|
on Financial Development and Growth |
| By: | Miguel D. Ramirez (Department of Economics, Trinity College) |
| Keywords: | Autoregressive Distributed Lag (ARDL) model, Block-Granger causality test, Bounds cointegration test, Complementarity hypothesis, Error correction term (ECT), Foreign Direct Investment (FDI), gross and net foreign capital stock, Hannan-Quinn criterion (HQ), Johansen methodology, labor productivity, Ramsey Reset test, unit root tests. |
| JEL: | O10 O40 O57 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:tri:wpaper:2602 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Diana Caballero (Banco Central del Paraguay); Marco Navarro (Banco Central del Paraguay) |
| Abstract: | Este documento presenta un análisis detallado de la inversión directa (ID) en Paraguay durante el período 2008–2024. Con base en información reciente a nivel de empresa, se caracterizan los flujos de ID según su modalidad de entrada, su composición por instrumentos financieros y su distribución sectorial, con énfasis en cuatro grandes sectores: primario, manufactura, servicios no financieros y servicios financieros. Los resultados muestran que la ID ha sido una fuente sostenida de financiamiento externo para el país, con un promedio de flujos netos anuales de USD 590 millones (1, 6% del PIB). Asimismo, se observa una creciente diversificación tanto en el origen de los capitales, que pasa de 39 países inversores en 2008 a 68 en 2024, como en la composición sectorial, lo que resalta el papel de la ID como catalizador de la productividad y de la integración al comercio internacional. El análisis microeconómico revela diferencias significativas entre sectores en términos de rentabilidad, concentración de flujos, orientación exportadora y modalidades de financiamiento. Estos resultados permiten identificar patrones diferenciados en el comportamiento de la ID, asociados a las características estructurales de cada actividad económica. |
| Keywords: | Inversión directa; balanza de pagos; flujos de capital; Paraguay; análisis sectorial |
| JEL: | F21 F23 O54 D22 |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:023353 |
| By: | Álvaro S. González (Center for Global Development) |
| Abstract: | The Group of Twenty (G20) Compact with Africa (CwA) enters its second phase (2025–2033), supported by a new World Bank Group multi-donor fund and expanded bilateral financial commitments. This expansion has been accompanied by a recent empirical analysis (International Monetary Fund [IMF] Working Paper WP/25/189) that estimates the causal effect of CwA membership on aggregate foreign direct investment (FDI) inflows. The analysis answers the question posed within the G20 Finance Track, the finance-ministry workstream that houses the Compact: did CwA increase aggregate investment? But the development payoff of that investment—the formal jobs, supply-chain linkages, and productivity spillovers for which member countries seek it—turns on the composition of FDI, not its volume. The Leaders’ Declaration named these goals. The analysis misses whether the investment the Compact attracts delivers jobs. Firm size is the key variable the aggregate-FDI metric omits. Project-level greenfield FDI data (Lakemann et al. 2025) and original weighted tabulations from World Bank Enterprise Surveys for all 15 CwA member countries show that large firms dominate employment across the15 CwA economies. Large firms (100 or more employees) account for 61.5 percent of formal employment among surveyed firms, and foreign ownership is more than four times as prevalent among large firms as among small ones, and large firms are more likely than small firms to have foreign owners in every member country. Foreign-owned large firms account for 15.9 percent of large-firm employment across the membership, and 29.4 percent once Egypt, whose surveyed large firms are overwhelmingly domestically owned, is excluded. To align the initiative with its stated development objectives, CwA Phase 2 should adopt a decomposed monitoring framework that disaggregates FDI by firm size, sector, and employment intensity; incorporate firm-size distribution metrics into reform benchmarking; and deploy mechanism design instruments—including security-bid frameworks and competitive monopoly auctions—to address the distinct risk structures impeding large-firm investment in frontier markets. |
| Date: | 2026–07–07 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:752 |
| By: | Clark Granger-Castaño; Jhorland Ayala-García; Fabio Montenegro Aparicio |
