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on Banking |
| By: | Saskia van Ewijk; Ivo Arnold |
| Abstract: | The two decades prior to the credit crisis witnessed a strategic shift from a traditional, relationships-oriented model (ROM) to a transactions-oriented model (TOM) of financial intermediation in developed countries. A concurrent trend has been a persistent decline in average bank interest margins. In the literature, these phenomena are often explained using a causality that runs from increased competition in traditional segments to lower margins to new activities. Using a comprehensive dataset with bank-level data on over 16,000 FDIC-insured U.S. commercial banks for a period ranging from 1992 to 2010, this paper qualifies this chain of causality. We find that a bank’s business model, measured using a multi-dimensional proxy of relationship banking activity, exerts a robust, positive effect on interest margins. Relationship banks still enjoy considerable interest margins. Our results provide evidence that banks’ quest for growth, not the level of competition in traditional retail segments, has transformed banks’ balance sheets and has reduced interest rate margins as a by-product. |
| Keywords: | interest margins; relationship banking; transaction banking; bank risk-taking |
| JEL: | G21 G28 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:387&r=ban |
| By: | Hałaj, Grzegorz |
| Abstract: | The aim of the paper is to propose a model of banks' asset portfolios to account for the strategic and optimising behavior of banks under adverse economic conditions. In the proposed modelling framework, banks are assumed to respond in an optimising manner to changes in their economic environment (e.g. interest rate and credit risk shocks, funding disruptions, etc.). The modelling approach is based on the risk-return optimal program in which banks aim at a particular composition of their assets to maximise risk-adjusted returns while taking into account regulatory capital and liquidity constraints. The approach is designed for applications in banks' stress testing context, as an alternative to the typical static balance sheet assumption. The stress testing applications are illustrated for a large sample of European banks. JEL Classification: |
| Keywords: | banking, Portfolio optimisation, stress-testing |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131533&r=ban |
| By: | Boissay, Frederic; Collard, Fabrice; Smets, Frank |
| Abstract: | The empirical literature on systemic banking crises (SBCs) has shown that SBCs are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. We attempt to explain these phenomena within a dynamic general equilibrium model featuring a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information on this market may generate sudden interbank market freezes, SBCs, credit crunches and, ultimately, severe recessions. Simulations of a calibrated version of the model indicate that typical SBCs break out in the midst of a credit boom generated by a sequence of positive supply shocks rather than being the outcome of a big negative wealth shock. We also show that the model can account for the relative severity of recessions with SBCs and their longer duration. JEL Classification: E32, E44, G01, G21 |
| Keywords: | Asymmetric information, credit crunch, lending boom, Moral Hazard, systemic banking crisis |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131514&r=ban |
| By: | Sarkisyan, Anna; Casu, Barbara |
| Abstract: | Using US bank holding company data for the period 2001 to 2007, this paper examines the relationship between banks' retained interests in securitisations and insolvency risk. We find that the provision of credit enhancements and guarantees significantly increases bank insolvency risk, albeit this varies for different levels of securitisation outstanding. Specifically, retained interests increase insolvency risk for “large-scale” securitisers while having a risk-reducing effect for “small-scale” and/or first-time securitisers. In addition, we find that the type of facility provided has implications for bank risk, with those with the most subordinated (first-loss) position having the greater impact on banks' default risk. Finally, we find that engagement in third-party securitisations has no significant effect on bank risk. JEL Classification: G21; G32 |
| Keywords: | insolvency risk, retained interests, securitisation |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131538&r=ban |
| By: | Maddaloni, Angela; Peydró, José-Luis |
| Abstract: | We analyze the impact on lending standards of short-term interest rates and macroprudential policy before the 2008 crisis, and of the provision of central bank liquidity during the crisis. Exploiting the euro area institutional setting for monetary and prudential policy and using the Bank Lending Survey, we show that in the period prior to the crisis, in an environment of low monetary policy interest rates, bank lending conditions unrelated to borrowers’ risk were softened. During the same period, we also provide some suggestive evidence of excessive risktaking for mortgages loans. At the same time, we show that the impact of low monetary policy rates on the softening of standards may be reduced by more stringent prudential policies on either bank capital or loan-to-value ratios. After the start of the 2008 crisis, we find that low monetary rates helped to soften lending conditions that were tightened because of bank capital and liquidity constraints, especially for business loans. Importantly, this softening effect is stronger for banks that borrow more long-term liquidity from the Eurosystem. Therefore, the results suggest that monetary policy rates and central bank provision of long-term liquidity complement each other in working against a possible credit crunch for firms. JEL Classification: E51, E52, E58, G01, G21, G28 |
