nep-ban New Economics Papers
on Banking
Issue of 2020‒11‒23
seven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Twelve Years after the Financial Crisis – Too-big-to-fail is still with us. Comments on the Financial Stability Board’s Consultation Report ‘Evaluation of the Effects of Too-big-to-fail reforms’ By Martin F. Hellwig
  2. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By Elliott, David; Meisenzahl, Ralf; Peydro, Jose-Luis; Turner, Bryce
  3. Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies By Jeon, Bang Nam; Wu, Ji; Chen, Limei; Chen, Minghua
  4. Balancing the Payment System By Toma\v{z} Fleischman; Paolo Dini
  5. The Financial (In)Stability Real Interest Rate, R** By Ozge Akinci; Gianluca Benigno; Marco Del Negro; Albert Queraltó
  6. Banking Crises under a Central Bank Digital Currency (CBDC) By Bitter, Lea
  7. Rise of the Central Bank Digital Currencies: Drivers, Approaches and Technologies By Raphael A. Auer; Giulio Cornelli; Jon Frost

  1. By: Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper contains comments made on the Financial Stability Board’s (FSB) Consultation Report concerning the success of regulatory reforms since the global financial crisis of 2007-2009. According to these comments, the FSB’s assessment of the role of equity is too narrow, being phrased in terms of bankruptcy avoidance and risk taking incentives, without attention to debt overhang creating distortions in funding choices, as well as the systemic impact of ample equity reducing deleveraging needs after losses and equity contributing to smoothing of lending and asset purchases over time. The FSB’s treatment of systemic risk pays too little attention to mutual interdependence of different parts of the system that is not well captured by linear causal relationships. Finally, the comments point out that bank resolution of systemically important institutions is still not viable, for lack of political acceptance of single-point-of-entry procedures, for lack of funding of banks in resolution (in the EI), for lack of fiscal backstops (in the EU), and for lack of political acceptance of bank resolution with bail-in.
    Keywords: Financial Stability Board, too-big-to-fail, systemic risk, banking regulation, bank resolution
    JEL: G01 G18 G21 G28 K23
    Date: 2020–10
  2. By: Elliott, David; Meisenzahl, Ralf; Peydro, Jose-Luis; Turner, Bryce
    Abstract: We show that nonbanks (funds, shadow banks, fintech) reduce the effectiveness of tighter monetary policy on credit supply and the resulting real effects, and increase risk-taking. For identification, we exploit exhaustive US loan-level data since 1990s and Gertler-Karadi monetary policy shocks. Higher policy rates shift credit supply from banks to less-regulated, more fragile nonbanks. The bank-to-nonbank shift largely neutralizes total credit and associated consumption effects for consumer loans and attenuates the response of total corporate credit (firm investment) and mortgages (house price spillovers). Moreover, different from the so-called risktaking channel, higher policy rates imply more risk-taking by nonbanks.
    Keywords: Nonbank Lending,Monetary Policy Transmission,Risk-Taking Channel
    JEL: E51 E52 G21 G23 G28
    Date: 2020
  3. By: Jeon, Bang Nam (School of Economics LeBow College of Business Drexel University); Wu, Ji (Southwestern University of Finance and Economics); Chen, Limei (Fudan University); Chen, Minghua (Southwestern University of Finance and Economics)
    Abstract: This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1400 commercial banks in 39 emerging economies during 2000-2016, we find that increased business diversification exerts two competing effects on bank risk, and overall reduces bank risk. The direct effect of increased diversification bolsters the stability of banks, but it is offset partially by the indirect effect whereby lowered efficiency, which is resulted from higher diversification, increases the riskiness of banks. This provides a consolidating evidence on the competing arguments on the diversification-efficiency nexus in the banking literature-the "diversification-premium" argument vs. the "diversification-discount" argument-with its extended implications on bank risk. In addition, we also present evidence that the diversification-bank risk nexus is heterogeneous on the bank size, market power and the ownership of banks, which provides useful policy implications for diversification strategies by bank managers as well as for the effective surveillance by bank regulators.
    Keywords: Diversification; Bank Efficiency; Bank Risk-Taking; Emerging Economies
    JEL: G15 G21 L25
    Date: 2020–08–01
  4. By: Toma\v{z} Fleischman; Paolo Dini
    Abstract: The increasingly complex economic and financial environment in which we live makes the management of liquidity in payment systems and the economy in general a persistent challenge. New technologies are making it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, the interbank balancing method can also be applied to private payment systems, complementary currencies, and trade credit clearing systems to provide better liquidity and risk management. In this paper we introduce the concept of a balanced payment system and demonstrate the effects of balancing on a small example. We show how to construct a balanced payment subsystem that can be settled in full and, therefore, that can be removed from the payment system to achieve liquidity-saving and payments gridlock resolution. We also briefly introduce a generalization of a payment system and of the method to balance it in the form of a specific application (Tetris Core Technologies), whose wider adoption could contribute to the financial stability of and better management of liquidity and risk for the whole economy.
    Date: 2020–11
  5. By: Ozge Akinci; Gianluca Benigno; Marco Del Negro; Albert Queraltó
    Abstract: We introduce the concept of a financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint, as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sector, measured by an increase in leverage, are accompanied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial conditions index and show how it is related to the gap between the natural and financial stability interest rates.
    Keywords: r**; financial crises; financial stability; occasionally binding credit constraint
    JEL: E4 E5 G0
    Date: 2020–11–01
  6. By: Bitter, Lea
    Abstract: One of the main concerns when considering Central Bank Digital Currency (CBDC) is the disintermediating effect on the banking sector in normal times, and even more the risk of a bank run in times of crisis. This paper extends the bank run model of Gertler and Kiyotaki (2015) by analyzing the impact of a CBDC. A CBDC is an additional type of liability to the central bank which, by accounting identity, must be accompanied by respective accommodations on the asset side. The model compares the effects of two different asset side policies with each other and to the economy without a CBDC. I find that a CBDC reduces net worth in the banking sector in normal times but mitigates the risk of a bank run in times of crisis. The prevailing concerns about the risk of a bank run turn out to be partial equilibrium considerations disregarding the asset side effects of a CBDC.
    Keywords: Central Bank Digital Currency (CBDC),Digital Currency,Central Banking,Financial Intermediation,Bank Runs,Lender of Last Resort
    JEL: E42 E58 G01 G21
    Date: 2020
  7. By: Raphael A. Auer; Giulio Cornelli; Jon Frost
    Abstract: Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.
    Keywords: central bank digital currency, CBDC, payments, central banking, digital currency, digital money, distributed ledger technology, blockchain
    JEL: E42 E44 E51 E58 G21 G28 F31
    Date: 2020

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