New Economics Papers
on Banking
Issue of 2011‒09‒16
25 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. International Liquidity: The Fiscal Dimension By Maurice Obstfeld
  2. Indexed debt contracts and the financial accelerator By Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
  3. The 2007-2008 financial crisis: Is there evidence of disaster myopia? By Camille Cornand; Céline Gimet
  4. Optimal monetary policy under financial sector risk By Scott Davis; Kevin X.D. Huang
  5. Who Should Supervise? The Structure of Bank Supervision and the Performance of the Financial System By Barry Eichengreen; Nergiz Dincer
  6. Bank Competition in the EU: How Has It Evolved? By Laurent Weill
  7. Money, Financial Stability and Efficiency By Allen, Franklin; Carletti, Elena; Gale, Douglas M
  8. Reexamining the empirical relation between loan risk and collateral: the roles of collateral characteristics and types By Allen N. Berger; W. Scott Frame; Vasso Ioannidou
  9. Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking By Nicolo, G. De; Gamba, A.; Lucchetta, M.
  10. A DSGE model of banks and financial intermediation with default risk By Wickens, Michael R.
  11. Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes By Hauck, Achim; Neyer, Ulrike; Vieten, Thomas
  12. The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel: A Luxembourg case study By Gaston Giordana; Ingmar Schumacher
  13. Is this bank ill? The diagnosis of doctor TARGET2 By Ronald Heijmans; Richard Heuver
  14. Bubbles, Banks, and Financial Stability By Kosuke Aoki; Kalin Nikolov
  15. Bank recapitalization in the U.S. - lessons from Japan By Montgomery, Heather; Takahashi, Yuki
  16. The price of liquidity: the effects of market conditions and bank characteristics By Falko Fecht; Kjell G. Nyborg; Jörg Rocholl
  17. Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities By Mardi Dungey; Gerald P. Dwyer; Thomas Flavin
  18. Cyclicality of Credit Supply: Firm Level Evidence By Bo Becker; Victoria Ivashina
  19. House prices and credit constraints: making sense of the U.S. experience By John V. Duca; John Muellbauer; Anthony Murphy
  20. Debt overhang in emerging Europe ? By Brown, Martin; Lane, Philip R.
  21. Do banking shocks matter for the U.S. economy? By Naohisa Hirakata; Nao Sudo; Kozo Ueda
  22. Heterogeneity, correlations and financial contagion By Fabio Caccioli; Thomas A. Catanach; J. Doyne Farmer
  23. The Implementation of Monetary Policy in China: The Interbank Market and Bank Lending By Hongyi Chen; Qianying Chen; Stefan Gerlach
  24. The Measurement of Banking Services in the System of National Accounts By Diewert, Erwin; Fixler, Dennis; Zieschang, Kimberly
  25. Subprime Consumer Credit Demand: Evidence from a Lender?sPricing Experiment By Sule Alan; Ruxandra Dumitrescu; Gyongyi Loranth

  1. By: Maurice Obstfeld
    Abstract: This paper argues that if policymakers seek to enhance global liquidity, then the international community must provide a higher and better coordinated level of fiscal support than it has in the past. Loans to troubled sovereigns or financial institutions imply a credit risk that ultimately must be lodged somewhere. Expanded international lending facilities, including an expanded IMF, cannot remain unconditionally solvent absent an expanded level of fiscal backup. The same point obviously applies to the European framework for managing internal sovereign debt problems, including proposals for a jointly guaranteed eurozone sovereign bond. Even attainment of a significant role for the Special Drawing Right depends upon enhanced fiscal resources and burden sharing at the international level.
    JEL: F33 F34 F36 H87
    Date: 2011–09
  2. By: Charles T Carlstrom; Timothy S Fuerst; Matthias Paustian
    Abstract: This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.
