Andy Mullineux

A comparison of linear forecasting models and neural networks: an application to Euro inflation and Euro Divisia

Linear models reach their limitations in applications with nonlinearities in the data. In this paper new empirical evidence is provided on the relative Euro inflation forecasting performance of linear and non-linear models. The well established and widely used univariate ARIMA and multivariate VAR models are used as linear forecasting models whereas neural networks (NN) are used as non-linear forecasting models. It is endeavoured to keep the level of subjectivity in the NN building process to a minimum in an attempt to exploit the full potentials of the NN. It is also investigated whether the historically poor performance of the theoretically superior measure of the monetary services flow, Divisia, relative to the traditional Simple Sum measure could be attributed to a certain extent to the evaluation of these indices within a linear framework. Results obtained suggest that non-linear models provide better within-sample and out-of-sample forecasts and linear models are simply a subset of them. The Divisia index also outperforms the Simple Sum index when evaluated in a non-linear framework.

The corporate governance of banks

Purpose – To consider the implications of the banks fiduciary duty to their depositors (as well as the shareholders) and the governments fiscal duty to taxpayers (in the presence of deposit insurance) for the corporate governance (CG) of banks. Design/methodology/approach – Recent contributions to the literature are outlined and assessed in the context of the asymmetric information literature relating to banking. Findings – The good CG of banks requires regulation to balance the interests of depositors and taxpayers with those of the shareholders. Originality/value – Linking the bank regulation in literature based on information asymmetry to the CG literature.

A composite leading indicator of the inflation cycle for the Euro area

We evaluate the performance of composite leading indicators of turning points of inflation in the Euro area, constructed by combining the techniques of Fourier analysis and Kalman filters with the National Bureau of Economic Research methodology. In addition, the study compares the empirical performance of Euro Simple Sum and Divisia monetary aggregates and provides a tentative answer to the issue of whether or not the UK should join the Euro area. Our findings suggest that, first, the cyclical pattern of the different composite leading indicators very closely reflect that of the inflation cycle for the Euro area; second, the empirical performance of the Euro Divisia is better than its Simple Sum counterpart and third, the UK is better out of the Euro area.

Asymmetric Effects of Interest Rate Changes: The Role of the Consumption-Wealth Channel

This article examines the role of the consumption-wealth channel in explaining asymmetric effects of monetary policy changes. Towards this end, we draw upon available literature on the consumption function and behavioural finance to construct a framework for asymmetric effects of monetary policy caused by the impact of wealth changes on aggregate consumption. We then employ data from the UK to examine the validity of the proposed framework. In the context of a liberalized economy with easy access to consumer credit, wealth reduction due to monetary tightening is expected to have weaker impact on spending than increase in wealth. Our results validate the above hypothesis.

Financial innovation and social welfare

Purpose - The purpose of this paper is to consider the case for regulating financial innovation in light of the recent global financial crisis. Design/methodology/approach - Responsibility for assuring the bank customers are “treated fairly” in the UK currents belongs to the Financial Services Authority (FSA), whilst the Office of Fair Trading (OFT) oversees the Consumer Credit Act. The paper argues for the regulation of retail banking and financial service provision as a utility, leaving the FSA to concentrate on prudential supervision and the OFT to concentrate on its other responsibilities. Financial innovation in wholesale and investment banking should be regulated by the prudential authorities. Findings - New financial instruments are frequently underpriced, which may be in part to encourage rapid and widespread adoption. Practical implications - Good, transactions cost and risk reducing, retail financial innovation should be encouraged. New wholesale financial products should be thoroughly “stress tested” prior to being licensed, analogous to the testing of new medical “drugs” by the pharmaceutical industry. Originality/value - The global banking crisis led to calls for banks to maintain lending to small- and medium-sized enterprises and households (especially mortgages). This implies that access to finance, like access to water and electricity, should be assured and that customers should be protected against the “monopoly” powers of large suppliers. Hence, retail banks are utilities and should be regulated as such.

Regional Monetary Policy: An Australian Perspective

Fraser P., MacDonald G. A. and Mullineux A. W. Regional monetary policy: an Australian perspective, Regional Studies. A structural vector autoregressive (SVAR) model for Australia is utilized to identify the domestic impacts of common monetary policy shocks on national and state business cycles and to consider the role of state diversification disparities for observed differences in responses to monetary policy innovations. Western Australia and Queensland differ to other states in their response to common shocks and evidence suggests this may be due to differences in their economic geographies. Overall, the Australian monetary union has become increasingly reliant on fiscal transfers particularly from Western Australia in the past two decades. This emphasizes the importance of a political union underpinning a successful monetary union.

