Pub Date : 2025-08-28DOI: 10.1016/j.jfs.2025.101458
Klaus Grobys , Juha-Pekka Junttila , James W. Kolari
Stablecoins seek to address the high price fluctuations of unbacked cryptocurrencies, such as Bitcoin and Ether. However, recent studies as well as the collapse of stablecoin USTC (Terra) cast doubt on the stability of stablecoins. Using well-known Markowitz portfolio optimization methods, we combine five leading stablecoins into a global minimum variance portfolio that represents a stable aggregate stablecoin (SAS). We find that SAS is much more stable than its constituent stablecoins. Also, in a stress test adding USTC to the portfolio, SAS remains stable with a narrow price range over time. Importantly, the construction of SAS using modern diversification methods has practical implications for the ongoing development of central bank digital currencies (CBDCs).
{"title":"A stablecoin that’s actually stable: A portfolio optimization approach","authors":"Klaus Grobys , Juha-Pekka Junttila , James W. Kolari","doi":"10.1016/j.jfs.2025.101458","DOIUrl":"10.1016/j.jfs.2025.101458","url":null,"abstract":"<div><div>Stablecoins seek to address the high price fluctuations of unbacked cryptocurrencies, such as Bitcoin and Ether. However, recent studies as well as the collapse of stablecoin USTC (Terra) cast doubt on the stability of stablecoins. Using well-known Markowitz portfolio optimization methods, we combine five leading stablecoins into a global minimum variance portfolio that represents a stable aggregate stablecoin (SAS). We find that SAS is much more stable than its constituent stablecoins. Also, in a stress test adding USTC to the portfolio, SAS remains stable with a narrow price range over time. Importantly, the construction of SAS using modern diversification methods has practical implications for the ongoing development of central bank digital currencies (CBDCs).</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101458"},"PeriodicalIF":4.2,"publicationDate":"2025-08-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144988960","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-24DOI: 10.1016/j.jfs.2025.101457
Trung K. Do
We analyze the relationship between cross-listing and innovation using a sample of firms from 40 countries spanning 1980–2016. We measure innovation through both the number of patents granted and citations received. Our results reveal a positive association between cross-listing and innovation, with this effect being more pronounced for firms from countries with poor legal environments and less developed financial systems. Overall, our findings align with bonding theory, suggesting that managers of cross-listed firms seek to bind themselves by adhering to the high legal and regulatory standards demanded by U.S. markets.
{"title":"Cross-listing, innovation and the role of nation-level institutions","authors":"Trung K. Do","doi":"10.1016/j.jfs.2025.101457","DOIUrl":"10.1016/j.jfs.2025.101457","url":null,"abstract":"<div><div>We analyze the relationship between cross-listing and innovation using a sample of firms from 40 countries spanning 1980–2016. We measure innovation through both the number of patents granted and citations received. Our results reveal a positive association between cross-listing and innovation, with this effect being more pronounced for firms from countries with poor legal environments and less developed financial systems. Overall, our findings align with bonding theory, suggesting that managers of cross-listed firms seek to bind themselves by adhering to the high legal and regulatory standards demanded by U.S. markets.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101457"},"PeriodicalIF":4.2,"publicationDate":"2025-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144903193","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-22DOI: 10.1016/j.jfs.2025.101449
Christina D. Mikropoulou , Angelos T. Vouldis
The analysis of contagion in financial networks has primarily focused on transmission channels operating through direct linkages. This paper develops an agent-based model of financial contagion in the interbank market that features both direct and indirect transmission mechanisms. We conduct simulations on actual interbank bilateral exposures, constructed manually from a confidential supervisory dataset reported by the largest euro area banks. The model is used to investigate and quantify the relative contributions of direct and indirect channels. We find that while the impact of direct contagion increases gradually with the shock intensity, the effect of indirect contagion is subject to threshold effects and can increase abruptly when the threshold is exceeded. In addition, the risk posed by indirect contagion has a higher upper bound compared to direct contagion. Finally, we find that in terms of overall impact, the shocks to the value of sovereign debt and non-bank financial institutions represent the most significant risk to the functioning of the interbank market.