| Abstract: | Las remesas internacionales se han consolidado como una fuente relevante de financiamiento externo para la economía colombiana, con flujos récord en los años recientes y una marcada concentración territorial. Este documento analiza el efecto de las remesas sobre el crecimiento económico departamental en Colombia durante el período 2009-2024, así como su relación con el proceso de convergencia regional del PIB real per cápita. La estrategia empírica combina modelos de panel dinámico estimados mediante GMM en primeras diferencias, que abordan la endogeneidad e incorporan términos de interacción, con un modelo de regresión con transición suave en panel (PSTR), que identifica umbrales de forma endógena. Los resultados revelan evidencia de una dinámica de convergencia entre departamentos y un efecto promedio de las remesas nulo o negativo una vez controlada la heterogeneidad no observada. Sin embargo, el efecto es condicional ya que se torna positivo y significativo en los departamentos que superan umbrales estructurales de profundidad financiera (alrededor del 8, 6% del PIB en cartera de consumo), de cobertura en educación media (cerca del 38%) y de ingreso per cápita inicial. Estos hallazgos indican que las remesas parecen no constituir un motor automático del crecimiento regional, y que su contribución depende de la capacidad de absorción de las economías receptoras, por lo que, en ausencia de políticas complementarias de inclusión financiera y educación, podrían reforzar las disparidades territoriales.*****ABSTRACT: International remittances have become a relevant source of external financing for the Colombian economy, with record flows in recent years and a marked territorial concentration. This paper analyzes the effect of remittances on departmental economic growth in Colombia over the period 2009-2024, as well as their relationship with regional convergence in real GDP per capita. The empirical strategy combines dynamic panel models estimated by first-difference GMM, which address endogeneity and incorporate interaction terms, with a Panel Smooth Transition Regression (PSTR) model that endogenously identifies thresholds. The results show evidence of conditional beta convergence across departments, and a null or negative average effect of remittances once unobserved heterogeneity is controlled for. However, the effect is fundamentally conditional: it becomes positive and significant in departments that exceed structural thresholds of financial depth (around 8.6% of GDP in consumer credit), secondary education coverage (close to 38%), and initial per capita income. These findings indicate that remittances are not an automatic driver of regional growth: their contribution depends on the absorptive capacity of the receiving economies, and, in the absence of complementary financial inclusion and education policies, they could reinforce territorial disparities. |
| Keywords: | Remesas, Crecimiento económico, Convergencia condicional, Capacidad de absorción, no linealidades, Remittances, Economic growth, Conditional convergence, Absorptive capacity, nonlinearities |
| JEL: | O15 R11 O47 C23 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:region:347 |
| By: | Pierre Jacquet (ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris, FERDI - Fondation pour les Etudes et Recherches sur le Développement International) |
| Abstract: | This paper analyses derisking in development finance and shows that the failure of the slogan "from billions to trillions" does not condemn the approach, but rather reveals a poorly conceived quantitative ambition. The use of public funds is legitimate only if the investment yields a social return greater than its private return, if the private sector would not have invested on its own, and if no other use of public funds is more effective. Implementing derisking requires genuine public-private engineering: detailed risk analysis, specialist expertise, robust project pipelines and the removal of regulatory barriers that hinder risk-sharing instruments. An effective derisking policy must prioritise additionality, risk assessment and risk management, address criticisms regarding its political legitimacy and the risk of subordinating the collective interest to private interests, promote guarantees in particular, and remain complementary to other development finance instruments. |
| Keywords: | Derisking, Development financing |
| Date: | 2026–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05707536 |
| By: | Fuchs, Andreas; Gröger, Andre; Heidland, Tobias; Wellner, Lukas |
| Abstract: | Policymakers advocate for foreign aid to reduce the "root causes" of migration at origin despite a lack of scientific evidence on the effectiveness of such policies. We examine the global effects of aid on migration by combining georeferenced data on World Bank project announcements and disbursements from 2008-2019 with survey data on migration preferences of one million individuals worldwide and bilateral migration flows. Employing event studies and instrumental variable regressions, we find that in the short term, aid improves expectations of the future and trust in institutions, reducing individual migration preferences and asylum seeker flows. In the longer term, aid increases incomes, leading to more regular migration, consistent with the "mobility transition" theory. |
