Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies

Recent innovations have made it feasible to transfer private digital currency without the intervention of an organization such as a bank. Any currency must prevent users from spending their balances more than once, which is easier said than done with purely digital currencies. Current digital currencies such as Bitcoin use peer-to-peer networks and open source software to stop double spending and create finality of transactions. This paper explains how the use of these technologies and limitation of the quantity produced can create an equilibrium in which a digital currency has a positive value. This paper also summarizes the rise of 24/7 trading on computerized markets in Bitcoin in which there are no brokers or other agents. The average monthly volatility of returns on Bitcoin is higher than for gold or a set of foreign currencies in dollars, but the lowest monthly volatilities for Bitcoin are less than the highest monthly volatilities for gold and the foreign currencies

In this paper, we measure the interdependence of three financial stress sub-indices (banking, securities and foreign exchange) for the major advanced economies during the 1981–2009 period using a single index based on the generalized variance decompositions developed by Diebold and Yilmaz (2012). We present spillover tables and indices that demonstrate financial stress innovations to and from other indices, in addition to spillover plots that show the dynamics of stress. Furthermore, we examine the relationship between financial stability and macroeconomic fundamentals by investigating the effects of financial stress on growth and on price levels. We proxy financial stability and monetary stability with a financial stress index (FSI) and a consumer price index (CPI), respectively, and examine their interdependence. Our findings indicate that the securities markets are the main net transmitters of stress to the other markets. In addition, up to 42.8% of the forecast error variance in all the markets examined emanates from stress spillovers. Finally, our findings highlight the interrelationship of financial and monetary stability

During the 2008 global financial crisis, financial institutions in the United States experienced big losses, and some firms failed. These failures occurred despite the external and internal regulatory mechanisms imposed upon the financial sector aimed at ensuring confidence and stability in the financial system. This study analyzes the impact of macroeconomic and financial stress on the profitability of financial firms. We utilize data from 1980 to 2010 to model firm profitability and stock returns using a panel regression, fixed-effect methodology. Our results show that the profitability of all firms is negatively affected by increases in macroeconomic and financial stress, measured by the National Financial Conditions Index (NFCI) and the Adjusted National Financial Conditions Index (ANFCI), respectively; however financial sector firms have exhibited an increased marginal sensitivity to both stress indexes that began in the 1990s and continued through the financial crisis of 2008. In a further analysis of the financial sector and banks, we show that depository institutions are relatively robust to macroeconomic and financial stress, and financial sector instability is driven by non-depository finance, investment, and real estate firms. Additionally, the largest 33 percent of financial firms and banks exhibit increased sensitivity to macroeconomic stress in the most recent sample. Our results coincide with the risks associated with recent trends in the financial services industry, such as deregulation, global market integration, financial product innovation, and the increasing predominance of non-depository intermediation