    Keywords: Indexation (Economics) ; Financial markets
    Date: 2011
  3. By: Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon); Céline Gimet (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: The disaster myopia hypothesis is a theoretical argument that may explain why crises are a recurrent event. Under very optimistic circumstances, investors disregard any relevant information concerning the increasing degree of risk. Agents' propensity to underestimate the probability of adverse outcomes from the distant past increases the longer the period since that event occurred and at some point the subjective probability attached to this event reaches zero. This risky behaviour may contribute to the formation of a bubble that bursts into a crisis. This paper tests whether there is evidence of disaster myopia during the recent episode of financial crisis in the banking sector. Its contribution is twofold. First, it shows that the 2007 financial crisis exhibits disaster myopia in the banking sector. And second, it identifies macro and specific determinant variables in banks' risk taking since the beginning of the years 2000.
    Keywords: disaster myopia; financial crisis; banks; risk taking dynamics; GMM
    Date: 2011
  4. By: Scott Davis; Kevin X.D. Huang
    Abstract: We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in the Taylor rule (the coefficients on the lagged interest rate, inflation, and the output gap) are optimally chosen, the central bank should not put any weight on endogenous fluctuations in the interbank lending spread. ; However, the central bank should adjust the risk free rate in response to fluctuations in the spread that occur because of exogenous financial shocks, but we find that the central bank should not be too aggressive in its easing policy. Optimal policy calls for a two-thirds of a percentage point cut in the risk free rate in response to a financial shock that causes a one percentage point increase in interbank lending spreads.
    Keywords: Business cycles ; Financial markets ; Monetary policy
    Date: 2011
  5. By: Barry Eichengreen; Nergiz Dincer
    Abstract: We assemble data on the structure of bank supervision, distinguishing supervision by the central bank from supervision by a nonbank governmental agency and independent from dependent governmental supervisors. Using observations for 140 countries from 1998 through 2010, we find that supervisory responsibility tends to be assigned to the central bank in low-income countries where that institution is one of few public-sector agencies with the requisite administrative capacity. It is more likely to be undertaken by a non-independent agency of the government in countries ranked high in terms of government efficiency and regulatory quality. We show that the choice of institutional arrangement makes a difference for outcomes. Countries with independent supervisors other than the central bank have fewer nonperforming loans as a share of GDP even after controlling for inflation, per capita income, and country and/or year fixed effects. Their banks are required to hold less capital against assets, presumably because they have less need to protect against loan losses. Savers in such countries enjoy higher deposit rates. There is some evidence, albeit more tentative, that countries with these arrangements are less prone to systemic banking crises.
    JEL: G0 H1
    Date: 2011–09
  6. By: Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: Economic integration on the EU banking markets is expected to favor competition, which should provide economic gains. However, even if there is a commonly accepted view in favor of enhanced bank competition during the last decade, no study has been performed in the 2000s showing this trend. In this paper, we aim to fill this gap by measuring the evolution of bank competition in all EU countries during the 2000s. We estimate the Lerner index and the H-statistic for a sample of banks from all EU countries. We provide evidence of a general improvement in bank competition in the EU, even if cross-country differences are observed in the pattern of the evolution of bank competition. We check whether convergence in bank competition has taken place on the EU banking markets, by applying ? and ? convergence tests for panel data. We show convergence in bank competition. These findings are also observed with standard competition measures (Herfindahl index, profitability indicators). We thus support the view th at bank integration has taken place in the European Union.
    Keywords: banking, competition, European integration
    JEL: G21 F36 L16
    Date: 2011
  7. By: Allen, Franklin; Carletti, Elena; Gale, Douglas M
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Keywords: monetary policy; nominal contracts
    JEL: E42 E44 E52 E58
    Date: 2011–09
  8. By: Allen N. Berger; W. Scott Frame; Vasso Ioannidou
    Abstract: This paper offers a possible explanation for the conflicting empirical results in the literature concerning the relation between loan risk and collateral. Specifically, we posit that different economic characteristics or types of collateral pledges may be associated with the empirical dominance of the four different risk-collateral channels implied by economic theory. For our sample, collateral overall is associated with lower loan risk premiums and a higher probability of ex post loan nonperformance (delinquency or default). This finding suggests that the dominant reason collateral is pledged is that banks require collateral from observably riskier borrowers ("lender selection" effect), while lower risk premiums arise because secured loans carry lower losses given default ("loss mitigation" effect). We also find that the risk-collateral channels depend on the economic characteristics and types of collateral. The lender selection effect appears to be especially important for outside collateral, the "risk-shifting" or "loss mitigation" effects for liquid collateral, and the "borrower selection" effect for nondivertible collateral. Among collateral types, we find that the lender selection effect is particularly strong for residential real estate collateral and that the risk shifting effect is important for pledged deposits and bank guarantees. Our results suggest that the conflicting results in the extant risk-collateral literature may be because different samples may be dominated by collateralized loans with different economic characteristics or different types of collateral.