Banking for the Public Good

Bank shareholders cannot be expected to provide good stewardship to banks because there is a conflict of interests between the shareholder owners and a non-mutually owned banks depositors; who provide the bulk of the funds in traditional retail banks and are willing to accept a lower return on their savings than shareholders, in return for lower risk exposure. Regulation is required to protect depositors where deposit insurance schemes are at best partially funded and underwritten by taxpayers, who in turn need to be protected, and to deliver financial stability, a public good. Once some banks become ‘too big (to be allowed) to fail’ (TBTF), they enjoy additional implicit public (taxpayer) insurance that enables them to fund themselves more cheaply than smaller banks, which gives them a competitive advantage. The political influence of big banks in the US and the UK is such that they can be regarded as financial oligarchies that have hitherto successfully blocked far reaching structural reform in the wake of the ‘Global Financial Crisis’ and lobbied successfully for the financial sector liberalisation that preceded it. The TBTF problem and associated moral hazard have been worsened by mergers to save failing banks during the crisis and as a result competition within a number of national banking systems, notably the UK, has been significantly reduced. Solutions alternative to making the banks small enough to be allowed to fail are considered in this paper, but it is difficult to be convinced that they will deliver banks that promote the common or public good. It is argued that regulating retail banking as a utility and pooling insurance against financial instability using pre-funded deposit insurance schemes, with risk related premiums that can also serve as bank resolution funds, should be pursued; and that capital leverage ratios and/or Financial Activity Taxes might be used to ‘tax’ the size of banks.

Financial sector convergence and corporate governance

Purpose - To explore the implications of financial sector convergence for corporate governance systems. Design/methodology/approach - Globalisation, regulatory harmonisation and pensions reform are driving convergence of bank and market oriented systems of corporate finance towards a hybrid model (“hybridisation”). Given the importance of financial systems in corporate governance, this may lead to convergence of corporate governance systems; legal traditions notwithstanding. Findings - The growth in the importance of funds (pension, insurance, mutual, hedge, venture capital) and the decline in the importance of bank as shareholders has the potential for forcing convergence in corporate governance if the funds actively use their shareholder (or proxy) voting rights. Data on financial institution voting patterns is required to test the hypothesis. Originality/value - Hybridisation is increasingly widely recognised, although not universally supported by the data. This paper attempts to draw the implication of the hybridisation process for corporate governance given the breakdown of traditional market and bank-based systems.

Convergence of European Financial Systems: Banks or Equity Markets?

Recent literature draws a distinction between Anglo-Saxon (capital market oriented) financial systems, as represented by the UK, and Continental (banking oriented) financial systems, as typified by Germany (Doukas, Murinde and Wihlborg 1998). It is useful, however, to note that in a conventional sense the term ‘banking’ involves bank lending via the creation of demand deposits in connection with a debt contract between the bank and the borrower, deposit taking and the provision of associated money transmission services to the public. Nevertheless, banks, especially in the European Union, are increasingly engaging in both banking and securities business, i.e. universal banking, fund management and, more recently, insurance business (‘bancassurance’ or ‘Allfinance’). The expression ‘bank oriented’ may therefore have various interpretations. It can mean a system in which banks are the dominant institutions providing both indirect finance (or intermediated debt) and access to direct finance from the money and capital markets via instruments such as commercial bills and paper (money market debt finance), bonds and Euro-notes (capital market debt finance) or shares (capital market equity finance), inter alia. The key distinctions here are between direct and indirect finance and between debt and equity financing. But since banking fundamentally involves the provision of indirect finance, ‘bank oriented’ could also be taken more narrowly to mean that the most important source of external financing for non-financial companies (NFCs) is bank loans.

The regulation of British retail banking utilities

Purpose - The purpose of this paper is to consider in the light of the post August 2007 banking crises, how “fair” access to retail banking services for British households and small- and medium-sized enterprises (SMEs) can be assured. Design/methodology/approach - The current responsibility for assuring the bank customers are “treated fairly” belongs to the Financial Services Authority (FSA). The paper argues for the establishment of a banking commission to regulate retail banks as utilities, leaving the FSA to concentrate on prudential (“risk based”) supervision of bank and non-bank financial institutions. Findings - If access to payments services is infrastructural and access to finance is regarded as essential in a modern society, then retail banks should be regulated as utilities. Originality/value - The banking crisis led to calls for banks to maintain lending to SMEs and households (especially mortgages). This implies that access to finance, like access to water and electricity, should be assured and that customers should be protected against the “monopoly” powers of large suppliers. Hence, retail banks are utilities and should be regulated as such.