| Keywords: | Foreign aid; Aid effectiveness; World bank; International migration; Asylum migration; Aspirations; Gallup world poll |
| JEL: | F22 F35 F53 H77 O15 O19 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19332 |
| By: | Furno, Francesco; Giannone, Domenico |
| Abstract: | We propose a simple yet robust framework to nowcast recession risk at a monthly frequency in both the United States and the Euro Area. Our nowcast leverages both macroeconomic and financial conditions, and is available the first business day after the reference month closes. In particular, we argue that financial conditions are not only useful to predict future downturns–as emphasized by the existing literature–but they are also useful to distinguish between expansions and downturns as they unfold. We then connect our recession risk nowcast with growth-at-risk by drawing on the literature on distributional regressions and quantile regressions. Finally, we benchmark our nowcast with the Survey of Professional Forecasters (SPF) and show that, while both have a similar ability to identify downturns, the former is more accurate in correctly identifying periods of expansion. |
| Keywords: | Business cycles; Financial conditions; Macroeconomic forecasting; Risk modeling and forecasting |
| JEL: | E32 C32 C53 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19483 |
| By: | Pettenuzzo, Davide; Sabbatucci, Riccardo; Timmermann, Allan |
| Abstract: | What do companies' 10-Q filings reveal about the state of the macro economy and do specific accounting variables contain particularly relevant information? To address these questions, we analyze the lead-lag patterns of more than twenty accounting variables in relation to aggregate economic activity. We develop new daily corporate account business activity indices that aggregate firm-level accounting information while controlling for shifts in the composition of announcers and reducing firm-specific noise. Our new indices show that firm liquidity becomes significantly lower while corporate debt grows significantly faster several months prior to recessions, and thus can be used as leading indicators. Conversely, operations, earnings and profitability measures tend to be significantly lower after recessions, suggesting they are mostly lagging, pro-cyclical indicators of economic activity. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19497 |
| By: | Anja Bauer (Nürnberg Institut für Marktentscheidungen); Rolf Bürkl (Nürnberg Institut für Marktentscheidungen); Katharina Gangl (Nürnberg Institut für Marktentscheidungen) |
| Abstract: | The current research report examines the motivational reasons for the high saving intentions in late 2025, a time of multiple crises. Inflation attitudes and pessimism are discussed in the literature and in public as two possible causes of high saving intentions. However, empirical evidence is scarce. In the present study, we exam-ine attitudes towards inflation and pessimism based on online surveys conducted in Germany (N = 3, 032) and the United States (N = 3, 006). These two countries differ sharply in both the extent and quality of saving. The results show that in both countries, existing savings are an important factor, such that individuals with existing savings report higher saving intentions than those without. In Germany, in addition, existing savings drive sav-ing intentions based on individuals’ motive to protect their wealth from inflation. Other motives to save include saving for retirement (Germany) and the perception that policies to fight inflation are unfair (U.S.). Thus, in both countries, inflation-related attitudes are more important for saving than pessimism. We end this research report with a discussion of policy measures that might support citizens in realizing their saving intentions not only via saving in a bank account but also via investments, which potentially yield higher personal profits. |
| Keywords: | saving intentions, savings, wealth, inflation attitudes, consumer climate, consumer confidence, behavioral economics, consumption behavior |
| JEL: | E31 E39 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:eoh:report:report-003 |
| By: | Bonaparte, Yosef; Korniotis, George; Kumar, Alok; Michaelides, Alexander; Zhang, Yuxin |
| Abstract: | A significant portion of U.S. households enters and exits investment accounts. Empirically, income and wealth changes are related to these transitions, with income changes not affecting the retired. A life-cycle model with participation costs cannot match the observed ownership dynamics, but an extension with stock-market crash better fits the average participation rate and ownership transitions of the middle-aged and retired. This extended model does not match the ownership dynamics of the young, which are better captured by a model with elevated income risk. Overall, these findings indicate that ownership transitions respond to wealth shocks across the life-cycle, both in our model and the data. |