    Date: 2011
  9. By: Nicolo, G. De; Gamba, A.; Lucchetta, M. (Tilburg University, Center for Economic Research)
    Abstract: This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance and equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benifits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank effciency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.
    Keywords: Capital requirements;liquidity requirements;taxation of liabilities. JEL Classifications
    Date: 2011
  10. By: Wickens, Michael R.
    Abstract: This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.
    Keywords: Default; Financial crisis; Financial intermediation; Liquidity shortages; Risk
    JEL: E44 E51 G12 G21 G33
    Date: 2011–09
  11. By: Hauck, Achim; Neyer, Ulrike; Vieten, Thomas
    Abstract: This paper develops a model to analyze two different bad bank schemes, an outright sale of toxic assets to a state-owned bad bank and a repurchase agreement between the bad bank and the initial bank. For both schemes, we derive a critical transfer payment that induces a bank manager to participate. Participation improves the bank's solvency and enables the bank to grant new loans. Therefore, both schemes can reestablish stability and avoid a credit crunch. However, an outright sale will be less costly to taxpayers than a repurchase agreement only if the transfer payment is sufficiently low. --
    Keywords: bad banks,financial crisis,financial stability,credit crunch
    JEL: G21 G28 G30
    Date: 2011
  12. By: Gaston Giordana; Ingmar Schumacher
    Abstract: In this paper we study the impact of the Basel III liquidity regulations, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the bank lending channel in Luxembourg. For this aim we built, based on individual bank data, time series of the LCR and NSFR for a sample of banks covering between 82% and 100% of total assets of the banking sector. Additionally, we simulated the optimal balance sheet adjustments needed to adhere to the regulations. We extend the existing literature on the identification of the bank lending channel by adding as banks characteristics the estimated shortfalls in both the LCR and NSFR. We find a significant role for the bank lending channel in Luxembourg which mainly works through small banks with a large shortfall in the NSFR. We also show that big banks are able to increase their lending following a contractionary monetary policy shock, in line with the fact that big banks in Luxembourg are liquidity providers. Our extrapolation and simulation results suggest that the bank lending channel will no longer be effective in Luxembourg once banks adhere to the Basel III liquidity regulations. We find that adhering to the NSFR may reduce the bank lending channel more strongly than complying with the LCR.
    Keywords: bank, bank lending channel, monetary policy, Basel III, LCR, NSFR
    JEL: E51 E52 E58 G21 G28
    Date: 2011–06
  13. By: Ronald Heijmans; Richard Heuver
    Abstract: We develop indicators for signs of liquidity shortages and potential financial problems of banks by studying transaction data of the Dutch part of the European real time gross settlement system and collateral management data. The indicators give information on 1) overall liquidity position, 2) the interbank money market, 3) the timing of payment flows, 4) the collateral’s amount and use and 5) bank run signs. This information can be used both for monitoring the TARGET2 payment system and for individual banks’ supervision. By studying these data before, during and after stressful events in the crisis, banks’ reaction patterns are identified. These patterns are translated into a set of behavioural rules, which can be used in payment systems’ stress scenario analyses, such as e.g. simulations and network topology. In the literature behaviour and reaction patterns in simulations are either ignored or very static. To perform realistic payment system simulations it is crucial to understand how banks react to shocks.
    Keywords: behaviour of banks; wholesale payment systems; financial stability
    JEL: D23 E42 E58
    Date: 2011–08
  14. By: Kosuke Aoki (Faculty of Economics, University of Tokyo); Kalin Nikolov (European Central Bank)
    Abstract: This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2) When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.