| Keywords: | banking stability, Macroprudential policy, monetary policy |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131560&r=ban |
| By: | Alter, Adrian; Beyer, Andreas |
| Abstract: | In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus. JEL Classification: C58, G01, G18, G21 |
| Keywords: | CDS, Contagion, Impulse responses, sovereign debt, systemic risk |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131558&r=ban |
| By: | Degryse, Hans; Elahi, Muhammad Ather; Penas, María Fabiana |
| Abstract: | We study the role of regional banking system characteristics for regional banking system fragility in Asia, Europe, Latin America and the US. We find that regional banking system fragility reduces when banks in the region jointly hold more liquid assets, are better capitalized, and when regional banking systems are more competitive. For Asia and Latin-America, a greater presence of foreign banks and more wholesale funded banks also reduces regional banking fragility. In contrast, regional banking fragility increases in foreign bank presence and wholesale funding in the US. We further investigate the possibility of contagion across regions. We find that the contagion effects of Europe and the US on Asia and Latin America are significantly higher compared to the effect of Asia and Latin America among themselves. Finally, the impact of cross-regional contagion is attenuated when the host region has a more liquid and more capitalized banking sector. JEL Classification: G15, G20, G29 |
| Keywords: | Banking system stability, cross-regional contagion, financial integration |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131567&r=ban |
| By: | Nobuhiro Kiyotaki (Princeton University) |
| Abstract: | We develop a variation of the macroeconomic model of banking in Gertler and Kiyotaki (2011) that allows for household liquidity risks and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread in the expected rates of return on bank asset and deposit fluctuates countercyclically. However, because bank assets have a longer maturity than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and a liquidation price for bank assets in equilibrium. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:59&r=ban |
| By: | Cimadomo, Jacopo; Hauptmeier, Sebastian; Zimmermann, Tom |
| Abstract: | We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities should increases relative to other assets. JEL Classification: E62, G11 G21, H30 |
| Keywords: | bank balance sheets, banking stability, Fiscal consolidations, portfolio re-balancing |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131511&r=ban |
| By: | De Santis, Roberto A.; Surico, Paolo |
| Abstract: | To what extent does the availability of credit depend on monetary policy? And, does this relationship vary with bank characteristics? Based on a common source of balance sheet data for the four largest economies of the euro area over the period 1999-2011, we uncover three main regularities. First, the effect of monetary policy on bank lending is significant and heterogeneous in Germany and Italy, which are characterised by a large number of banks; but it is very weak in Spain and more homogeneous in France, where the banking industry has a higher degree of market concentration. Second, there is some evidence that monetary policy exerts larger effects on cooperative and savings banks with lower liquidity and less capital in Germany and savings banks with smaller size in Italy. Third, heterogeneity across groups of banks belonging to the same category in any particular country is found to be less pronounced. JEL Classification: C33, E44, E52, G21 |
| Keywords: | commercial, cooperative, credit availability, heterogeneous effects, monetary policy, savings banks |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131568&r=ban |
| By: | Ciccarelli, Matteo; Maddaloni, Angela; Peydró, José-Luis |
| Abstract: | The Euro area economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity. Using detailed data on lending conditions and standards, we analyse how financial fragility has affected the transmission mechanism of the single Euro area monetary policy during the crisis until the end of 2011. The analysis shows that the monetary transmission mechanism has been time-varying and influenced by the financial fragility of the sovereigns, banks, firms and households. The impact of monetary policy on aggregate output is stronger during the financial crisis, especially in countries facing increased sovereign financial distress. This amplification mechanism, moreover, operates mainly through the credit channel, both the bank lending and the non-financial borrower balance-sheet channel. Our results suggest that the bank-lending channel has been partly mitigated by the ECB nonstandard monetary policy interventions. At the same time, when looking at the transmission through banks of different sizes, it seems that, until the end of 2011, the impact of credit frictions of borrowers have not been significantly reduced, especially in distressed countries. Since small banks tend to lend primarily to SME, we infer that the policies adopted until the end of 2011 might have fall short of reducing credit availability problems stemming from deteriorated firm net worth and risk conditions, especially for small firms in countries under stress. JEL Classification: E44, E52, E58, G01, G21, G28 |
