Polycentric banking and macroeconomic stability

The article is devoted to topical issues of assessing the stability of Ukrainian banking institutions. The stability of the banking system of Ukraine directly depends on the stability of each individual banking institution and their ability to constantly develop dynamically, and this, in turn, is determined by the macroeconomic stability of the state and the development of the market infrastructure, which is ensured by the mandatory observance of the basic corporate principles of the organization and conduct of banking activities, which are formed in the banking system with the active participation of the National Bank of Ukraine and commercial banks. The military aggression of the russian federation in Ukraine, the instability of the international financial sector and the unfavorable development of global economic processes have a significant impact on the state and confidence of participants in the Ukrainian banking sector, and as a result, on the stability of Ukrainian banking institutions. The deterioration of the stability of Ukrainian banks is connected with a number of problematic issues, namely: distrust of banking institutions of their clients; rather high credit risks caused by the imperfect structure of the Ukrainian economy; a significant increase in factors that affect the profile of banking risks. In general, the changes that have been taking place in the economy of Ukraine recently have a rather drastic impact on the pace and directions of development of the Ukrainian banking system. It is quite clear that today the assessment of the stability of Ukrainian banks is one of the priority tasks for both banking institutions and state bodies. The approaches used today to assess the stability of banking institutions differ in the composition of factors that are taken into account, the indicators that characterize the components of stability, the permissible values of these indicators, etc. Foreign experience regarding the application of certain mechanisms and methods to assess the stability of banking institutions is not always acceptable in domestic conditions and needs some adjustment. In this regard, in modern conditions, the solution of problematic issues regarding the development and implementation of an effective system for assessing the stability of Ukrainian banks and the banking system as a whole in the context of the integration of the Ukrainian economy into the world economy is of particular relevance.

The article summarizes the theoretical aspects of macroeconomic stability and bank capitalization as part of the national development of the economy. The authors systematize the main approaches to the definitions of these categories on the basis of a review of publications of foreign and domestic scientists. The main domestic and foreign indicators of bank capitalization and macroeconomic stability are identified. The aim of the study is to identify and analyze the main indicators of bank capitalization and macroeconomic stability and assess their relationship on the basis of the canonical model. In addition, the objective of the article is to develop practical recommendations for banks taking into account the results of the canonical analysis. The metadata for the bibliometric analysis were obtained from the Scopus scientometric database. The results of the bibliometric analysis allowed us to determine the relationship of macroeconomic stability and capitalization of banks with economic, financial, social and business processes. Among the main indicators of macroeconomic stability are the following: GDP, inflation, unemployment rate, national currency exchange rate, etc. Among the main indicators of bank capitalization are the ratio of capital to assets (for the G7 countries) and standards H1 and H2 (for Ukraine). The authors analyzed the above-mentioned indicators in the G7 countries and Ukraine from 2009 to 2020. The authors used canonical analysis and Statistica software to achieve the purpose of the study. The authors built a model based on quarterly statistical data of Ukraine from 2015 to 2020. The obtained results of the canonical analysis confirmed the strong connection between the volume of GDP and the capital of banks, which is 0.791, between GDP and the H2 ratio – 0.851, between the volume of bank capital and household income – 0.835. This necessitates further consideration of fluctuations in GDP and household incomes by banks, when developing resource policy. The constructed model shows the inseparable links between the processes in the banking system and macroeconomic processes. Banks also need to develop and implement appropriate action plans in case of negative economic growth scenario and impoverishment of the population.

