Mostly Economics

Riksbank researchers Lukas Elestedt, Ulrika Nilsson and Carl-Johan Rosenvinge in this article:

Vulnerability to cyber attacks has risen as the financial sector has become increasingly digitalised. In parallel, the number of advanced cyber attacks has also increased. Taken together, this increases the cyber risks for the financial sector.

Cyber risks are characterised by speed and scalability, where a cyber attack has the potential to spread rapidly and widely. They can thus pose a systemic threat. In the Economic Commentary, Riksbank staff members Luka Elestedt, Ulrika Nilsson and Carl-Johan Rosenvinge describe how a cyber attack on the financial sector or its critical service providers can directly affect financial stability, if the agent or agents affected are sufficiently critical and the impact of the attack is sufficiently serious. However, even indirectly, attacks can affect financial stability, for example, by having a decisive impact on public confidence in the financial system.

So what can be done to combat the cyber threat to the financial system? According to the authors, it is essential that every agent understands both what needs to be protected and what it needs to be protected against. Measures aimed at preventing and stopping cyber attacks need to be complemented by the ability to detect, respond and recover from them.

In order to improve resilience to cyber threats, long-term planning to reduce the vulnerability of the financial system and good coordination are important. This coordination should involve both private and public agents in the financial sector. In addition, both authorities with financial stability responsibilities and authorities responsible for cyber security should be involved so that the coordination leads to greater resilience.

Markus Brunnermeier, Harold James and Jean-Pierre Landau in this BIS paper look at future of money and banking:

The ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange. We may see an unbundling of the separate roles of money, creating fiercer competition among specialized currencies. On the other hand, digital currencies associated with large platform ecosystems may lead to a re-bundling of money in which payment services are packaged with an array of data services, encouraging differentiation but discouraging interoperability between platforms.

Digital currencies may also cause an upheaval of the international monetary system: countries that are socially or digitally integrated with their neighbors may face digital dollarization, and the prevalence of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. Central bank digital currency (CBDC) ensures that public money remains a relevant unit of account.

Interesting paper by ECB economists:

We build a three-period model to investigate market failures in the market-based financial system. Institutional investors (IIs), such as insurance companies and pension funds, have liabilities offering guaranteed returns and operate under a risk-sensitive solvency constraint. They seek to allocate funds to asset managers (AMs) that provide diversification when investing in risky assets. At the interim date, AMs that run investment funds face investor redemptions and liquidate risky assets and/or deplete cash holdings, if available. Dealer banks can purchase risky assets, thus providing market liquidity.

The latter ultimately determines equilibrium allocations. In the competitive equilibrium, AMs suffer from a pecuniary externality and hold inefficiently low amounts of cash. Asset fire sales increase the overall cost of meeting redemptions and depress risk-adjusted returns delivered by AMs to IIs, forcing the latter to de-risk. We show that a macroprudential approach to (i) the liquidity regulation of AMs and (ii) the solvency regulation of IIs can improve upon the competitive equilibrium allocations.

John Mullin in this Richmond Fed article traces history of financial repression and whether it will comeback:

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Norges Bank Deputy Governor Ida Wolden Bache in this speech:

Not many years ago, it was inconceivable that Facebook would launch its own means of payment or that large international banks would offer cryptocurrency investments. The landscape is evolving quickly.

The extent to which new solutions are adopted does not only depend on their features, but also on the alternatives. In Norway, banks have made great headway in terms of digitalisation. We have an efficient and secure payment system, and the value of the Norwegian krone commands trust and confidence. As such, I do not believe we are facing a fundamental transformation of the financial system in the near future. As long as the means of payment we use is based on Norwegian kroner, we will have money created by banks and payments that must ultimately be settled by banks. Monetary policy will still have a channel into the wider economy, and even though banks may look different in the future than they do today, they will not become obsolete.

But we cannot sit still. Going forward, it will be even more important for banks to develop their services in pace with technological advances and the public’s wishes. And I can promise, on behalf of Norges Bank, that we will do our part to ensure that paying in Norwegian kroner will continue to be an attractive and safe alternative in the future. This is a task we do not take lightly.