| Keywords: | credit channel, financial crisis, heterogeneity, monetary policy, non-standard measures |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131527&r=ban |
| By: | Bolt, Wilko; Humphrey, David |
| Abstract: | Banks supply payment services that underpin the smooth operation of the economy. To ensure an efficient payment system, it is important to maintain competition among payment service providers but data available to gauge the degree of competition are quite limited. We propose and implement a frontierbased method to assess relative competition in bank-provided payment services. Billion dollar banks account for around ninety percent of assets in the US and those with around to billion in assets turn out to be both the most and the least competitive in payment services, not the very largest banks. JEL Classification: G21 L80 L00 |
| Keywords: | banks, competition, frontier analysis, payments |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131539&r=ban |
| By: | Nuño, Galo; Thomas, Carlos |
| Abstract: | We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so. JEL Classification: E20, G10, G21 |
| Keywords: | call option, cross-sectional volatility, Financial intermediaries, leverage, limited liability, Moral Hazard, put option, short-term collateralized debt |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131524&r=ban |
| By: | Idier, Julien; Lamé, Gildas; Mésonnier, Jean-Stéphane |
| Abstract: | We explore the practical relevance from a supervisor's perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis. JEL Classification: C5, E44, G2 |
| Keywords: | balance sheet ratios, MES, panel, systemic risk, tail correlation |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131546&r=ban |
| By: | Adrian Babin (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper uses a Latent Class Stochastic Frontier Approach to factor out the heterogeneity in the data and to provide evidence on the existence of different bank technologies in international banking with different response schedules to external shocks and diverse constraints. We use an unbalanced panel of 756 banks from 77 countries during 2005-2010 for this purpose. Using bank level structural variables we determine four different profit and cost banking technologies in the data. Further analysis indicates heterogeneity not only among the level of profit and cost efficiency, but also regarding the response of banks to the crisis. Interestingly, we find that banks from the same class but from different regions had a different efficiency evolution over the period. Moreover, we document the existence of banks that are more predisposed to be efficient in certain regions than in others. Finally, we document that banks have several potential options for rebalancing the balance sheet for improving the efficiency, albeit some of these strategies have opposite effects on the profit and cost efficiency. |
| Keywords: | efficiency, heterogeneity, crisis, latent classes |
| JEL: | G21 G28 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2013_08&r=ban |
| By: | Abildgren, Kim; Vølund Buchholst, Birgitte; Staghøj, Jonas |
| Abstract: | Utilising a unique data set with annual accounts from around 37,000 Danish non-financial firms spanning almost one and a half decade, we offer microeconometric evidence on bankfirm relationships and the survival of firms during the financial crisis 2008-9. Within the framework of accounting-based credit-scoring models we find that the probability of default during the crisis was significantly higher for firms with a “weak” bank than for comparable firms with a “sound” bank– even after controlling for differences in the credit quality of firms. We discuss how to interpret these results in relation to the real effects of financial crisis. JEL Classification: E44, G21, G33 |
| Keywords: | bank-firm relationships, financial crisis, firm survival, probability of default |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131516&r=ban |
| By: | Derviz, Alexis |
| Abstract: | We explore the ability of a macroprudential policy instrument to dampen the consequences of equity mispricing (a bubble) and the correction thereof (the bubble bursting), as well as the consequences for real activity in a production economy. In our model, producers are financed by both bank debt and equity, and face a mix of systematic and idiosyncratic uncertainty. Positive/negative bubbles arise when prior public beliefs about the aggregate productivity of producers (business sentiment) become biased upwards/downwards. Economic activity in equilibrium is influenced by the bubble size. The presence of macroprudential policy is represented by a convex dependence of bank capital requirements on the quantity of uncollateralized credit. We find that this kind of policy is more successful in suppressing equity price swings than moderating output fluctuations. Economic activity declines with the introduction of a macroprudential instrument in this model, so that the ultimate welfare contribution of the latter would depend on the aggregate default costs. JEL Classification: G01, G21, G12, E22, D82 |