    Date: 2011–08
  15. By: Montgomery, Heather; Takahashi, Yuki
    Abstract: This study empirically investigates the effectiveness of the Capital Purchase Program (CPP), the centerpiece of the United States 700 billion dollar policy response to the global financial crisis of 2008. We frame our analysis of the United States policy response against the backdrop of Japan’s banking crisis and policy response in the late 1990s. As one of the only advanced economies with a large global presence in international finance, Japan’s banking crisis of 1997 and the effectiveness of the policy response offered important lessons to U.S. policymakers in 2008. Based on empirical studies of Japan’s bank recapitalization program, we distill the most crucial lessons to be the importance of speed, adequate scale and customized restructuring in forming recapitalization packages. The United States and other economies affected by the 2008 global crisis took this first lesson to heart and reacted with unprecedented speed to events in the Autumn of 2008. But despite the large headline figure of 700 billion dollars, the program was not of adequate scale and was actually smaller than Japan’s recapitalization program of 1997-1998 in relative terms. More critically, program implementation in the first year was standardized and there was no investigation into the recipient banks’ business plans or financial condition to allow restructuring to be tailored to each individual recipient bank. These latter two points significantly hampered the effectiveness of the bank recapitalization program. Our findings demonstrate that the program was successful in achieving at least one policy objective of the program: boosting recipient banks regulatory capital ratios. But we find that the program failed to achieve another important policy objective, to stimulate bank lending. To the contrary, we find evidence that recipient banks reduced lending, presumably because of the pressure to cut highly risk-weighted assets in order to increase their capital adequacy ratios. Although encouraging banks to increase bad loan write-offs was not an explicit policy objective of the CPP according to our reading of statements from the Department of Treasury, we also look at the impact of the program on bad loan write-offs and find no evidence that recapitalization stimulated bad loan write-offs either. The main empirical results here echo the findings of analysis of Japan’s bank recapitalization program in 1997. In Japan’s case, the second round capital injections in 1998 were of significantly larger scale and more tailored to meet the needs of recipient banks, which increased the effectiveness of the policy intervention. Future research will investigate whether the United States followed a similar pattern and the CPP recapitalizations of 2009 were more effective than those made in the first year of the program.
    Keywords: Capital injection; Systemic crisis
    JEL: G28 G21
    Date: 2011–03
  16. By: Falko Fecht (European Business School, Universität für Wirtschaft und Recht, Gustav-Stresemann-Ring 3, D-65189 Wiesbaden, Germany.); Kjell G. Nyborg (University of Zurich, Institut für Banking & Finance, Plattenstrasse 14, 8032 Zürich, Schweiz.); Jörg Rocholl (ESMT European School of Management and Technology, Schlossplatz 1, D- 10178 Berlin, Germany.)
    Abstract: We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual banklevel data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes. JEL Classification: G12, G21, E43, E58, D44.
    Keywords: Banks, liquidity, money markets, repos, imbalance.
    Date: 2011–09
  17. By: Mardi Dungey; Gerald P. Dwyer; Thomas Flavin
    Abstract: The misevaluation of risk in securitized financial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the effects on the common factor of the financial crisis.
    JEL: G12 C32
    Date: 2011–09
  18. By: Bo Becker; Victoria Ivashina
    Abstract: Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time-series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms’ substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm’s switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.
    JEL: E32 E44 G21
    Date: 2011–09
  19. By: John V. Duca; John Muellbauer; Anthony Murphy
    Abstract: Most U.S. house price models break down in the mid-2000s due to the omission of exogenous changes in mortgage credit supply (associated with the subprime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time homebuyers. Incorporating a measure of credit conditions—the cyclically adjusted loan-to-value ratio for first-time buyers—into house price-to-rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.
