ABSTRACT The banking turmoil in March 2023 and the associated public interventions to prevent or reduce the risk of a systemic fallout underscore the fact that despite banking systems being in a much better shape in many countries relative to the position prior to the global financial crisis, some bank run risk remains. In fact, bank run risk may be increasing. As fintech and new technologies transform banking, uninsured deposits may become near-perfectly mobile, making bank runs all but inevitable if the governance of the financial system is not appropriately adapted. In this article we discuss how digitalization and new technologies can affect bank run risk and we look at approaches to adapting governance to containing related systemic vulnerabilities in the banking system. We also briefly consider how central bank digital currencies could fit into future frameworks. We conclude that there is no silver bullet, but that adjusting frameworks will become necessary if bank deposit mobility increases.

Abstract This article explores the use of artificial intelligence software to create financial recommendations. It seeks to define the impacts and outline the benefits of using ChatGPT software in the highly regulated Australian financial sector. ChatGPT was asked to create a financial recommendation, which was evaluated against the relevant regulations and the recommendations of existing professionals and market contributors. The data generated was analysed using Qualtrics analysis techniques. The findings suggest that ChatGPT significantly reduces the time required to carry out creation, input, and editing services for simple financial advice recommendations. However, ChatGPT fails to operate effectively with complex financial advice and requires professional guidance to ensure regulatory adherence. In future, it may be possible to develop ChatGPT as a complementary tool to decrease the time and cost required to create financial recommendations.

Abstract As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.

Abstract Departing from the principle of absolute priority, contingent convertible (CoCo) bonds are particularly exposed to bank losses despite not having ownership rights. In this article we show the link between adverse CoCo bond design and their yields, confirming the existence of market discipline in designated bail-in debt. Specifically, focusing on the write-down feature as a loss-absorption mechanism in CoCo debt, we find a yield premium on this feature relative to equity-conversion CoCo bonds as predicted by theoretical models. Moreover, and consistent with theories on moral hazard, we find this premium to be largest when existing incentives for opportunistic behaviour are largest, while the premium is non-existent if moral hazard is perceived to be small. Overall, our findings support the notion of market discipline through monitoring debt investors and have important implications for the optimal design of CoCos from a regulatory perspective.

ABSTRACT The meteoric growth of global cryptocurrency markets presents novel challenges to regulators. Some policymakers and scholars warn that regulation will cause trading activity to cross borders into less-regulated jurisdictions—or even smother a promising new financial asset class. Others believe regulatory actions will stimulate activity by providing clarity to market participants. Standing behind this disagreement is a debate about the desirability of either outcome. Some believe that governments should promote development of the cryptocurrency sector within their countries, while others view cryptocurrencies as conduits of illegality and fraud that should be restricted through strict regulation or even outright bans. Yet these debates have, to date, been conducted almost entirely without data concerning the effects of regulation on market activity. As a corrective, in this article we assembled original data on cryptocurrency regulations worldwide and used them to empirically examine movement in trading activity at a number of exchanges following key regulatory announcements. We found that a wide variety of models yielded almost entirely null results. From the creation of bespoke licensing regimes to targeted anti-money-laundering and anti-fraud enforcement actions, as well as many other categories of government activities, we found no systemic evidence that regulatory measures cause traders to flee, or enter into, the affected jurisdictions. These findings at last provide an empirical basis for regulatory decisions concerning cryptocurrency trading. Among other things, they call into question that capital flight or chilling effects should be a first-order concern.