| Keywords: | asset price, bank, bubble, credit, Macroprudential policy |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131551&r=ban |
| By: | Ko Munakata; Koji Nakamura; Yuki Teranishi |
| Abstract: | We introduce financial market friction through search and matching in the loan market into a standard New Keynesian model. We reveal that the second order approximation of social welfare includes the terms related to credit, such as credit market tightness, the volume of credit, and the loan separation rate, in addition to the inflation rate and consumption under financial market friction. Our analytical result justifies why optimal policy should take credit variation into account. We introduce monetary policy and macroprudential policy measures for financial stability into the model. The optimal outcome is achieved through monetary and macroprudential policies by taking into account not only price stability but also financial stability. |
| Keywords: | Optimal macroprudential policy; optimal monetary policy; financial market friction |
| JEL: | E44 E52 E61 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-51&r=ban |
| By: | Khandker, Shahidur R.; Faruqee, Rashid; Samad, Hussain A. |
| Abstract: | Microcredit programs in Bangladesh have experienced spectacular growth in recent years, with a growing number of borrowers availing credit from multiple microcredit agencies. There is a growing concern that if there are not sufficient returns to borrowing from microfinance institutions (MFIS), some borrowers might be taking loans that they will not be able to repay. A household may be considered over-indebted, for example, if its debt liability exceeds 40 percent of its income or assets. Using a long panel of household survey data from Bangladesh, the paper finds that some 26 percent of microcredit borrowers are over-indebted on this measure versus 22 percent of non-microcredit borrowers. Econometric analysis suggests that both MFI competition and multiple borrowing raise indebtedness. However, repeated borrowing, while it affects short-term liability adversely, does affect the long-term debt-asset ratio favorably. That is, repeated borrowing helps increase assets more than debt over time. Microcredit borrowers in Bangladesh are thus not necessarily over-indebted. But when borrowing is seen as protection against shocks such as floods even at the cost of being indebted, MFIs may offer micro-insurance schemes to safeguard borrowers against economic shocks. |
| Keywords: | Debt Markets,Bankruptcy and Resolution of Financial Distress,Currencies and Exchange Rates,Banks&Banking Reform,Emerging Markets |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6574&r=ban |
| By: | Mathias Drehmann; Mikael Juselius |
| Abstract: | Early warning indicators (EWIs) of banking crises should ideally be evaluated on the basis of their performance relative to the macroprudential policy maker's decision problem. We translate several practical aspects of this problem - such as difficulties in assessing the costs and benefits of various policy measures as well as requirements for the timing and stability of EWIs - into statistical evaluation criteria. Applying the criteria to a set of potential EWIs, we find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures. The credit-to-GDP gap is the best indicator at longer horizons, whereas the DSR dominates at shorter horizons. |
| Keywords: | EWIs, ROC, area under the curve, macroprudential policy |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:421&r=ban |
| By: | Beck, Roland; Jakubik, Petr; Piloiu, Anamaria |
| Abstract: | Using a novel panel data set we study the macroeconomic determinants of nonperforming loans (NPLs) across 75 countries during the past decade. According to our dynamic panel estimates, the following variables are found to significantly affect NPL ratios: real GDP growth, share prices, the exchange rate, and the lending interest rate. In the case of exchange rates, the direction of the effect depends on the extent of foreign exchange lending to unhedged borrowers which is particularly high in countries with pegged or managed exchange rates. In the case of share prices, the impact is found to be larger in countries which have a large stock market relative to GDP. These results are robust to alternative econometric specifications. JEL Classification: G21, G28, G32, F34 |
| Keywords: | Credit risk, currency mismatches, non-performing loans |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131515&r=ban |
| By: | Gross, Marco; Kok Sørensen, Christoffer |
