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  • Author: Diego Zuluaga
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: When the Libra Association first announced its plan to launch a private digital currency for domestic and cross‐​border payments — then consisting of a single token backed by a mix of stable fiat currencies — financial inclusion was a big part of its business case. With 1.7 billion people globally lacking a bank or mobile money account, Libra thought it was imperative for some of the world’s largest companies, including the leading social media platform, to join forces and bring cheap payments to the world’s “unbanked.” And while this project has faced a rocky reception from central bankers and regulators — for reasons good and bad — even they often frame the case for their own, public digital currencies (CBDCs) in terms of bringing cheap and fast electronic payments to the greatest possible number of people, as cash use and cash acceptance decline.
  • Topic: Finance, Banks, Inclusion , Digital Currency
  • Political Geography: Global Focus
  • Author: Charles W. Calomiris
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: What we use as our medium of exchange is subject to dramatic change over time, and sometimes bank regulation has accelerated such changes. The national banking system, founded in 1863, envisioned the creation of a uniform medium of exchange in the form of national bank notes, which replaced the preexisting system of state bank note issuance. But the creation of the national banking system soon resulted in the diminished importance of bank notes as a medium of exchange. Under the new system, state banks faced a prohibitive tax of 10 percent per year on any notes they issued, and national banks had to maintain collateral at the Treasury for their outstanding national bank notes equal to 111 percent of their outstanding notes, and also had to maintain an additional 5 percent in required government‐​currency (“greenback”) cash reserves on hand. That meant that if a bank wanted to make loans, it had to find an alternative to bank notes as a funding source for those loans. Deposits had been growing in importance leading up to the National Banking Act of 1863, but the act accelerated the growth of deposits markedly, and they became the primary funding vehicle for loans. As Comptroller Eckels remarked in 1896: “And thus it has come about that deposit taking is now the feature, and the issuing of circulating notes but the incident, in national banking, instead of, as in the early history of the system, the note‐​issuing function being the feature and deposit banking but the incident” (Eckels 1896: 565; emphasis added).
  • Topic: Science and Technology, Finance, Banks, Loans
  • Political Geography: Global Focus
  • Author: George Selgin
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Various proposals for a central bank digital currency (CBDC) involve different technical solutions to as many distinct problems. My concern is with the monetary policy implications of those (e.g., Bordo and Levin 2019; Ricks 2020) that would allow anyone to place deposits in a Fed Master Account, directly or using ordinary banks as brokers.
  • Topic: Monetary Policy, Banks, Central Bank, Financial Stability, Digital Currency
  • Political Geography: Global Focus
  • Author: Caitlin Long
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Stablecoins are financial obligations issued on a blockchain. They are generally fully collateralized with either fiat currency deposits at a bank, or with short‐​term government bonds held at a custodian. They’re issued only by nonbanks, although FINMA in Switzerland does allow Swiss banks to issue Swiss franc–denominated stablecoins. Usually stablecoins do not pay interest, and they are designed to trade at par with the fiat currency. Because they are issued on a blockchain, they usually settle in minutes, with irreversibility, and — critically — they are “programmable,” which means users can build their own software applications to interact with them.
  • Topic: Monetary Policy, Banks, Digital Currency
  • Political Geography: Global Focus, United States of America
  • Author: Lawrence H. White
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Private commercial banks have been providing trusted money to the public for hundreds of years, in the form of banknotes (where allowed) and transferable deposit balances, as an integral part of their business model. Economically, money balances are a private good: they are rival in consumption (you and I can’t both simultaneously spend a given banknote or deposit balance) and excludable in supply (you and your bank can stop me from spending the funds in your wallet or account) (White 1999: 89). Accordingly, the market does not inherently fail to provide money efficiently.
  • Topic: Markets, Monetary Policy, Economy, State, Banks, Digital Currency
  • Political Geography: Global Focus
  • Author: Tobias Adrian, Tommaso Mancini-Griffoli
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: a card, waving a phone, or clicking a mouse. Or we might hand over notes and coins, though in many countries increasingly less often. Today’s world is characterized by a dual monetary system, involving privately issued money — by banks of all types, telecom companies, or specialized payment providers — built upon a foundation of publicly issued money — by central banks. While not perfect, this system offers significant advantages, including innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector. These objectives — innovation and diversity on the one hand, and stability and efficiency on the other — are related. More of one usually means less of the other. A tradeoff exists that countries — central banks especially — have to navigate. How much of the private sector to rely upon, versus how much to innovate themselves? Much depends on preferences, available technology, and the efficiency of regulation. So it is natural, when a new technology emerges, to ask how today’s dual monetary system will evolve. If digitalized cash — called central bank digital currency — does emerge, will it displace privately issued money or allow it to flourish? The first is always possible, by way of more stringent regulation. We argue that the second remains possible, by extending the logic of today’s dual monetary system. Importantly, central banks should not face a choice between either offering central bank digital currency, or encouraging the private sector to provide its own digital variant. The two can coincide and complement each other — to the extent central banks make certain design choices and refresh their regulatory frameworks.
