Financial regulation and banking

Fostering FinTech for financial transformation

Thorsten Beck, Yung Chul Park, 16 September 2021

The recent wave of financial innovation related to digitalisation has the potential to change the landscape of financial service providers quite dramatically, creating the need for a flexible regulatory framework that can accommodate these changes while safeguarding stability. This column introduces a new eBook that takes stock of financial digitalisation over the past decade and applies global lessons to the regulatory debates in Korea.

Banks’ IT adoption and lending during the pandemic

Nicola Branzoli, Edoardo Rainone, Ilaria Supino, 23 August 2021

The Covid-19 pandemic increased the pace of change in clients’ relationships with the banking sector, with mobility restrictions forcing banks to make better use of information technology to accommodate the increasing demand for digital financial services. This column analyses the role of IT adoption in bank lending since the outbreak of the pandemic. It finds that intermediaries with a higher degree of digital readiness provided more credit to non-financial corporations. It also shows that proximity to a physical bank branch increased the positive impact of IT on the amount of credit granted.

Money flow networks: Evidence from Japan

Yoshi Fujiwara, Hiroyasu Inoue, Takayuki Yamaguchi, Hideaki Aoyama, Takuma Tanaka, Kentaro Kikuchi, 09 August 2021

The way money flows among firms can tell us about their economic activities and responses to economic shocks such as the one caused by Covid-19. This column uses data on remittances in a regional bank in Japan to demonstrate how the three parts of the network structure of the flow of money – upstream, downstream, and circulation of flow – reflect characteristics of supplier-customer relationships. As well as helping with the prediction of occurrences following an economic shock, the findings also have implications for banks’ management of credit risk.

The moral hazard of limited liability

Charles Goodhart, 30 July 2021

A predominant example of moral hazard is the application of limited liability to the shareholders of publicly listed private-sector corporations. This column argues that changing the incentives for senior employees and majority shareholders for listed firms may be the most effective form of regulation. The author suggests that creating a system where managerial staff and other shareholders are incentivised to adhere to best practice to protect themselves, as well as the firm in question, is optimal.

The credit line channel

Daniel Greenwald, John Krainer, Pascal Paul, 29 July 2021

Aggregate US bank lending to firms tends to expand following adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening. Based on detailed loan-level supervisory data, this column shows that these responses are almost entirely explained by large firms drawing on their bank credit lines. However, funding stability for large firms may imply that smaller firms face tighter borrowing conditions. The authors show that such a crowding out effect was at play during the COVID-19 crisis and explore the implications of such spillovers within a structural model.

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