{"title":"Financial contagion within the interbank network","authors":"Christina D. Mikropoulou , Angelos T. Vouldis","doi":"10.1016/j.jfs.2025.101449","DOIUrl":"10.1016/j.jfs.2025.101449","url":null,"abstract":"<div><div>The analysis of contagion in financial networks has primarily focused on transmission channels operating through direct linkages. This paper develops an agent-based model of financial contagion in the interbank market that features both direct and indirect transmission mechanisms. We conduct simulations on actual interbank bilateral exposures, constructed manually from a confidential supervisory dataset reported by the largest euro area banks. The model is used to investigate and quantify the relative contributions of direct and indirect channels. We find that while the impact of direct contagion increases gradually with the shock intensity, the effect of indirect contagion is subject to threshold effects and can increase abruptly when the threshold is exceeded. In addition, the risk posed by indirect contagion has a higher upper bound compared to direct contagion. Finally, we find that in terms of overall impact, the shocks to the value of sovereign debt and non-bank financial institutions represent the most significant risk to the functioning of the interbank market.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"81 ","pages":"Article 101449"},"PeriodicalIF":4.2,"publicationDate":"2025-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144921378","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-20DOI: 10.1016/j.jfs.2025.101455
Esteban Argudo
I use data on unsecured consumer loans from Lending Club to study how peer-to-peer lending markets respond to monetary policy shocks. I find that both loan supply and demand decrease following unexpected increases in the federal funds rate. The contraction in supply is smallest for risky borrowers, while the decline in demand is largest for these borrowers. In contrast, both demand and supply increase following surprise LSAP contractions, with the increases being largest for risky borrowers. These findings suggest that peer-to-peer lending dampens the effectiveness of monetary policy transmission in unsecured consumer credit markets while increasing risk-taking.
{"title":"Monetary policy transmission via nonbank lending: Evidence from peer-to-peer loans","authors":"Esteban Argudo","doi":"10.1016/j.jfs.2025.101455","DOIUrl":"10.1016/j.jfs.2025.101455","url":null,"abstract":"<div><div>I use data on unsecured consumer loans from Lending Club to study how peer-to-peer lending markets respond to monetary policy shocks. I find that both loan supply and demand decrease following unexpected increases in the federal funds rate. The contraction in supply is smallest for risky borrowers, while the decline in demand is largest for these borrowers. In contrast, both demand and supply increase following surprise LSAP contractions, with the increases being largest for risky borrowers. These findings suggest that peer-to-peer lending dampens the effectiveness of monetary policy transmission in unsecured consumer credit markets while increasing risk-taking.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101455"},"PeriodicalIF":4.2,"publicationDate":"2025-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144893214","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-16DOI: 10.1016/j.jfs.2025.101450
Daniel Neukirchen , Gerrit Köchling , Peter N. Posch
We exploit exogenous shocks to institutional investors’ portfolios to show that managers engage in significantly more stakeholder-related misconduct when institutional investors are distracted. Additional cross-sectional tests reveal that managerial career concerns and risk-taking equity incentives strongly moderate this relationship, suggesting that managers weigh the potential benefits and risks before engaging in misconduct during these periods. Finally, we provide evidence that the results are more pronounced when especially those institutional investors who are likely to be motivated monitors of the managers become distracted.
{"title":"Institutional distraction and illegal business practices: The role of career concerns and wealth incentives","authors":"Daniel Neukirchen , Gerrit Köchling , Peter N. Posch","doi":"10.1016/j.jfs.2025.101450","DOIUrl":"10.1016/j.jfs.2025.101450","url":null,"abstract":"<div><div>We exploit exogenous shocks to institutional investors’ portfolios to show that managers engage in significantly more stakeholder-related misconduct when institutional investors are distracted. Additional cross-sectional tests reveal that managerial career concerns and risk-taking equity incentives strongly moderate this relationship, suggesting that managers weigh the potential benefits and risks before engaging in misconduct during these periods. Finally, we provide evidence that the results are more pronounced when especially those institutional investors who are likely to be motivated monitors of the managers become distracted.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101450"},"PeriodicalIF":4.2,"publicationDate":"2025-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144908764","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-16DOI: 10.1016/j.jfs.2025.101451
Grzegorz Hałaj, Ruben Hipp
We evaluate the impact of contagion and common exposures on banks’ capital using a structural regression framework derived from the balance sheet identity and inspired by the structural VAR literature. Contagion arises through bilateral exposures, fire sales, rollover risk, and market-based sentiment, while common exposures reflect overlapping portfolio holdings. We estimate the model using granular regulatory balance sheet and interbank exposure data for the Canadian banking sector. Our results yield three key insights. First, contagion driven by bilateral contractual exposures remains relatively stable over time until the onset of quantitative easing. In contrast, non-contractual contagion channels are less stable and move with market conditions. Second, we observe an increase in common exposure risk along with a decrease in contagion risk, following unprecedented fiscal and monetary policy measures in the COVID-19 pandemic. Third, we demonstrate how our framework complements traditional bank stress-testing approaches that focus on individual institutions by analysing second-round effects. In a policy application, we simulate targeted bailouts and show that their effectiveness in stabilizing the system is related to the interconnectedness of the rescued institution.