Globally, economies are preparing for a future where innovations accelerate. Governments are vying to harness new technologies and developing financial innovations to drive progress. Against such a backdrop, this thesis comprises of three independent essays on institutions incorporating innovation and the resulting impact on macroeconomic and financial stability. The first two essays pertains to financial innovation by a central bank who replaces the cash in circulation with a central bank issued digital currency. Several countries like China, France, Sweden etc. have already taken concrete steps or announced their intentions to launch a CBDC in the future (Desouza and Ye, 2019). In this context, the first two essays studies the welfare and macroeconomic implications of the central banks using a financial innovation like CBDC as a secondary monetary policy instrument. The third and final essay deviates from financial innovation to a framework of technological innovation where firms create new patents through Research and Development (R&D). Chapter 1 examines the economic consequences of an interest-bearing design of CBDC, and extend the discussion to an open-economy context with trade and capital flows. Through the lens of a dynamic stochastic general equilibrium (DSGE) model, the study simulate a baseline scenario which resembles a cash economy, and two counter-factual scenarios associated with interest-bearing CBDC — the price rule and the quantity rule regimes. The simulations show that 1) the price rule regime is welfare-improving; 2) the adjustable interest rate on CBDC causes uneven distributional effects between households and financial investors; and 3) macroeconomic stability is enhanced with the adjustable interest rate. Chapter 2 investigates the macroeconomic consequences of implementing an interest-bearing CBDC in the monetary policy framework of an emerging market economy. The model setup in chapter 2 deviates from chapter 1 in terms of; a) households buy both domestic and imported consumption goods using CBDC b) firms use labour alone as the factor of production c) central bank use CBDC interest rate (price rule) to target CPI inflation instead of domestic price inflation d) central bank engages in sterilised foreign exchange (FX) intervention to target exchange rate. The study simulate a baseline cash economy, a cash economy with FX intervention and a CBDC economy with FX intervention. The simulations show that 1) interest-bearing CBDC is welfare improving for an emerging market economy; 2) the adjustable interest rate on CBDC causes uneven distributional effects between households and financial investors; and 3) exchange rate management becomes even more effective when interest-bearing CBDC interacts with sterilised FX intervention. Chapter 3 deviates from the framework of CBDC to a production based asset pricing model where innovation is driven by firms through R&D. Chapter 3 examines the implications of wage inertia on macroeconomic aggregates and asset prices in a production economy where growth is endogenously determined by innovation as developed by Kung and Schmid (2015). Wage inertia such as wage stickiness with endogenous labour supply (Uhlig, 2007; Donadelli and Gruning, 2016) and search and matching models with Nash and with alternative offer bargaining (AOB) (Christiano et al., 2016) are incorporated in the Kung and Schmid (KS) model. Following a positive productivity shock, the AOB model shows a) labour market and asset pricing moments are closer to the data compared to other types of wage inertia models and the benchmark KS model b) the impulse response of dividends is larger – and closer to the data - under AOB compared to the other models since wages rise the least, as labour, vacancies and unemployment are more responsive following a positive productivity shock.

