nep-ban New Economics Papers
on Banking
Issue of 2021‒10‒04
35 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Epidemic exposure, financial technology, and the digital divide By Saka, Orkun; Eichengreen, Barry; Aksoy, Cevat Giray
  2. La transformación en el uso de efectivo y pagos digitales durante la pandemia de Covid-19 By Batiz-Lazo, Bernardo; Bautista-González, Manuel A; González-Correa, Ignacio
  3. The welfare effects of financial inclusion in Ghana: An exploration based on a multidimensional measure of financial inclusion By Abdul Malik Iddrisu; Michael Danquah
  4. Peer Monitoring vs. Search Costs in the Interbank Market: Evidence from Payment Flow Data in Norway By Jon H. Findreng
  5. Macro-scaled Microcredit and Constraints on Household Business Development: Evidence from Northern Thailand By Archawa Paweenawat; Narapong Srivisal
  6. Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  7. Climate Stress Testing By Richard Berner; Robert Engle; Hyeyoon Jung
  8. COVID Response: The Primary Dealer Credit Facility By Antoine Martin; Susan McLaughlin
  9. Systemic risk in interbank networks: disentangling balance sheets and network effects By Alessandro Ferracci; Giulio Cimini
  10. A Tale of Two Bailouts: Effects of TARP and PPP on Subprime Consumer Debt By Allen N. Berger; Onesime Epouhe; Raluca Roman
  11. The leverage effect of bank disclosures By König, Philipp Johann; Laux, Christian; Pothier, David
  12. COVID Response: The Paycheck Protection Program Liquidity Facility By Desi Volker
  13. A Q-Theory of Banks By Juliane Beganau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
  14. Liquidity Provision and Co-insurance in Bank Syndicates By Kevin F. Kiernan; Vladimir Yankov; Filip Zikes
  15. Debt, Financial Vulnerability and Repayment Behaviour in Older Canadian Households By Jie Zhou
  16. Banking-Crisis Interventions, 1257-2019 By Andrew Metrick; Paul Schmelzing
  17. Will banks introduce negative interest rates to household deposits? A game-theoretical model By Sebastiaan Wijsman
  18. COVID Response: The Main Street Lending Program By David M. Arseneau; Jose Fillat; Molly Mahar; Donald P. Morgan; Skander J. Van den Heuvel
  19. The Main Street Lending Program By David M. Arseneau; Jose Fillat; Molly Mahar; Donald P. Morgan; Skander J. Van den Heuvel
  20. Making sustainable finance sustainable By Ozili, Peterson K
  21. Reserve Bank of India’s Pandemic Responses By Chakraborty, Lekha S
  22. Money Creation and Banking: Theory and Evidence By Heon Lee
  23. Allies or Commitment Devices? A Model of Appointments to the Federal Reserve By Schnakenberg, Keith; Turner, Ian R; Uribe-McGuire, Alicia
  24. Revisiting Thailand's Monetary Policy Model for an Integrated Policy Analysis By Pongpitch Amatyakul; Tosapol Apaitan; Savaphol Hiruntiaranakul; Nuwat Nookhwun
  25. COVID Response: The Money Market Mutual Fund Facility By Kenechukwu E. Anadu; Marco Cipriani; Ryan M. Craver; Gabriele La Spada
  26. Exploring the sources of loan default clustering using survival analysis with frailty By Enrique Bátiz-Zuk Enrique; Abdulkadir Mohamed; Fátima Sánchez-Cajal
  27. Decentralized lending and its users: Insights from Compound By Kanis Saengchote
  28. International Reserve Management, Global Financial Shocks, and Firms’ Investment in Emerging Market Economies By Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
  29. Banks’ equity stakes in firms: A blessing or curse in credit markets? By Falko Fecht; José-Luis Peydró; Günseli Tümer-Alkan; Yuejuan Yu
  30. Macroprudential policy and the sovereign-bank nexus in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  31. Bank Mergers, Acquirer Choice and Small Business Lending: Implications for Community Investment By Bernadette A. Minton; Alvaro G. Taboada; Rohan Williamson
  32. Can the Federal Reserve Effectively Target Main Street? Evidence from the 1970s Recession By John Kandrac
  33. COVID Response: The Fed’s Central Bank Swap Lines and FIMA Repo Facility By Mark Choi; Linda S. Goldberg; Robert Lerman; Fabiola Ravazzolo
  34. Is High Inflation the New Challenge for Central Banks? By Luigi Bonatti Roberto Tamborini; Roberto Tamborini
  35. The Revenge of Defaulters. Sovereign Defaults and Interstate Negotiations in the Post-War Financial Order, 1940–65 By Juan Flores Zendejas; Pierre Pénet; Christian Suter

  1. By: Saka, Orkun; Eichengreen, Barry; Aksoy, Cevat Giray
    Abstract: We ask whether epidemic exposure leads to a shift in financial technology usage and who participates in this shift. We exploit a dataset combining Gallup World Polls and Global Findex surveys for some 250,000 individuals in 140 countries, merging them with information on the incidence of epidemics and local 3G internet infrastructure. Epidemic exposure is associated with an increase in remote-access (online/mobile) banking and substitution from bank branch-based to ATM activity. Heterogeneity in response centers on the age, income and employment of respondents. Young, high-income earners in full-time employment have the greatest tendency to shift to online/mobile transactions in response to epidemics. These effects are larger for individuals with better ex ante 3G signal coverage, highlighting the role of the digital divide in adaption to new technologies necessitated by adverse external shocks.