{"title":"Decomposing systemic risk: The roles of contagion and common exposures","authors":"Grzegorz Hałaj, Ruben Hipp","doi":"10.1016/j.jfs.2025.101451","DOIUrl":"10.1016/j.jfs.2025.101451","url":null,"abstract":"<div><div>We evaluate the impact of contagion and common exposures on banks’ capital using a structural regression framework derived from the balance sheet identity and inspired by the structural VAR literature. Contagion arises through bilateral exposures, fire sales, rollover risk, and market-based sentiment, while common exposures reflect overlapping portfolio holdings. We estimate the model using granular regulatory balance sheet and interbank exposure data for the Canadian banking sector. Our results yield three key insights. First, contagion driven by bilateral contractual exposures remains relatively stable over time until the onset of quantitative easing. In contrast, non-contractual contagion channels are less stable and move with market conditions. Second, we observe an increase in common exposure risk along with a decrease in contagion risk, following unprecedented fiscal and monetary policy measures in the COVID-19 pandemic. Third, we demonstrate how our framework complements traditional bank stress-testing approaches that focus on individual institutions by analysing second-round effects. In a policy application, we simulate targeted bailouts and show that their effectiveness in stabilizing the system is related to the interconnectedness of the rescued institution.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101451"},"PeriodicalIF":4.2,"publicationDate":"2025-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144860300","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-14DOI: 10.1016/j.jfs.2025.101453
Jon Danielsson , Andreas Uthemann
The rapid adoption of artificial intelligence (AI) poses new and poorly understood threats to financial stability. We use a game-theoretic model to analyse the stability impact of AI, finding that it amplifies existing financial system vulnerabilities — leverage, liquidity stress and opacity — through superior information processing, common data, speed and strategic complementarities. The consequence is crises become faster and more severe, where the likelihood of a crisis is directly affected by how effectively the authorities engage with AI. In response, we propose that the financial authorities develop their own AI systems and expertise, establish direct AI-to-AI communication, implement automated crisis facilities and monitor AI use.
{"title":"Artificial intelligence and financial crises","authors":"Jon Danielsson , Andreas Uthemann","doi":"10.1016/j.jfs.2025.101453","DOIUrl":"10.1016/j.jfs.2025.101453","url":null,"abstract":"<div><div>The rapid adoption of artificial intelligence (AI) poses new and poorly understood threats to financial stability. We use a game-theoretic model to analyse the stability impact of AI, finding that it amplifies existing financial system vulnerabilities — leverage, liquidity stress and opacity — through superior information processing, common data, speed and strategic complementarities. The consequence is crises become faster and more severe, where the likelihood of a crisis is directly affected by how effectively the authorities engage with AI. In response, we propose that the financial authorities develop their own AI systems and expertise, establish direct AI-to-AI communication, implement automated crisis facilities and monitor AI use.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101453"},"PeriodicalIF":4.2,"publicationDate":"2025-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144878801","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-11DOI: 10.1016/j.jfs.2025.101452
Evangelos Salachas , Georgios P. Kouretas , Nikiforos T. Laopodis
Using VAR and Local Projections models, enhanced with macroeconomic factors and monetary policy shocks, we investigate the underlying mechanisms through which the Fed’s and ECB’s react to bank reactions of geopolitical risks between January 1994 and March 2024. Our findings reveal that central banks react to geopolitical risk events by tightening monetary policy to fend off potential inflationary pressures. However, the effect is often temporary, as policymakers typically adopt accommodative measures during economic expansions and shift to tighter policies during contractions. Analyzing reactions based on central bank presidents' tenures, we find that while earlier responses were limited, in recent years, both central banks have reacted more strongly and immediately, reflecting their growing concern over geopolitical risks. Furthermore, we document that the Fed adopted a more accommodative stance in response to bilateral geopolitical risk shocks between the US and China, driven by changes in capital flows and trade activities. In contrast, the ECB’s responses were more consistently contractionary, particularly in periods of heightened inflation concerns or when geopolitical tensions threatened price stability within the euro area.