This thesis investigates three comprehensive research issues in the context of five selected Association of Southeast Asian Nations (ASEAN) banking markets (Indonesia, Malaysia, the Philippines, Thailand and Vietnam) during the period 1998-2010. This study is motivated by the extensive restructuring efforts that took place in the aftermath of the Asian Financial Crisis (AFC) which has shaped the banking behaviour in ASEAN countries to enable them to sustain their financial systems’ stability. As a result of the crisis, banks adopted several strategies in response to various structural and policy changes and, therefore, there were vast effects on banks’ behaviour following the AFC and pre and post the Global Financial Crisis (GFC) period. The first empirical study of this thesis investigates the impact of market power on credit risk, revenue diversification and bank stability. The findings suggest that bank market power is positively associated with credit risk and revenue diversification. Nevertheless, these associations diminished during the GFC, implying that banks with greater market power were able to better manage their non-performing loans during the crisis period. Bank stability, however, is not associated with market power. Instead, it is found to be a negative function of state-ownership, asset composition and banking freedom. Overall, even though ASEAN banks with greater market power have higher credit risk, they are more diversified thus leaving their overall bank risk unaffected. The second empirical study examines the association between net interest margin, revenue diversification and risk-adjusted profitability. The findings suggest a two-way association between net interest margin and revenue diversification. The results denote a significant inverse relationship in the period 1998-2002, indicating subsidisation between interest and fee-generating business in the aftermath of the crisis. For the latter part of the sample (2003-2010), a positive association has been reported for net interest margin and revenue diversification implying that non-interest income does not necessarily increase with the detriment of the net interest margin. The findings reveal that diversification benefits exist for the same sub-sample period i.e. after the Basel II regulations came into force around 2003. The results also suggest that in the aftermath of both crises, risk adjusted profitability declined as banks had limited scope to diversify their sources of revenue. Overall, ASEAN banks have evolved over time, moving from the worsening risk-return trade-off to the beginnings of the benefits of diversification. The third empirical study investigates the influence of the cost of deposits, market power and the business cycle on the bank capital buffer determination. The findings imply that the capital buffer is positively associated with the cost of deposits, bank market power and the business cycle. The findings indicate that the higher the cost of deposits and the greater their market power, banks tend to hold a greater capital buffer. Furthermore, the capital buffer can vary pro-cyclically with the business cycle suggesting that banks can increase their capital buffers by expanding through various lending during economic upturns which will provide opportunities for banks to make use of this excess capital during recessions. Further, the findings suggest that the banking sector can contribute to the performance of the economy if they hold sufficient buffers and retain a healthy flow of credit when the economy is in crisis. This analysis provides some insight into ASEAN banks’ response to Basel III, which indicates that these banks will find it much harder to comply with the new regulations. This study contributes to the literature through providing evidence of the ASEAN banks’ diverse responses in the aftermath of the AFC and pre- and post-GFC with regard to the research issues. In addition, this thesis adds to the limited, but fast growing, literature on bank market power by using an improved version of the Lerner index in the form of a Funding adjusted Lerner index. Regarding the methodology, unlike other studies, this thesis extends the literature by addressing endogeneity by employing the GMM method for estimation. In addition, this thesis is includes a broader set of bank-specific, country-specific and industry-specific determinants together to address the research issues. Apart from the academic contributions, this thesis offers several implications for bankers, shareholders and regulators. The regional focus of the analysis provides useful insights for ASEAN banks for future policy formulation involving bank market power, credit risk, revenue diversification, bank stability, net interest margin, cost of deposits and the business cycle, given the restructured banking system in the region.

It is established that Ukraine’s banking system has continued to perform its functions without interruption and to support the state and the real sector under wartime conditions. Studies of selected elements of monetary policy and macroeconomic stability, as well as the realities of commercial banks’ operations, indicate that the banking system is resilient, liquid, solvent, adequately capitalized, and profitable. At the same time, the prolonged full-scale war sustains a high level of uncertainty, which requires adaptation to current challenges and the building of a foundation for financial stability and the development of lending, sustainable economic growth, effective capital-market development, and strengthened confidence among depositors and investors. The formation of Ukraine’s commercial banking system has followed a complex evolutionary path reflecting the broader transformational processes in the national economy. From the outset of independence to the present stage, the system has developed under the influence of significant political, economic, and social changes that have shaped its functional structure, adaptability, and capacity to respond to challenges. In the course of this development, the commercial banking system has become a key element of the country’s financial infrastructure, providing essential support for economic development and introducing modern financial instruments and technologies. Today, Ukraine’s banking system continues to adapt to change, particularly under martial law and in the context of integration into the European financial space. Expanded access to financial services, the digitalization of banking operations, and strengthened regulatory oversight have enhanced the sector’s resilience and efficiency. At the same time, the challenges of maintaining stability amid internal and external crises call for further reform and improvement to preserve development dynamics and ensure the stability of the financial system as a whole.

This paper examines the influence of regulatory quality (RQ) on the link between foreign direct investment (FDI) and bank stability in Gulf Cooperation Council (GCC) countries. Through panel data analysis for 128 banks (Islamic and conventional) from the six GCC countries, the study reveals that FDI adversely affects bank stability of the GCC region; stability of Islamic banks shows a greater exposure to the adverse effect of FDI compared the stability of conventional banks. However, higher RQ weakens the adverse effects of FDI on the stability of banks in the GCC region. Islamic banks display a more significant role in allowing RQ to mitigate the detrimental effect of FDI on the stability of the overall banking system. This finding underscores the role of Islamic banks in stabilizing the GCC’s financial system. The study offers clear understandings for regulators, policymakers, and risk managers, emphasizing the need for careful regulatory quality management, particularly during increased foreign capital inflows to safeguard monetary and financial stability amidst FDI.