| Keywords: | Trading costs; Life-cycle model |
| JEL: | D14 G11 G12 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19512 |
| By: | Beck, Thorsten; Levine, Ross |
| Abstract: | This chapter reviews the finance and law literature, which focuses on the role of legal institutions in shaping financial development. Considerable research finds that (1) in legal systems that enforce private property rights, support private contractual arrangements, and protect investors’ legal rights, savers are more willing to finance firms, and financial markets more efficiently allocate capital, and (2) the different legal traditions that emerged in Europe over previous centuries and were spread internationally through conquest, colonization, and imitation help explain cross-economy differences in investor protection, the contracting environment, and financial development. We discuss alternative explanations of financial development and weigh the evidence. |
| Keywords: | Legal institutions; Legal origins; Corporate finance; legal adaptability; Political structure |
| JEL: | G1 G2 G3 K2 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19387 |
| By: | International Monetary Fund |
| Abstract: | The Brazilian financial system has undergone significant change since the 2018 FSAP. While the system remains bank-dominated, with two of the six largest banks state-owned, technology-driven change has brought new digital entrants and stronger competition in banking services. Financial markets have grown significantly, with strong growth in corporate bond markets and derivatives, and a nascent but fast-growing structured credit market alongside intensifying retail trading. Payment services have been revolutionized by the Pix system, and crypto market activity is growing. Household and corporate indebtedness have increased despite elevated borrowing costs. |
| Keywords: | financial system interconnectedness; Fsap analysis; derivatives market; market infrastructure; sovereign bond market; Fsap finding; financial market; Banco Nacional; Financial sector stability; Financial Sector Assessment Program; Stress testing; Anti-money laundering and combating the financing of terrorism (AML/CFT); Credit; Global; Middle East |
| Date: | 2026–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2026/192 |
| By: | Jodi Dianetti; Giorgio Ferrari; Yunzhi Hu; Hao Xing |
| Abstract: | Using a mean-field game framework, we study a dynamic model of bank runs in which more withdrawals raise the risk of bank failure. Even though depositors receive gradual and idiosyncratic shocks, withdrawals occur in clusters. The main mechanism is latent fragility: run-prone depositors accumulate gradually over time and may prefer to wait individually, but they withdraw together once collective exit becomes self-fulfilling. We establish equilibrium existence and characterize earliest-run and latest-run equilibria. The clustering mechanism arises whether depositor heterogeneity is discrete or continuous. A common aggregate state coordinates withdrawal timing and leads to a unique threshold equilibrium. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.22317 |
| By: | Romain Houssa; Jean Paul Madrigal Rodríguez |
| Abstract: | This paper studies the macroeconomic effects of sudden stops using a newly constructed database that expands country coverage to 137 economies and extends the sample to 1985Q1–2025Q4. We document a new wave of sudden-stop episodes in the 2020s, partly reversing the apparent decline observed after the post-global-financialcrisis. Local-projection estimates show that sudden stops are typically preceded by economic expansions and followed by persistent output losses lasting up to two years. The contraction is driven mainly by sharp declines in investment and consumption, while net exports rise because imports contract more strongly than exports. The results reveal two distinct transmission mechanisms. Sudden stops in net external financing operate through forced external adjustment and import compression, with larger and more persistent effects under pegged exchange-rate regimes. By contrast, gross-inflow sudden stops operate through financial conditions: leverage rises, credit conditions tighten, asset prices fall, and investment declines. This financial transmission of gross-inflow sudden stops also differs across country groups, reflecting differences in financial structure. Developing countries are more exposed to increases in financing costs, whereas advanced economies display stronger debt deflation and asset-price effects. |
| Keywords: | inflow-driven sudden stops, dynamics, local projections, economic growth |
| JEL: | E3 E43 E52 C51 C33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12890 |
| By: | Gyöngyi Lóránth (University of Vienna & CEPR); Anatoli Segura (Banca d’Italia & CEPR); Jing Zeng (University of Bonn & CEPR) |
