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Recommended readings

Cryptocurrencies: Looking Beyond the Hype

Cryptocurrencies have attracted intense interest on the part of businesses and consumers, as well as central banks and other authorities. This attention comes from their promise to replace trust in long-standing institutions, such as commercial and central banks, with trust in a new, fully decentralized system founded on the blockchain and related distributed ledger technology (DLT). This paper shows that the essence of good money has always been trust in the stability of its value. For trust to be maintained, honest network participants need to control the vast majority of computing power, each and every user needs to verify the history of transactions, and the supply of the cryptocurrency needs to be predetermined by its protocol. However, trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded in blockchain. Additional criticism includes: transactions are slow and costly, prone to congestion, and cannot scale with demand. The decentralized consensus behind the technology is also fragile and consumes vast amounts of energy. Public policy responses need to prevent abuses while allowing further experimentation.

Global Financial Development Report: Bankers Without Borders

Perhaps no sector than banking better illustrates both the potential benefits and perils of deeper international integration. In the wake of the global financial crisis, the globalization trend has been partially reversed, as multinational banks from developed countries—“the North”—have scaled back their international operations. On the other hand, developing country banks continued their international expansion, accounting for 60% of the new entry into foreign markets. In particular, “South–South” transactions— from developing countries to other developing countries—started growing. However, international banking is no panacea for guaranteeing financial development and stability. Recent research suggests that for designing effective policies, it is important to keep in mind differences in bank characteristics and home and host country conditions.

Countries that are open to international banking can benefit from global flows of funds, knowledge, and opportunity, but the regulatory challenges are complex. Encouraging the right type of foreign bank presence or forms of capital flows without causing distortions is challenging. Regulation and supervision of international banking is complex and should involve extensive cross-border coordination. The rise of South-South banking and greater regionalization of banking comes with benefits but also possible risks. Fintech developments may have important implications for the global banking landscape.

Basel III & Unintended Consequences for Emerging Markets and Developing Economies

Initially designed for internationally-active banks, Basel III recommendations are expected to be adopted globally. However, various countries in the region have recognized that some elements of Basel III are not applicable in their jurisdictions, and furthermore, countries applying Basel III standards should conduct a deep assessment. Questions remain as to whether some Basel III recommendations might generate unintended consequences for emerging markets and development economies (EMDEs). The authors identify five areas, in which these effects might be present: (i) Spillover effects on the volume, composition, and stability of cross-border flows to EMDEs; (ii) Trade finance affected by Basel III’s treatment of trade letters of credit and the output floor. In particular, there is disagreement between Basel and the industry with respect to the appropriate risk weight for letters of credit and the default rates for such products; (iii) The potential decreased role of foreign subsidiaries as liquidity providers of EMDEs’ government securities, which in turn might increase the financing cost of EMDE governments; (iv) Project finance might be affected by a tightening of the large exposure rule, preventing lending by smaller banks. In addition to a tightening of capital requirements for infrastructure projects and SME loans, as well as liquidity requirements; (v) Capital requirements for off-balance sheet positions, such as derivatives can have an important effect on banks’ offering of this type of risk management tools and their role in capital markets. These topics are discussed in five separate blogs, as follows:

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