Although few academic economists today endorse a gold standard, historical data show that actual gold standards have outperformed actual fiat standards in at least five respects. Gold standards have exhibited: (1) lower mean inflation rate, hence lower deadweight cost of economizing on money balances; (2) lower price level uncertainty, hence deeper long-term bond markets; (3) greater international trade and capital flows, due to network benefits of a common currency area; (4) lower resource costs of gold mining for monetary purposes with a lower real price of gold, due to the absence of private demand to hold gold as an inflation hedge; and (5) greater fiscal discipline. Returning to a gold standard would be immediately feasible for the US, the Eurozone, and Switzerland, where official gold stocks are large enough at the current price of gold to provide historically reasonable reserve ratios behind broader monetary aggregates. Other major nations (Japan, UK, China) would have to purchase gold.

This paper reviews critical legal and policy issues created by cross-border banking insolvencies. These include (I) Insolvency principles, such as (1) criteria for intervention; (2) deposit insurance; (3) power to manage; (4) ability to maximize recoveries. Also included is (II) International legal complications. Critical issues in cross-border crisis management involve: (1) division of labor between home and host countries; (2) the availability of information; (3) the legal, regulatory and supervisory framework; (4) the law governing initiation of proceedings; (5) grounds for intervention; (6) deposit insurance; (7) legal powers of controlling authorities; (8) the potential financial and economic effects. We conclude with a few proposals for cooperation.

Although the world of banking and finance is becoming more integrated every day, in most aspects the world of financial regulation continues to be narrowly defined by national boundaries. The main players here are still national governments and governmental agencies. And until recently, they tended to follow a policy of shielding their activities from scrutiny by their peers and members of the academic community rather than inviting critical assessments and an exchange of ideas. The turbulence in international financial markets in the 1980s, and its impact on US banks, gave rise to the notion that academics working in the field of banking and financial regulation might be in a position to make a contribution to the improvement of regulation in the United States, and thus ultimately to the stability of the entire financial sector. This provided the impetus for the creation of the “US Shadow Financial Regulatory Committee”. In the meantime, similar shadow committees have been founded in Europe, Japan and Latin America. The specific problems associated with financial regulation in Europe, as well as the specific features which distinguish the European Shadow Financial Regulatory Committee (ESFRC) from its counterparts in the US and Japan, derive from the fact that while Europe has already made substantial progress towards economic and political integration, it is still primarily a collection of distinct nation–states with differing institutional set-ups and political and economic traditions. Therefore, any attempt to work towards a European approach to financial regulation must include an effort to promote the development of a European culture of co-operation in this area, and this is precisely what the European Shadow Financial Regulatory Committee seeks to do. In this paper, Harald Benink, chairman of the ESFRC, and Reinhard H. Schmidt, one of the two German members, discuss the origin, the objectives and the functioning of the committee and the thrust of its recommendations.

Assume data on Nj stock (asset) returns are available for p stocks, allowing us to construct approximate density functions f(xj) for (j=1, 2, …, p) from p empirical cumulative distribution functions (ECDFs). Our portfolio choice is designed to rank ECDF-induced, ill-behaved f(xj) densities subject to multiple modes, asymmetric fat tails, dips, turns, and numerous overlaps. Older portfolio theory assumes that parameters like the mean, variance, and percentiles fully describe f(xj). All six of our algorithms avoid (expected) utility theory. The only available algorithm by Anderson for order-k Stochastic Dominance (SDk) needs a trapezoidal approximation. Our new exact algorithm for SDk is based on ECDFs and overcomes pairwise comparisons. We include algorithms for statistical inference using the bootstrap and one for “pandemic proof” out-of-sample portfolio performance comparisons from our R package ‘generalCorr’. We suggest a test for “zero cost profitable arbitrage” and illustrate our algorithms in action by using two sets of recent 169-month stock returns. We do not claim to suggest new optimal portfolios.