    JEL: G20 G59 I10
    Date: 2021–09–28
  2. By: Batiz-Lazo, Bernardo; Bautista-González, Manuel A; González-Correa, Ignacio
    Abstract: Resumen: No hay evidencia sustancial de que la pandemia de Covid-19 represente un cambio estructural hacia una economía sin efectivo (cashless) en el sector de pagos minoristas. En el corto plazo, los consumidores aumentaron su volumen de pagos digitales y sin contacto (contactless) como respuesta a los confinamientos y creencias de que el efectivo podría propagar el virus. Sin embargo, lo anterior no ha resultado en una reducción permanente en el uso o eliminación de billetes y monedas. Además, en muchos países se observó la “paradoja del efectivo”, es decir, una disminución del efectivo como medio de pago y, simultáneamente un alza en su demanda precautoria ante la incertidumbre y el deterioro en las expectativas económicas.
    Abstract: Definitive and uncontroversial evidence is yet to emerge that the Covid-19 pandemic brought about a structural shift to a cashless economy in the retail payments sector. In the short term, consumers increased their volume of digital and contactless payments in response to lockdowns and beliefs that cash could spread the virus. However, this has not resulted in a permanent reduction in the usage or elimination of banknotes and coins. Moreover, there was a “cash paradox” in many countries, i.e., a decrease in the demand of banknotes as means of payment and, simultaneously, a rise in its precautionary demand of cash given consumers’ heightened uncertainty and the deterioration of economic expectations.
    Keywords: Keywords: cash, cashless economy, cashless society, banknotes and coins, digital payments, Covid-19 pandemic, retail payments, Spain, United States, United Kingdom, Mexico. Palabras Clave: efectivo, economía sin efectivo, sociedad sin efectivo, billetes y monedas, pagos digitales, pandemia de Covid-19, sistema de pagos minorista, España, Estados Unidos, Reino Unido, México.
    JEL: E40 G20 L81 N20
    Date: 2021–09
  3. By: Abdul Malik Iddrisu; Michael Danquah
    Abstract: Using a nationally representative household survey data set from Ghana, this paper provides empirical evidence regarding the role of financial inclusion or financial exclusion in household welfare. We first compute a multidimensional index of financial inclusion, and then we examine the effect of financial inclusion on household welfare. The study finds that households suffering financial deprivation have lower welfare compared with their financially included counterparts.
    Keywords: Financial inclusion, Household welfare, Ghana, Exclusion, Deprivation
    Date: 2021
  4. By: Jon H. Findreng
    Abstract: Bilateral payment flows between banks may provide private information about a borrowing bank’s liquidity position. This paper analyses whether private information on the bilateral payment flow of central bank reserves foster peer monitoring or whether the information is used to reduce search costs in the unsecured interbank market. In the former, banks with outflows of liquidity are penalized by their counterparties, while in the latter, these banks benefit through reduced search costs to find a liquidity provider. I use data from Norges Bank’s real time gross settlement system over the period 2012 to 2015 to identify unsecured overnight interbank loans and payment flows. The results suggest that banks are using private information from payment flows to reduce search costs and not for peer monitoring. This has important implications for regulators’ assessment of the pros and cons of a centralized versus a decentralized interbank market.
