Embedded Supervision: How to Build Regulation into Blockchain Finance
The use of distributed ledger technology in finance could improve the quality of bank supervision through the better monitoring of risks in financial markets. This paper argues for “embedded supervision,” in which the incentives of market participants would replace conventional data-verification processes and regulatory compliance could be monitored by simply reading the market’s ledger. The key results describe the conditions under which participants’ incentives would be strong enough to ensure that supervisors could trust the data found in the distributed ledger.
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The Macroeconomic Impact of Changes in Economic Bank Capital Buffers
There remains a dearth of empirical evidence on the effects of changing bank capital requirements on lending, lending spreads, and the macroeconomy. This paper uses bank-level and macroeconomic data to study the effects of changes to bank capital buffers in the four largest euro-area countries. The authors find that a negative shock to capital buffers leads to a decline in bank lending growth, as well as a smaller decline in output and prices.
Market-implied Systemic Risk and Shadow Capital Adequacy
The financial crisis underscored the importance of understanding systemic risk, but properly measuring such risk requires more than just aggregating the default probabilities of individual institutions. This paper provides a forward-looking, distribution-based methodology to measure systemic solvency risk based on market-implied expected losses. Such a market-implied measure of systemic risk complements existing accounting-based capital adequacy assessments and could enable better macroprudential oversight.
Policy Uncertainty and Bank Mortgage Credit
Firms in the heavily regulated financial sector likely face more uncertainty than others in the face of possible changes to political leadership. This paper analyzes the effect of policy uncertainty on banks’ mortgage lending decisions, decisions that have well-documented implications for financial stability. The authors find that banks reduce mortgage lending during the quarters in which gubernatorial elections are held in their home state, with more uncertain elections leading to larger declines in lending.