| Abstract: | We study the effects of aligning the incentives of national authorities through the common provision of deposit insurance in a model of cross-border banks with both endogenous risk-taking and within-group risk-sharing. Under national deposit insurance, local authorities inefficiently ring-fence resources owing from healthy to impaired subsidiaries. A single authority responsible for a common deposit insurance fund does not ring-fence. This encourages cross-border integration, but has an ambiguous impact on banks' risk-taking. Overall, common deposit insurance increases welfare when the fundamental risk in the economy is high but otherwise can lead to excessive cross-border integration and lower welfare. |
| Keywords: | Cross-border bank, common deposit insurance, intragroup support, ring-fencing, banking union |
| JEL: | D8 G11 G2 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:422 |
| By: | Petr Jakubik (Cayman Islands Monetary Authority, Cayman Islands & Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia); Matej Korinek (Charles University in Prague, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia); Saida Teleu (Anglo-American University, Prague, Czechia) |
| Abstract: | This paper examines how global financial conditions shape bank profitability in small, open, and externally dependent economies. Using bank-level data for Caribbean and Central American countries and System GMM estimation, we assess the impact of U.S. long-term interest rates on two profitability measures: return on equity (ROE) and return on assets (ROA). We find that U.S. Treasury yields have a strong positive effect on ROE, while the response of ROA is considerably weaker. This asymmetric transmission is consistent with portfolio and balance-sheet frictions that constrain balance-sheet adjustment and may limit asset expansion and portfolio reallocation, with global yield movements operating as an indicator of external financial conditions within the global financial cycle rather than as a purely isolated U.S.-specific monetary shock. Using a leverage-based benchmark, we show that the magnitude of the ROE response cannot be explained by accounting mechanics alone, supporting the interpretation that the ROE-ROA divergence reflects constrained adjustment rather than purely mechanical leverage amplification. The findings indicate that equity-based profitability measures are more informative indicators of external financial transmission, with implications for international financial analysis and financial stability monitoring in small open economies. |
| Keywords: | Bank profitability, Portfolio friction; Global financial cycle; Small open economies; System GMM; Caribbean banks |
| JEL: | G21 G15 E44 E58 F36 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2026_23 |
| By: | Fisnik Bajrami (Institute of Economic Studies, Charles University, Prague, Czech Republic); Ermal Lubishtani (University for Business and Technology, Prishtina, Kosovo) |
| Abstract: | One of the main expected benefits of official dollarization is its potential to promote trade by reducing exchange rate risk and transaction costs. This paper assesses the dollarization-trade relationship through a meta-regression analysis of 270 estimates from 14 empirical studies. The publication-bias diagnostics do not provide strong evidence that the reported effects are driven by selective reporting or small-study effects, while the average reported association remains positive. The results also show that the reported trade effect of dollarization is time-dependent. Reported effects are largest during the first 10 years after dollarization and decline as the post-dollarization horizon lengthens. This declining pattern remains evident across alternative specifications and robustness checks, although statistical precision weakens for the longest time horizon. |
| Keywords: | Official dollarization, trade, monetary integration, meta-regression analysis, publication bias |
| JEL: | F14 F33 E42 F15 C83 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2026_24 |
| By: | Hugo Oriola; Jamel Saadaoui |
| Abstract: | International organization loans are often expected to reassure investors, yet market responses to projects and loans vary sharply across recipient countries. We argue that loan approvals function as noisy signals of policy credibility, and that geopolitical alignment with major powers shapes how financial markets interpret these signals--through channels whose sign depends jointly on the institutional basis of the lender's credibility and on which power the recipient is aligned with. Using a monthly dataset covering more than 100 countries, we examine how loan approvals by the Asian Development Bank (ADB) and the International Monetary Fund (IMF) affect financial conditions in non-permanent members of the UN Security Council. We find weaker, only marginally robust evidence that alignment with the US is associated with more favorable currency reactions to IMF lending, tentatively consistent with a shareholder-credibility channel; alignment with Russia is associated with less favorable currency reactions, consistent with a leniency channel, although this result is also only marginally robust to cluster-robust inference. We do not find a comparable effect for alignment with China. For the ADB, whose credibility rests less on conditionality than on continuity of financing, alignment with China or Russia is instead associated with more favorable currency reactions, consistent with a backstop channel. Stock prices and Treasury bill yields display markedly weaker and less consistent conditioning effects. |