| Abstract: | This paper aims to illustrate how a Mixed-Cross-Section Global Vector Autoregressive (MCS-GVAR) model can be set up and solved for the purpose of forecasting and scenario simulation. The application involves two cross-sections: sovereigns and banks for which we model their credit default swap spreads. Our MCS-GVAR comprises 23 sovereigns and 41 international banks from Europe, the US and Japan. The model is used to conduct systematic shock simulations and thereby compute a measure of spill-over potential for within and across the group of sovereigns and banks. The results point to a number of salient facts: i) Spill-over potential in the CDS market was particularly pronounced in 2008 and more recently in 2011-12; ii) while in 2008 contagion primarily went from banks to sovereigns, the direction reversed in 2011-12 in the course of the sovereign debt crisis; iii) the index of spill-over potential suggests that the system of banks and sovereigns has become more densely connected over time. Should large shocks of size similar to those experienced in the early phase of the crisis hit the system in 2011/2012, considerably more pronounced and more synchronized adverse responses across banks and sovereigns would have to be expected. JEL Classification: C33, C53, C61, E17 |
| Keywords: | Contagion, forecasting and simulation, Global macroeconometric modeling, macro-financial linkages, models with panel data, network analysis, spill-overs |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131570&r=ban |
| By: | Lane, Philip R.; McQuade, Peter |
| Abstract: | Europe experienced substantial cross-country variation in domestic credit growth and cross border capital flows during the pre-crisis period. We investigate the inter-relations between domestic credit growth and international capital flows over 1993-2008, with a special focus on the 2003-2008 boom period. We establish that domestic credit growth in European countries is strongly related to net debt inflows but not to net equity inflows. This pattern also holds for an extended sample of 54 advanced and emerging economies. JEL Classification: E51, F32, G15 |
| Keywords: | financial globalisation, financial stability, macro-prudential regulation |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131566&r=ban |
| By: | Moritz Schularick (Free University of Berlin); Alan Taylor (University of Virginia); Oscar Jorda (Federal Reserve Bank of San Francisco) |
| Abstract: | This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In addition to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output, but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that nancial factors play an important role in the modern business cycle. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:71&r=ban |
| By: | Castrén, Olli; Rancan, Michela |
| Abstract: | We use financial accounts data at sector level to construct financial networks for individual euro area countries. We then connect the country-level networks to one large “Macro Network”, using information on cross-border linkages between the national banking sectors. We then evaluate the features of the resulting framework using various network statistics. Shock simulations reveal that the structural features of the bilateral linkages are a key determinant of the losses that may be generated when the shocks propagate in the system. The network structures evolve over time, showing increasing interconnectedness in different instrument categories before the financial crisis hit in 2007, and a sharp retrenchment from bilateral exposures after the crisis started. This reflects the surge in counterparty risk and the de-leveraging processes which were triggered by the initial asset price losses and were further amplified by the economic downturn. As a consequence, there was a marked deterioration in financial integration both within economies and across countries in the euro area. Nonetheless, our analysis suggests that the risk of contagion is not reduced, while a more diversified portfolio of cross-border exposures might mitigate shocks effects. JEL Classification: E44, F36, G01, G15, G21 |
| Keywords: | Balance sheet contagion, cross-border exposures, Financial crises, Financial networks, interconnectedness |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131510&r=ban |
| By: | Darracq Pariès, Matthieu; De Santis, Roberto A. |
| Abstract: | The identification of non-standard monetary policy shocks is a key challenge for econometricians, not least as these measures are somewhat unprecedented in modern central banking history and as the instruments vary widely across the various non-standard measures. This paper focuses on the 3-year long-term re-financing operations (LTROs), implemented by the ECB in December 2011 and February 2012. The macroeconomic impact of this measure is identified using the April 2012 Bank Lending Survey (BLS) as well as the special ad-hoc questions on the LTROs conducted in mid-February 2012. We estimate a panel-VAR for the euro area countries, which include relevant BLS variables, and identify credit supply shocks both recursively and with sign restriction methods. The macroeconomic effects of the 3-year LTROs are associated with the favorable credit supply shocks extracted through BLS information for the first half of 2012. Compared with the most likely developments one could have expected at the end of 2011 when financial tensions culminated, our counterfactual exercises suggest that the 3-year LTROs significantly lifted prospects for real GDP and loan provision to non-financial corporations over the next two-to-three years. JEL Classification: C23, E52 |
| Keywords: | Non-standard monetary policy measures, Panel VAR |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131508&r=ban |