Settlement Fund Circulation Problem

In the economic activities, the central bank has an important role to cover payments of banks, when they are short of funds to clear their debts. For this purpose, the central bank timely puts funds so that the economic activities go smooth. Since payments in this mechanism are processed sequentially, the total amount of funds put by the central bank critically depends on the order of the payments. Then an interest goes to the amount to prepare if the order of the payments can be controlled by the central bank, or if it is determined under the worst case scenario. This motivates us to introduce a brand-new problem, which we call the settlement fund circulation problem. The problems are formulated as follows: Let G=(V,A) be a directed multigraph with a vertex set V and an arc set A. Each arc ain A is endowed debt d(a)ge 0, and the debts are settled sequentially under a sequence pi of arcs. Each vertex vin V is put fund in the amount of p_{pi}(v)ge 0 under the sequence. The minimum/maximum settlement fund circulation problem (Min-SFC/Max-SFC) in a given graph G with debts d: Arightarrow mathbb{R}_{+}cup {0} asks to find a bijection pi:Ato {1,2,dots,|A|} that minimizes/maximizes the total funds sum _{vin V}p_{pi }(v). In this paper, we show that both Min-SFC and Max-SFC are NP-hard; in particular, Min-SFC is (I) strongly NP-hard even if G is (i) a multigraph with |V|=2 or (ii) a simple graph with treewidth at most two,and is (II) (not necessarily strongly) NP-hard for simple trees of diameter four, while it is solvable in polynomial time for stars. Also, we identify several polynomial time solvable cases for both problems

Alternative arrangements for the distribution of intraday liquidity

In July 2006, the Federal Reserve will end its provision of free daylight credit to government-sponsored enterprises (GSEs), financial services corporations created by Congress to establish a secondary market in mortgages and other consumer loans. To meet their payments to investors, the GSEs can use a wide variety of alternative funding arrangements. While such arrangements can in theory distribute liquidity efficiently, a decline in the intraday funds in circulation following the Fed's move may lead to some slowing in payments by both the GSEs and commercial banks.Bank liquidity ; Government-sponsored enterprises ; Credit ; Federal funds

The Impact of Monetary Union and the Euro on European Capital Markets: What May Be Achieved in Capital Market Integration

Up to now, the Euro has been successful in replacing the traditional European currencies and in altering the landscape of European Capital Markets. Domestic users of the Euro are almost the same in number as the population of the United STates, although the Gross Domestic Products of the two economies are clearly not comparable. Still, if the Member States within the Euro-area truly want to be recognized as an integrated capital market, some work must be done. This Article will estimate, from current economic thought, what remains to be done and what can be achieved in the short term. Some historical analysis will help in identifying the players and the main trends at work. Moreover, some of the international issues that have been raised by the new role of the European Monetary Union (“EMU”) will be presented

Surplus Liquidity: Implications for Central Banks

Surplus liquidity occurs where cashflows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank. This is reflected in holdings of reserves in excess of the central bank's required reserves. The occurrence of surplus liquidity is widespread, covering many countries around the world. Historically, it has been observed most often in Soviet, wartime and transitional countries. Transitional economies, for example, often attract large capital inflows as the economy opens and undergoes privatisation. The effect of these inflows on liquidity is often magnified by central bank intervention in the foreign exchange market when there is upward pressure on the domestic currency. In the wartime economy, consumption is restricted and large amounts of involuntary savings accumulate until goods and services eventually become more widely available. Soviet-style economies have displayed widespread shortages and administered prices. This creates a situation of repressed inflation, whereby prices are too low relative to the money stock, leaving individuals with excess real balances. The importance of surplus liquidity for central banks is threefold and lies in its potential to influence: (1) the transmission mechanism of monetary policy; (2) the conduct of central bank intervention in the money market, and (3) the central bank's balance sheet and income.Surplus Liquidity, Implications,Central Banks

Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility

The European Monetary Union is stuck in a severe balance of payments crisis. Greece, Ireland, Portugal and Spain in particular have suffered from balance of payment deficits whose accumulated value, as measured by the Target balances in the national central banks’ balance sheets, was 314 billion euros in March 2011. The national central banks of these countries covered the deficits by creating and lending out additional central bank money that flowed to the euro core countries, Germany in particular, and crowded out the central bank money resulting from local refinancing operations. Thus the ECB forced a public capital flow from the core countries to the peripheral countries that partly compensated for the now reluctant private capital flows.currency union, balance of payments, bailout, payment system.

Europe’s New Post-Trade Infrastructure Rules. ECMI Policy Brief No. 20, 8 November 2012

After more than a decade of indecision, the EU is finally now set to implement a consistent regulatory architecture for clearing and settlement. Following the agreement on a European market infrastructure Regulation (EMIR), the European Commission has proposed harmonised rules for centralised settlement depositaries (CSDs), while the European Central Bank is moving forward with its plans for a central eurozone settlement engine. This paper analyses three components of the new post-trade infrastructure measures: 1) the regulatory framework for and supervision of central counterparties under the new EMIR legislation, 2) the authorisation requirements of trade repositories and 3) the draft CSD Regulation and the progress with the ECB’s Target 2 Securities project. It then discusses the impact of the new rules, and argues that, analogous to the unexpected impact of MiFID on trading infrastructures, a similar EMIR revolution may be on its way

Central bank Financial Independence

Central bank independence is a multifaceted institutional design. The financial component has been seldom analysed. This paper intends to set a comprehensive conceptual background for central bank financial independence. Quite often central banks are modelled as robot like maximizers of some goal. This perspective neglects the fact that central bank functions are inevitably deployed on its balance sheet and have effects on its income statement. A financially independent central bank exhibits the adequate balance sheet structure and earnings generation capacity to efficiently perform its functions. From a long term perspective, as far as the demand for banknotes is maintained seignorage waters down any central bank financial independence concern. However, from a short term perspective central bank financial vulnerability may condition its effective independence. Vulnerability may be real or accounting based. However, no matter its origin, institutional solutions are needed to minimize their impact. Adequate capitalization turns out to be a key issue. Alternatively, contingent capital in the form of institutional arrangements to bear central bank losses may be a (second- best) solution. The paper analyses in the context of simple VAR model the interplay between capitalization, accounting rules and dividend distribution. This analysis is preceded by a thorough discussion of the risk return profile of central banks net return on assets. Three main conclusions shape the input to the capitalization model. Central banks return on assets can be very volatile from a short term perspective. From a medium term perspective, natural earnings generation cycles dampen down volatility. On average, central banks net return on assets typically exhibits a discount over government debt financing cost. These observations shape the central bank financing planning problem as follows. Namely, the size of the discount relative to the social costs that would arise in case of a lack of central bank independence, along with central bank exposure to risks and the volatility thereof, determine the incentives of the government to maintain an excess of financial assets in the form of central bank capital. Actually, the working of smoothing mechanisms operating across time on central banks earnings leads to a distinction between short term and medium term capital, i.e. the optimum capital solution is a band. In the same vein, the need to maintain optimal consistence between central bank financial strength and dividends distribution policy leads also to smoothing proposals for pay out policy.Central Banking Capital, Independence, Accounting, Profits