| Keywords: | international organizations, United Nations, geopolitical preferences, catalytic effect, Asian Development Bank, International Monetary Fund |
| JEL: | D78 F30 F42 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-69 |
| By: | Avdis, Efstathios; Glebkin, Sergei |
| Abstract: | We introduce CHILE, an asymmetric information asset-pricing framework with general utilities and payoffs. It features a large economy (LE) with continuous-and-heterogeneous information (CHI). We apply the framework to ask how wealth inequality affects market quality. Holding the quality of private information fixed, making the rich richer and the poor poorer harms information efficiency but improves liquidity. So does making the rich more informed and the poor less informed while holding wealth fixed. With endogenous information, the above effects are reinforced. Overall, widening wealth inequality is a double-edged sword for market quality, increasing liquidity but harming information efficiency. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19496 |
| By: | Remo Isch-Taudien (University of Bern and Study Center Gerzensee); Cyril Monnet (University of Bern and Study Center Gerzensee) |
| Abstract: | An intrinsically useless asset can have value not because it serves as a medium of exchange today, but because it could in the future— this is the option value of money. We characterize the private and social option values of cryptocurrency in a model with a possibly selfinterested government controlling the cash supply. The social value is ambiguous: negative because cryptocurrency raises the cost of holding cash, yet positive when it disciplines the government. Calibrating the model, we find households would forgo 0.10%-0.81% of consumption to live in an economy where Bitcoin carries option value. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2602 |
| By: | Pattnaik, Subhransu; Kramer, Berber; Ward, Patrick |
| Abstract: | Digital credit has emerged as a promising tool for addressing liquidity constraints among smallholder farmers, yet evidence on its longer-term effects on agricultural investment and production remains limited. This paper examines how access to digital agricultural credit shapes farmers’ investment decision and production outcomes over time using a two-phase cluster randomized intervention implemented in Odisha, India. We combine difference-in-differences, and staggered treatment estimators to assess how impacts evolve over years. We found limited evidence of immediate increases in aggregate agricultural input expenditure and durable asset accumulation. In contrast, we find robust evidence of positive effects on agricultural production among existing producers. Taken together, the findings indicate that digital credit primarily operates by relaxing liquidity constraints and improving the productivity of existing farming operations rather than inducing new entry into agriculture or triggering immediate capital deepening. The results highlight the importance of distinguishing between short-run and long-run responses to financial interventions and suggest that agricultural investment is dynamic nature and can take time to materialize. |
| Keywords: | Agricultural Finance, Farm Management |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404346 |
| By: | Sofia Priazhkina |
| Abstract: | This policy note examines how a non-interest-bearing retail central bank digital currency (CBDC) could affect the financial stability of Canada’s systemically important banks during a severe recession. Stress test results show that the banks remain resilient, maintaining key regulatory ratios even under high CBDC demand. To manage funding outflows, banks scale back balance sheet growth and replace some lost deposits with alternative funding. Profitability stays strong overall, though short-term volatility may occur. To reduce potential risks, the note recommends a gradual CBDC rollout with holding limits, well-timed capital buffer adjustments, liquidity regulation updates, early communication of regulatory changes, and coordination with central bank balance sheet policies. |
| Keywords: | Financial system; Financial stability and systemic risk; Models and tools; Economic models; Money and payments; Digital assets and fintech; Structural challenges; Digitalization and productivity |
| JEL: | E44 E58 E61 G01 G21 G28 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsap:26-30 |