{"title":"Understanding central bank responses to geopolitical risks: Evidence from the Fed and ECB","authors":"Evangelos Salachas , Georgios P. Kouretas , Nikiforos T. Laopodis","doi":"10.1016/j.jfs.2025.101452","DOIUrl":"10.1016/j.jfs.2025.101452","url":null,"abstract":"<div><div>Using VAR and Local Projections models, enhanced with macroeconomic factors and monetary policy shocks, we investigate the underlying mechanisms through which the Fed’s and ECB’s react to bank reactions of geopolitical risks between January 1994 and March 2024. Our findings reveal that central banks react to geopolitical risk events by tightening monetary policy to fend off potential inflationary pressures. However, the effect is often temporary, as policymakers typically adopt accommodative measures during economic expansions and shift to tighter policies during contractions. Analyzing reactions based on central bank presidents' tenures, we find that while earlier responses were limited, in recent years, both central banks have reacted more strongly and immediately, reflecting their growing concern over geopolitical risks. Furthermore, we document that the Fed adopted a more accommodative stance in response to bilateral geopolitical risk shocks between the US and China, driven by changes in capital flows and trade activities. In contrast, the ECB’s responses were more consistently contractionary, particularly in periods of heightened inflation concerns or when geopolitical tensions threatened price stability within the euro area.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101452"},"PeriodicalIF":4.2,"publicationDate":"2025-08-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144852347","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-06DOI: 10.1016/j.jfs.2025.101454
Stefan Jacewitz , Jonathan Pogach , Haluk Unal , Chengjun Wu
The regulatory dialectic describes the dynamic process of banks and regulators continuously acting and reacting to one another. We provide empirical evidence of the regulatory dialectic in the prime institutional money market fund (PI-MMF) industry. Regulations on commercial deposits fueled growth in bank-sponsored PI-MMFs as a form of shadow banking in a relatively less regulated market. Re-regulation following the 2008 financial crisis halted this rapid growth, and the industry shifted from PI-MMFs to government institutional MMFs. We conjecture that this dialectical process will continue, and the decline of the PI-MMF may engender a shift toward structurally similar products, like stablecoins.
{"title":"The regulatory dialectic in bank-sponsored money market funds","authors":"Stefan Jacewitz , Jonathan Pogach , Haluk Unal , Chengjun Wu","doi":"10.1016/j.jfs.2025.101454","DOIUrl":"10.1016/j.jfs.2025.101454","url":null,"abstract":"<div><div>The regulatory dialectic describes the dynamic process of banks and regulators continuously acting and reacting to one another. We provide empirical evidence of the regulatory dialectic in the prime institutional money market fund (PI-MMF) industry. Regulations on commercial deposits fueled growth in bank-sponsored PI-MMFs as a form of shadow banking in a relatively less regulated market. Re-regulation following the 2008 financial crisis halted this rapid growth, and the industry shifted from PI-MMFs to government institutional MMFs. We conjecture that this dialectical process will continue, and the decline of the PI-MMF may engender a shift toward structurally similar products, like stablecoins.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101454"},"PeriodicalIF":4.2,"publicationDate":"2025-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144886740","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-07-19DOI: 10.1016/j.jfs.2025.101437
Julio Dávila , Elizaveta Lukmanova
We show the possibility of negative nominal interest rates in a general equilibrium model with financial intermediation. We establish that the decentralization of the planner’s steady state requires a zero nominal lending rate on bank loans to firms, as well as a negative nominal lending rate on central bank loans to banks. We also find that implementing the planner’s steady state requires firms to be bound by collateral requirements that limit their leverage. The key driver of the results is the very defining characteristic of banking, namely banks’ ability to create money by opening deposit accounts that borrowers can withdraw from, and that are unbacked by household deposits. Our results can be used to rationalize the ultra-low rates policy implemented by major central banks in the second half of the 2010’s and early 2020’s.
{"title":"Negative nominal rates","authors":"Julio Dávila , Elizaveta Lukmanova","doi":"10.1016/j.jfs.2025.101437","DOIUrl":"10.1016/j.jfs.2025.101437","url":null,"abstract":"<div><div>We show the possibility of negative nominal interest rates in a general equilibrium model with financial intermediation. We establish that the decentralization of the planner’s steady state requires a zero nominal lending rate on bank loans to firms, as well as a negative nominal lending rate on central bank loans to banks. We also find that implementing the planner’s steady state requires firms to be bound by collateral requirements that limit their leverage. The key driver of the results is the very defining characteristic of banking, namely banks’ ability to create money by opening deposit accounts that borrowers can withdraw from, and that are unbacked by household deposits. Our results can be used to rationalize the ultra-low rates policy implemented by major central banks in the second half of the 2010’s and early 2020’s.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"80 ","pages":"Article 101437"},"PeriodicalIF":6.1,"publicationDate":"2025-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144702832","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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