The rapid development of globalization and convergence processes in the financial sphere, strengthening cooperation between countries in foreign economic activity, digital transformation of economic relations, free movement of labor and liberalization of state regulation inevitably affect the state of macroeconomic stability in the country. Macroeconomic stability is the basis for sustainable economic growth, so its support is one of the most important tasks not only of the central bank, but also of other government regulators and supervisors. To monitor the current state of economic development of the country and identify structural imbalances in the real and financial sectors of the economy, the development of an aggerated indicator becomes objectively necessary. The purpose of this study is to systematize the existing methodological approaches to assessing macroeconomic stability in the country. Methods of induction, analysis, synthesis, comparison were used within the research. The article analyzes the index of macroeconomic stability of individual developed countries and the developing world, calculated by experts from the reinsurance company Swiss Re and the London School of Economics. Analysis of existing methods for assessing macroeconomic stability and its derivatives has identified several approaches: probabilistic (determining the probability of adverse events and phenomena that impair macroeconomic stability), signal (analysis of the market environment based on key indicators and their compliance with threshold values). determination of the deterministic relationship between the selected variables). The obtained results will be of practical value for public authorities and international organizations for the current analysis and adoption of a set of preventive measures to combat crises in the economy. Priority areas for further research are the development of its own methodology for assessing the level of macroeconomic stability of the country, taking into account the presence of transmission effects between participants in the financial and real sectors of the economy.

The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries

The period from 1946 until the early 1970s was a period of stability in banking in the UK and one in which there was a high degree ofcompliance with regulation. It stands in contrast to the period since the 1970s, which has been more prone to banking crises, most notably the global financial crisis of 2007-9. This research seeks better to understand and account for stability and compliance in banking by describing, exploring and explaining the regulatory, competition and institutional frameworks within which clearing banking operated in the period 1946-79. Initially, the thesis explores the regulatory framework for banks by setting out a detailed and systematic analysis ofthe forms and techniques of bank regulation. An analysis of this type does not exist in the literature. The thesis then evaluates the degree of concentration and competition in clearing banking. It questions aspects of the dominant view in the literature which sees stability as a consequence of a concentrated clearing banking system in which there was very limited competition. The third framework supporting stability and compliance in the banking system was the institutional framework. The institutional framework can be viewed as a set of constraints which had a normative dimension. It explores these constraints and demonstrates how they worked as counterweights to excessive risk-taking by banks. By the 1970s, the banking system was becoming less stable as these frameworks disintegrated or were dismantled, and in December 1973 a crisis of the secondary banks broke. Finally, drawing on a historical understanding of bank regulation in the period 1946-79 and a comparison with contemporary bank regulation, some guiding principles are suggested for regulatory policymakers and practitioners today. The methodology of the research is historical, based upon the analysis and evaluation of a broad range of published and unpublished records.

The article is devoted to the problem of ensuring the financial stability of commercial banks as a key factor in the stability of the banking system and the economy as a whole. In this context, it is substantiated that in conditions of growing uncertainty and risks associated with global economic crises, stress testing becomes an important tool for assessing the ability of banks to withstand adverse conditions. An analysis of key aspects of methodological support for stress testing was carried out, including the development of scenarios, assessment of the impact of stress scenarios on the bank’s financial indicators, analysis of results and development of measures to improve financial stability. On this basis, a description of key aspects of ensuring the stress testing of the financial stability of a commercial bank is provided, their positive and negative features are highlighted. A scheme of methodological support for stress testing of the financial stability of a commercial bank is built, which includes such elements as: phased implementation of methodological techniques, tools and evaluation criteria for implementation. The criteria for assessing the methodological support for stress testing of the financial stability of a commercial bank are disclosed, which allow: to determine whether the capital reserve is sufficient to cover possible losses in the event of adverse scenarios; to assess the bank’s ability to timely fulfill its financial obligations under stress scenarios, and to determine whether the scenarios also indicate compliance with regulatory requirements, the timeliness of threat identification and the level of risk management effectiveness. It is substantiated that the formation of methodological support for stress testing of the financial stability of a commercial bank is an effective tool for ensuring the stability of the banking system and increasing the financial stability of banks. It provides a comprehensive approach to assessing the bank’s ability to withstand adverse conditions and developing measures to minimize risks.

