Sarkis Joseph Khoury

Outsourcing Central Banking: Lessons from Estonia

An orthodox currency board (CB) renders central banking redundant for interest and exchange rate determination. Thereby, monetary policy is de facto outsourced. Foreign direct investment (FDI) in banking can lead to outsourcing of the second important central bank function, responsibility for banking supervision. Economic and political conditions for outsourcing of central banking are discussed. Estonias experience with a CB and expanding foreign involvement in banking is reviewed. The Argentine CB experience is discussed briefly to provide a contrast. The conclusion outlines the conditions for successful currency outsourcing to another country or regional authority.

Foreign banks in the United States: Entry strategies and operations

This article deals with a very significant component of the U.S. banking industry: foreign banks in the United States. Their growth in the U.S., and specifically in California, is traced, as are the foci of their business strategy. In addition, the article explores the motivation of foreign banks to enter the U.S. market. All available theories are summarized and their relevance explored. The article goes on to speculate about some factors likely to influence the growth of foreign banking in the United States.

Computing the Extent of Circumvention of Proposition 13: A Note

We analyze the own-source revenues of California state and local governments relative to the States personal income in order to examine the extent to which the growth in non-tax revenues has circumvented the reduction in taxes produced by Proposition 13. Our results show that, while non-tax revenues have been the favored means to circumvent Californias fiscal constitution, the circumvention has been only marginal.

Lessons from the EMU for Asian Regional Integration: An Economic Perspective

ABSTRACT Critical costs and benefits of creating an EMU-like structure in Asia are identified. Analyzing the EU, we pay particular attention to two kinds of economic benefits and costs that do not appear much in conventional economic analysis. First, there are benefits and costs of harmonization in different areas including the monetary area. Second, giving up sovereignty within a policy area can provide many countries with a kind of insurance against domestic institutional, legal, and political weaknesses. Although we emphasize economic arguments it is necessary to recognize that the EU is very much a politically motivated project. Politics may well be the biggest obstacle to an EMU-like monetary system in Asia. Conditions in Asia require consideration of alternatives to a monetary union since there exist disparate economic and political systems that may well prove impossible to fully integrate.

Conceptual model for explaining the IT investment paradox in the banking sector

This paper discusses the IT productivity paradox in the banking sector (US banking in particular) and the fundamental justifications for the continuing and expanding IT investment in the banking industry. Given the dramatic increase in IT investment in the banking industry despite the inconclusive evidence of IT productivity gains, this study explains why heavy investment in IT continues amidst conflicting evidence of positive returns. A set of three exogenous forces: (1) technological turbulence, (2) market turbulence, and (3) regulatory turbulence are proposed as key drivers behind IT investments by banks. The contribution of this paper is the development of a conceptual model that proposes that IT investments in banks can be viewed as guided by two logics: strategic, and operational. Driven by the discussion of whether IT matters (Carr, 2003), we propose a framework for analysing whether IT investments in banks are indeed driven by the need for creating competitive advantages (strategic) or by the operational requirements of the bank.

The Value of Life: A New Labor Theory-Based Model

This paper develops a labor-based model where a worker chooses between not only work and leisure, as the traditional labor models have argued, but rather between labor, leisure and the purchase of insurance. The model allows the insurance buyer to determine the amount of insurance he is willing to work for and purchase while maximizing utility and derives the shadow price of risk, thus the value of life. The model is applied to quadratic, logarithmic, and exponential utility functions. Results can help insurance companies determine the cost of insurance associated with a specific job and related risk.

Trust in the Euro and the EU’s Banking Union After the Financial Crisis

Wihlborg and Khoury examine whether greater institutional flexibility can strengthen confidence in the euro and the European banking union. The authors highlight the costs and benefits of harmonization as compared with those arising from competition among national regulatory frameworks. Greater trust requires either that some EU member states abandon the euro as their currency, or that they effect far-reaching structural reforms. Politically, it is advantageous to divide the euro zone into two different currency areas. Regarding the EU’s banking union, Wihlborg and Khoury contend that market discipline with regard to banks’ risk-taking improves national regulatory frameworks through institutional competition. Mutual recognition between national supervisory authorities requires harmonization of rules for dealing with troubled banks, as well as for banking regulation and supervision.

The Long Term Stability of the Euro—A Critical Review

This paper deals with the stability of the euro since its inception and the structural weaknesses in the allocation of responsibility for monetary and fiscal policy in particular. Recent events reflect those weaknesses and, as a result, the survival of the euro zone in its current configuration is threatened. This paper examines the stability of the euro zone by focusing on interest rates [more specifically, the risk premia in the various troubled European Monetary Union (EMU) countries] and their determinants, and the stability of these premia which affect the price of government bonds. The conclusion is that the bond markets are quite unstable and that the instability was caused by budget profligacy. This paper looks at the entire period since the inception of the euro which covers the financial crisis of 2008 and beyond and asks whether moral hazard and the free rider problems in fiscal policy and the markets for sovereign debt have contributed to the current crisis. This includes examining the determinants of the risk premiums in the various countries making up the EMU, focussing on variables that are in the Maastricht Treaty charter such as budget deficits, cumulative debt in relation to GDP, rates of inflation, and monetary variables. The conclusion is inescapable: One cannot run a country or a union with 19 finance ministers where many have set aside the convergence criteria, and with a monetary policy that accommodates the extreme needs of some members instead of dealing decisively with serious structural problems that EU and the EMU especially, face. This paper examines the economic relationships in the troubled countries of the EMU in order to draw some lessons for policy makers.

Stability of predictors and the forecasting of foreign exchange rates

The forecasting of foreign exchange rates is like reading tea leaves to some and a sophisticated form of economic analysis to others. Several firms currently earn substantial profits selling exchange-rate forecasts based on various models and with different track records. This study critically reviews the pitfalls and the merits of existing approaches to forecasting foreign exchange rates and introduces a new element in the forecasting model: the stability of predictors. The findings are that stability variables do improve the forecasting ability of an econometrically based model. The results of the suggested model are superior to those derived using the forward rate and the current spot rate as forecasting tools for future spot rates. The forecasting model developed here is shown to be transferable from one currency to another. The utilization of complex statistical techniques in the forecasting of foreign exchange rates depends on whether or not the foreign exchange markets are efficient. The foreign exchange market that is efficient in any sense (weak, semistrong, and strong) is signaling foreign exchange managers that regardless of the forecasting technique employed-sophisticated econometric models, simple forecasting tools, or chart reading-the market cannot be beaten. A simple, costless forecasting tool continuously observable in the marketplace, such as the forward rate, should prove to be a sufficient predictor of the future spot rate if markets are functioning efficiently. Empirical tests on the efficiency of the foreign exchange markets suffer the following drawbacks: 1.