  • Topic: Monetary Policy, Banks, Money, Digital Policy, Digital Currency
  • Political Geography: Global Focus
  • Author: Gunther Schnabl
  • Publication Date: 10-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil. In this fragile environment, the future path of the EMU is uncertain. To enhance the stability of the EMU, a group of German and French economists has called for a common euro area budget, for a strengthening of the European Stability Mechanism as lender of last resort for euro area countries and banks, as well as for a common European deposit insurance scheme (Bénassy-Quéré et al. 2018). In response, 154 German economists have warned against transforming the EMU into what they call a “liablity union,” which systematically undermines market principles and wealth (Mayer et al. 2018). In 2018, a French-German initative to introduce a common euro area budget faced strong opposition from a group of northern European countries as well as from Italy, symbolizing the political deadlock concerning reforms of the EMU. This article explains the different views on the institutional setting of monetary policymaking in Europe from a historical perspective. It begins with a description of the economic and monetary order in postwar Germany. It then discusses the positive implications for the European integration process and the economic consequences of the transformation of postwar German monetary order. The final section offers some economic policy recommendations.
  • Topic: Economics, History, Monetary Policy, Reform, European Union, Banks, Currency
  • Political Geography: Europe, Germany
  • Author: Sebastian Edwards
  • Publication Date: 10-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: dea has emerged in economic policy circles in the United States: “Modern Monetary Theory” (MMT). The central tenet of this view is that it is possible to use expansive monetary policy—money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits, and create a “jobs guarantee” program that will ensure full employment and good jobs for everyone. This view is related to Abba Lerner’s (1943) “functional finance” idea, and has become very popular in progressive spheres. According to MMT supporters, this policy would not result in crowding out of private investment, nor would it generate a public debt crisis or inflation outbursts.
  • Topic: Debt, Monetary Policy, Populism, Banks, Economic Policy, Inflation
  • Political Geography: Latin America
  • Author: Andrew Liu
  • Publication Date: 01-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: In 2016 alone, China saw $9 trillion in mobile payments—in contrast to a comparably small $112 billion of mobile payments in the United States (Abkowitz 2018). The use of mobile payment systems such as Alipay and WeChat Pay are widespread in China, with users ranging from beggars to lenders to criminals. Previously, the mobile payments landscape was largely untouched and unregulated by the Chinese government because of its relative insignificance in the Chinese economy. However, with the explosive growth in mobile payment transactions, the People’s Bank of China (PBOC) implemented a new mobile payment regulation on June 30, 2018. Most notably, the government will require all mobile payments to be cleared through the PBOC, and hence, all mobile payment transactions will begin to touch the hands of the Chinese Communist Party (CCP) (Hersey 2017). The PBOC’s stated reasoning for implementing this regulation is to curb money laundering and fraud. While those are valid concerns, it is unlikely that there are not additional motivations for the new regulation. In this article, I analyze the effects this new regulation has had and will likely have on the various mobile payment system stakeholders, competitors, and users, and also uncover what underlying motives the PBOC has in implementing the regulation.
  • Topic: Government, Regulation, Economy, Banks, Chinese Communist Party (CCP)
  • Political Geography: China, Asia
  • Author: Yiping Huang, Tingting Ge
  • Publication Date: 01-2019
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: When China began economic reform in 1978, it had only one financial institution, the People’s Bank of China (PBOC), which, at that time, served as both the central bank and a commercial bank and accounted for 93 percent of the country’s total financial assets. This was primarily because, in a centrally planned economy, transfer of funds was arranged by the state and there was little demand for financial intermediation. Once economic reform started, the authorities moved very quickly to establish a very large number of financial institutions and to create various financial markets. Forty years later, China is already an important player in the global financial system, including in the banking sector, direct investment, and bond and equity markets. However, government intervention in the financial system remains widespread and serious. The PBOC still guides commercial banks’ setting of deposit and lending rates through “window guidance,” although the final restriction on deposit rates was removed in 2015. Industry and other policies still play important roles influencing allocation of financial resources by banks and capital markets. The PBOC intervenes in the foreign exchange markets from time to time, through directly buying or selling foreign exchanges, setting the central parity, and determining the daily trading band. The regulators tightly manage cross-border capital flows, and the state still controls majority shares of most large financial institutions.
  • Topic: Economics, Foreign Exchange, Reform, Financial Markets, Banks
  • Political Geography: China, Asia