The deposit insurance system is a form of banking regulation that protects depositors and provides stability in the banking system. It is an important part of the financial safety net, especially in times of economic turmoil, as it provides explicit depositor protection and prevents a ‘bank run’. However, there are some negative effects on banking stability associated with the increase in bank risk, i.e., moral hazard, adverse selection and the principal-agent problem. The functioning of the deposit insurance system depends on its determinants, but also on the characteristics of the national banking system, supervision, legal and cultural framework and the general development of the country. Considering that the banking systems in EU and especially in comparison to Southeast European countries are very different, the aim of this paper is to study the impact of the deposit insurance system on bank stability depending on the characteristics of banks. Bank stability is analysed using bank risk variables: z-score and ratio of non-performing loans to total loans. By applying a dynamic panel analysis using the GMM Arellano–Bond (AB) estimator to a sample of EU countries and selected Southeast European countries, we provide further evidence on the deposit insurance system over the period from 2005 to 2014. The results provide evidence that large and systemically important banks behave in a riskier way, distorting the purpose of the deposit insurance scheme and jeopardising the safety of banking systems.

Subject. Financial and macroeconomic stability in Russia. Objectives. To characterize the financial and macroeconomic stability of Russia. Methods. General scientific methods and specialized economic-mathematical techniques were applied. Results. It has been revealed that the banking system is increasing its financial demands on the economy, while the growth of households’ net assets is slowing down. At the same time, the credit burden on consumers is rising and the financial resilience of households is declining. The evolution of Russia’s financial market towards a debt-based model has been demonstrated, along with an increasing dependence of the Russian economy on foreign direct investment. An increase in the monetization of public debt has been detected – this occurs through financing government spending via money emission, which in turn drives inflation and leads to a tightening of monetary policy. Stock market volatility is reducing investors’ interest in equities relative to debt securities, while a high key interest rate and rising inflation pose risks for companies. GDP dynamics and the unemployment rate indicate the economy’s ability to sustain growth. However, there is a need to boost investment potential, maintain steady economic growth, shift towards a balanced budget, pursue a moderate fiscal policy, and encourage long-term savings. Conclusions. The identified characteristics will be of interest to government authorities, experts, and researchers involved in developing mechanisms for macroeconomic regulation and adapting Russia’s economic institutions to external shocks and internal challenges.

The History of Interbank Settlement Arrangements: Exploring Central Banks’ Role in the Payment System

The paper's starting point is finding an answer to the question: What kind of monetary policy should be followed by the Central bank in new market circumstances? As a major monetary institution, the Central bank should provide credibility for its monetary policy, which is particularly important during a macroeconomic stabilisation. In order to choose the most appropriate monetary policy, its creators should be familiar with the monetary policy's effects on economic activities, first of all on investment activities and the period in which they may occur. The Central bank uses its special status and authorisations to control monetary trends, to keep and handle foreign exchange reserves, to keep banks' required reserves, to manage the country's debt, to be the final creditor of the banking system, to take care of the banking system's liquidity. That is why the Central bank has become important for the functioning of the whole financial market, and especially the monetary market. The Central bank has both direct and indirect influence on the most important events on financial markets, financial system, as well as a wider influence - on a country's whole economy. In order to envisage the financial market's impact on monetary and investment policies, one should begin with the Central bank's role on the financial market, and at the same time analyse the financial market's instruments and institutions.

Research on risk or sustainability in the banking system does play an important role in the banking industry, where competitiveness increases unceasingly. Simultaneously, the trend of diversifying banks’ business models is becoming more popular. Thus, this paper attempts to investigate the impact of business model diversification on bank risk and stability. The proxy of business models includes (1)Non-net interest income; (2) trading income. The paper applied Generalized Least Squares (GLS) to conduct empirical research on 18 joint-stock commercial banks listed on the Vietnam Stock Exchange from 2010 to 2019 (The GLS with panel data). The results indicated the negative impact of non-net-interest income on bank stability. Trading in foreign exchange, gold has no meaning for bank risk. The study offers some theoretical and practical implications for banks to control better risks based on new empirical findings. Especially, the diversification of business models is ineffective, and banks need more suitable solutions.