The accuracy of dynamic stress-test capital models remains undocumented. Three methodologies: a CLASS-style approach, Bayesian model averaging, and a Lasso specification are used to forecast the performance of 14 large US banks during the financial crisis. Individual bank models are calibrated using bank historical data while regulatory models are calibrated using representative bank data. Representative bank model forecasts differ dramatically from the forecasts from bank-specific models and from actual outcomes. The Lasso methodology is most accurate, but its superiority may be sample-specific and is only apparent ex post. The results highlight the policy uncertainty inherent in regulatory stress tests.

Multi-year forecasts of bank performance under stressful economic conditions determine large institution regulatory capital requirements and yet the accuracy of these forecasts is undocumented. I compare the accuracies of alternative stress test model forecasts using the financial crisis as the stress scenario. Models include specifications that mimic the Federal Reserve CLASS model and alternatives that use Lasso, the AIC and an abridged set of explanatory variables. A simple single-equation Lasso model has, by far, the best forecast accuracy. Large differences in model forecast accuracy are undetectable from estimation sample statistics. These findings highlight the need for new methods for validating bank stress test models.

This paper examines the interplay among bank liquidity creation (which incorporates all bank on- and off-balance sheet activities), monetary policy, and financial crises. We find that: (1) high liquidity creation (relative to trend) – particularly off-balance sheet liquidity creation – helps predict crises, controlling for other factors; (2) monetary policy has statistically significant, but economically minor effects on liquidity creation by small banks during normal times, and these effects are even weaker during financial crises; (3) monetary policy has very little effects on medium and large bank liquidity creation during both normal times and crises. These findings suggest that authorities may wish to monitor bank liquidity creation closely in order to predict and perhaps lessen the likelihood of financial crises. They might also consider other tools to control bank liquidity creation, such as capital and liquidity requirements.

The efficacy of the Financial Stability Board's proposed requirement for minimum “total loss absorbing capacity” (TLAC) at global systemically important banks (G-SIBs) is assessed using a stylized model of a bank holding company and an equilibrium asset pricing model to value financial claims. I identify a number of G-SIB strategies that satisfy minimum TLAC requirements but fail to reduce implicit safety net subsidies that accrue to G-SIB shareholders or increase the resources available to recapitalize a failing G-SIB subsidiary. To meet the FSB's stated goals, TLAC requirements must impose minimum TLAC at all subsidiaries and restrict how TLAC funds can be invested. An equivalent, but much simpler solution is to significantly increase regulatory capital requirements on systemically important bank subsidiaries.

In August 2020, the Federal Open Market Committee adopted a far-reaching Revised Statement on Longer-Run Goals and Monetary Policy Strategy. The framework contains two major changes from the original 2012 statement. First, policy decisions will attempt to mitigate shortfalls, rather than deviations, of employment from its maximum level. Second, the FOMC will implement Flexible Average Inflation Targeting. We show how to modify the rules in the Fed’s Monetary Policy Report to be consistent with the revised statement, how the pattern of falling behind the curve, pivot, and getting back on track in Fed policy during 2021 and 2022 could have been avoided by following inertial rules consistent with either the original or the revised statements, and how current and projected Fed policy for 2023 – 2026 is in accord with the prescriptions from inertial rules.

We construct theory-based measures of systemic bank shocks. These measures complement banking crisis indicators employed in many empirical studies, which we show capture (lagged) policy responses to systemic bank shocks. To illustrate the importance of disentangling shocks and policy responses to these shocks, we assess the impact of deposit insurance and safety net guarantees on both the probability of a systemic bank shock and that of a policy response. We find that deposit insurance and safety net guarantees do not affect the probability of a systemic bank shock, but increase the probability of a policy response to such a shock, consistent with the results of the previous literature. The joint use of measures of systemic bank shocks and policy responses may lead to a policy-relevant re-interpretation of the findings of a large empirical literature.