ABSTRACT This article first explores how the prudential regulatory framework may be drastically changed as a result of the adoption of regtech and suptech innovations. The adoption of a shared data architecture, whereby the regulator is provided with seamless access to the accounts of regulated firms, may result in the development of a centralized approach to regulatory modelling, thus bypassing the existing partition between internal models and standardized approaches. Secondly, this article discusses how, thanks to the adoption of advanced predictive analytics, non-bank fintech lenders can gain insights into borrowers’ creditworthiness irrespective of banks’ control over traditional sources of information for credit scoring. This, though, may give rise to a new type of strategic gaming, this time by borrowers keen to maximize their chances of being granted a loan. In any case, preventing banks from adopting these new methods for the purpose of regulatory modelling might weaken their competitiveness. Thirdly, this article explores whether the transition to a centralized approach for credit risk management would conflate the distinction between microprudential and macroprudential interventions, in particular with respect to the countercyclical macroprudential policy. Finally, the article argues that non-bank (fintech) firms could be persuaded to coalesce behind endorsement of the new regulatory shared data platform in return for the support from the central bank. In this way, the regulatory perimeter could be extended in order to steer the adoption of financial innovations in a manner that benefits society overall.

Micro-prudential stress tests, such as the EU-wide stress test of the European Banking Authority, relate to macro-prudential (ie financial stability) aspects via three strands. (i) They are based on a macro-scenario that allows assessing a system-wide shock to banks and to extend the stress testing framework to account for feedback effects. (ii) The results feed into the regular measurement and assessment of a bank’s risks, that is the supervisory review and evaluation process. In 2016, the European Central Bank incorporated the qualitative results of the stress test into the definition of supervisory measures; these results could have an impact on Pillar 2 requirements. The quantitative results of the stress test, namely the capital depletion in the adverse stress test scenario, were used for determining Pillar 2 guidance. Pillar 2 requirement is one input factor for the minimum requirement on own funds and eligible liabilities, while Pillar 2 guidance is a capital expectation above the (macro-prudential) buffers. (iii) Stress tests can reveal recapitalization needs that could lead to private or public recapitalization or to supervisory and early intervention measures, which may activate recovery and resolution plans in the extreme. This overview highlights the linkages between micro-prudential stress tests and macro-prudential aspects, reaching from supervision to capital buffers and to crisis management and bank resolution.

Abstract The author examines a controversy over the methods used by federal agencies to enforce fair-lending laws. Some hold that investigators should use primarily qualitative reviews of documents in loan files in their investigations. Others hold that the qualitative methodology of file reviews is inadequate and needs to be supplemented or replaced by quantitative statistical methods. The author argues that the methods in the federal Interagency Fair Lending Examination Procedure should be revised to use a combination of qualitative and quantitative methods in a better way so that they complement each other. Investigations should rely primarily on quantitative methods to investigate institutional discrimination, but use the qualitative methods of file reviews in the investigation of individual agents for their discriminatory decisions.

The purpose of this paper is to assess the order-to-trade ratio (OTR) and resting time (RT) regulations that aim to contain order-based manipulative high-frequency trading (HFT). The paper examines the mechanism of limit order display and uses spoofing as one typical order-based manipulative scheme as the basis for assessment. The examination provides a theoretical foundation for the assessment of the OTR and RT regulations. The paper finds that order-based manipulation is the foundation of manipulative HFT tactics that take advantage of the incomplete display of limit order history by the stock exchange. Regarding deterrence of spoofing, the RT regulation is more effective than the OTR regulation, as the former creates uncertainty regarding spoof orders.

In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from trading in bank business models. Prominent reform proposals are the Volcker Rule in the U.S., the Vickers Report in the UK, and, based on the Liikanen proposal, the Barnier proposal in the EU. A major element of these reforms is to separate classical commercial banking activities from securities trading activities, notably from proprietary trading. While the reforms are at different stages of implementation, there is a strong ongoing discussion on what possible economic consequences are to be expected. The goal of this paper is to look at the alternative approaches of these reform proposals and to assess their likely consequences for bank business models, risk-taking and financial stability. Our conclusions can be summarized as follows: First, the focus on a prohibition of only proprietary trading, as envisaged in the current EU proposal, is inadequate. It does not necessarily reduce risk-taking and it likely crowds out desired trading activities, thereby negatively affecting financial stability. Second, there is potentially a better solution to limit excessive trading risk at banks in terms of potential welfare consequences: Trading separation into legally distinct or ring-fenced entities within the existing banking organizations. This kind of separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies across banking, non-proprietary trading and proprietary trading.