Stablecoin Devaluation Risk

Stablecoin Devaluation Risk

by Barry Eichengreen, My T. Nguyen, Ganesh Viswanath-Natraj

Stablecoins’ reliance on centralized custodians introduces devaluation risk similar to that of traditional currencies under fixed exchange rate regimes. The authoers construct market-based measures of stablecoin devaluation risk using spot and futures prices for Tether, estimating an average devaluation probability of 60 basis points annually and peaking at over 200 basis points during the 2022 Terra-Luna crash. Key risk factors include market volatility and transaction velocity, with elevated interest rates indicating devaluation risk. Deviations from covered interest rate parity point to segmentation between traditional and stablecoin markets, driven by leverage trading and arbitrage costs. Our findings suggest the need for increased transparency and regulatory oversight to mitigate stablecoin risk.

Stablecoin

 

Exchange rates, capital flows and the financial cycle: the origins of the BIS view

Exchange rates, capital flows and the financial cycle: the origins of the BIS view

by Barry Eichengreen

There is no official Bank for International Settlements view of feasible and desirable exchange rate and international monetary arrangements, so far as can be gleaned from documents and publications of the institution.  Butit is possible to discern the outlines of an unofficial, unstated institutional consensus.  Its most prominent elements are the proposition that lax credit conditions create incentives for risk taking that can threaten systemic stability; that the instruments and institutions that convey capital flows across borders are important for understanding financial-stability risks; and that there is a role for macro-prudential policy in restraining the excesses that heighten these risks.

In this project I will trace the events, personalities and institutional dynamics responsible for the development of this view.  I will do so through the lens of the Bank’s Annual Reports, which provide a distillation of the thinking of staff and management.  I will see characterize the evolution of those analyses, focusing on the post-Bretton Woods period that saw the emergence of the modern BIS and is most directly relevant to today.  I plan on supplementing my discussion with material from the BIS archives and secondary sources.

Brexit, the City of London, and the Prospects for Portfolio Investment

Brexit, the City of London, and the Prospects for Portfolio Investment

by Barry Eichengreen, William Jungerman and Mingyang Liu

Although multiple studies have attempted to estimate the impact of Brexit on FDI flows into and out of the UK, no previous study appears to have undertaken a similar analysis of portfolio capital flows and financial intermediation services.  This project will take three approaches to addressing these questions.  The first approach will use data from the IMF’s Consolidated Portfolio Investment Survey to estimate the impact of EU membership on capital flows.  Using these data, it will be possible to estimate a gravity-theoretic model of total gross portfolio capital inflows and total gross portfolio capital outflows for each country pair, pooling cross-sections for different years and attempting to identify an EU membership effect.  A second approach will then replicate this analysis using bank-intermediated flows using the Bank for International Settlements’ Locational Banking Statistics.  The third approach will then analyze the determinants of international financial center status and ask how this is affected by the same variables (notably by EU membership, customs union membership, and participation in the euro area).  The financial consultancy Z/Yen Group provides annually a list of top international financial centers based on an extensive online questionnaire.  Its Global Financial Centres Index (GFCI) is an ordinal ranking of financial centers around the world (averaging some 70 in number).  Rank-ordered logit models will be used to analyze the determinants of financial center status, where the key explanatory variables will be financial links (assets and liabilities of the country in which the financial center is located, again from the CPIS) and trade data (from the IMF’s balance of payments statistics), where the effects of these variables will allowed to vary with EU membership.  These estimates will then be used to construct counterfactuals for various Brexit scenarios to answer the question of how London’s financial center status will be affected.

For a paper draft, see this.

Topics

Capital flows

Initiatives

Financial Globalization