    Keywords: Housing - Prices ; Subprime mortgage ; Credit ; Rent
    Date: 2011
  20. By: Brown, Martin; Lane, Philip R.
    Abstract: This paper assesses the extent to which debt overhang poses a constraint to economic activity in Emerging Europe, as the region emerges from the recent financial and economic crisis. At the macroeconomic level, it finds that the external imbalance problem for Emerging Europe has been in most cases more one of flows (high current account deficits in the pre-crisis years) rather than large stocks of external debt. A high reliance on equity funding means that net external debt is far lower than net external liabilities. Domestic balance sheets have expanded quite rapidly but sector liabilities remain relatively low compared with advanced economies. With the important exception of Hungary, public debt levels also remain relatively low in Emerging Europe. At the microeconomic level, the potential for debt overhang in the corporate sector is limited to a few countries: Latvia, Lithuania, Estonia, and Slovenia. Due to the low incidence of household debt, hardly any country, except Estonia, seems to face a threat of debt overhang in the household sector. The strong increase in non-performing loans compared with pre-crisis bank profitability suggests that debt overhang in the banking sector is a threat in Ukraine, Latvia, Lithuania, Hungary, Georgia, and Albania. Financial integration of Emerging Europe seems to have contributed to the transmission of the crisis to the region. At the same time, this integration is helping the region in managing the crisis by concerted actions of the major players.
    Keywords: Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets
    Date: 2011–08–01
  21. By: Naohisa Hirakata; Nao Sudo; Kozo Ueda
    Abstract: The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.
    Keywords: Price levels ; Financial markets ; Monetary policy
    Date: 2011
  22. By: Fabio Caccioli; Thomas A. Catanach; J. Doyne Farmer
    Abstract: We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and degree correlations between banks. We study the probability of contagion conditional on the failure of a random bank, the most connected bank and the biggest bank, and we consider the effect of targeted policies aimed at increasing the capital requirements of a few banks with high connectivity or big balance sheets. Networks with heterogeneous degree distributions are shown to be more resilient to contagion triggered by the failure of a random bank, but more fragile with respect to contagion triggered by the failure of highly connected nodes. A power law distribution of balance sheet size is shown to induce an inefficient diversification that makes the system more prone to contagion events. A targeted policy aimed at reinforcing the stability of the biggest banks is shown to improve the stability of the system in the regime of high average degree. Finally, disassortative mixing, such as that observed in real banking networks, is shown to enhance the stability of the system.
    Date: 2011–09
  23. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Qianying Chen (Hong Kong Institute for Monetary Research); Stefan Gerlach (Institute for Monetary and Financial Stability and University of Frankfurt and Hong Kong Institute for Monetary Research)
    Abstract: We analyze the impact of monetary policy instruments on interbank lending rates and retail bank lending in China using an extended version of the model of Porter and Xu (2009). Unlike the central banks of advanced economies, the People's Bank of China uses changes in the required reserve ratios and open market operations to influence liquidity in money markets and adjusts the regulated deposit and lending rates and loan targets to intervene in the retail deposit and lending market. These interventions prevent the interbank lending rate from signalling monetary policy stance and transmitting the effect of policy to the growth of bank loans.
    Keywords: Monetary Policy Implementation, Regulated Retail Interest Rates, Transmission Mechanism, Window Guidance, Bank Loans, China
    JEL: E42 E52 E58
    Date: 2011–08
  24. By: Diewert, Erwin; Fixler, Dennis; Zieschang, Kimberly
    Abstract: The paper considers some of the problems associated with the indirectly measured components of financial service outputs in the System of National Accounts (SNA), termed FISIM (Financial Intermediation Services Indirectly Measured). The paper characterizes FISIM by a user cost and supplier benefit approach determining the price and quantity of various financial services in the banking sector. We examine the need for FISIM in the context of plausible alternative accounting schemes that could be used to account for financial services. The alternative accounting frameworks have implications for the labour and multifactor productivity of both the financial and nonfinancial sectors.
    Keywords: User costs, banking services, deposit services, loan services, Total Factor Productivity growth, production accounts, System of National Accounts, FIS
    Date: 2011–09–01
  25. By: Sule Alan; Ruxandra Dumitrescu; Gyongyi Loranth
    Abstract: We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. What is novel about our contribution is that we were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. We find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity constraints. We also demonstrate the importance of truly exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with nonexperimental variation leads to seriously biased estimates even when conditioning on a rich set of controls and individual fixed effects. In particular, this procedure results in a large and statistically significant 3-month elasticity of credit card debt with respect to interest rates even though the experimental estimate of the same elasticity is neither economically nor statistically different from zero.
    Keywords: subprime credit; randomized trials; liquidity constraints
    JEL: D11 D12 D14
    Date: 2011–02

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