johannes Breckenfelder, Victoria Ivashina, 27 November 2021

The onset of COVID-19 led to heightened uncertainty and a ‘dash-for-cash’, particularly in the mutual fund sector which faced fire sale pressure. Typically, banks trading securities absorb such pressure and support market liquidity, but regulation may limit their ability to do so. This column analyses the role of bank leverage constraints as an amplifier of bond market illiquidity. It concludes that leverage ratio regulation can have negative side effects by increasing bond market illiquidity in times of economic distress, suggesting that the optimal leverage ratio is procyclical.

Dirk Niepelt, 24 November 2021

Central bank digital currency has become a major preoccupation of central bankers. In a new CEPR eBook, academics and policymakers review what we know about the economic, legal, and political implications, discuss current projects, and look ahead. While consensus on the ‘right’ CBDC choices remains elusive, common perspectives emerge. First, money, banking and payments are ripe for upheaval, with or without CBDC. Second, the key risk of CBDC is unlikely to be bank disintermediation – privacy, politics, and information may be more critical. Third, the use case for CBDC must be clarified country by country, and may not exist. Fourth, parliaments and voters should have the final say.

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