    Keywords: peer monitoring, search cost, unsecured overnight interbank market, interest rates, central bank liquidity policy, OTC markets
    JEL: G21 E42 E43 E58
    Date: 2021–05–29
  5. By: Archawa Paweenawat (Bank of Thailand); Narapong Srivisal (Chulalongkorn University)
    Abstract: This paper studies impacts of One-Million-Baht Village Fund program on entrepreneurial activities of households in northern Thailand. In addition to being one of the largest-scaled microfinance programs to date, the implementation of the Village Fund program provides us with an exogenous variation in the availability of microcredit per household that can be used to form an instrumental variable. We apply our unique dataset, containing the instrument and a precise measure of the extent to which household businesses are financially constrained, to estimate Probit models that are subject to the problem of endogenous borrowing decisions. We find evidence for the positive impacts of the Village Fund program on relieving financial constraints faced by household businesses, but the impacts on business startup rates are not significant. Our findings offer policy implications on improving effectiveness of microfinance programs in promoting household businesses.
    Keywords: Entrepreneurship, Financial Constraints, Microfinance, Village Funds
    JEL: G21 G51 O16
    Date: 2021–09
  6. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good which can be undermined by sovereign debt problems in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.
    Keywords: Core-periphery models; Stability in a monetary union; Risk sharing; Monetary union institutions; Unconventional policies
    JEL: E02 E58 E63 E65
    Date: 2021–09
  7. By: Richard Berner; Robert Engle; Hyeyoon Jung
    Abstract: Climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. Specifically, we introduce a measure called CRISK, systemic climate risk, which is the expected capital shortfall of a financial institution in a climate stress scenario. We use the measure to study the climate-related risk exposure of large global banks in the collapse of fossil-fuel prices in 2020.
    Keywords: climate risk; financial stability; stress testing
    JEL: Q54 C53 G20
    Date: 2021–09–01
  8. By: Antoine Martin; Susan McLaughlin
    Abstract: The Federal Reserve established a new Primary Dealer Credit Facility (PDCF) in March 2020, to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households, in the face of deteriorating conditions in the market for triparty repo financing due to the coronavirus pandemic. A similar facility had been established in March 2008 to help restore the orderly functioning of the market, following the near-bankruptcy of Bear Stearns, and to prevent the spillover of distress to other financial firms. This paper provides an overview of the 2020 PDCF and compares it to the 2008 version.
    Keywords: Primary Dealer Credit Facility; COVID-19; Federal Reserve lending facilities; pandemic
    JEL: E58 G21 G24
    Date: 2021–09–01
  9. By: Alessandro Ferracci; Giulio Cimini
    Abstract: We study the difference between the level of systemic risk that is empirically measured on an interbank network and the risk that can be deduced from the balance sheets composition of the participating banks. Using generalised DebtRank dynamics, we measure observed systemic risk on e-MID network data (augmented by BankFocus information) and compare it with the expected systemic of a null model network, obtained through an appropriate maximum-entropy approach constraining relevant balance sheet variables. We show that the aggregate levels of observed and expected systemic risks are usually compatible but differ significantly during turbulent times (in our case, after the default of Lehman Brothers and the VLTRO implementation by the ECB). At the individual level instead, banks are typically more or less risky than what their balance sheet prescribes due to their position in the network. Our results confirm on one hand that balance sheet information used within a proper maximum-entropy network models provides good systemic risk estimates, and on the other hand the importance of knowing the empirical details of the network for conducting precise stress tests of individual banks, especially after systemic events.
    Date: 2021–09
  10. By: Allen N. Berger; Onesime Epouhe; Raluca Roman
    Abstract: High levels of subprime consumer debt can create social problems. We test the effects of the Troubled Asset Relief Program (TARP) and Paycheck Protection Program (PPP) bailouts during the Global Financial Crisis and COVID-19 crisis, respectively, on this debt. We use over 11 million credit bureau observations of individual consumer debt combined with banking, bailout, and local market data. We find that subprime consumers with more TARP institutions in their markets had significantly increased debt burdens following these bailouts. In contrast, PPP bailouts were associated with reduced subprime consumer debt. Findings are robust to addressing identification concerns, and yield policy implications regarding bailout structures and strings attached to bailout funds.
    Keywords: Household Debt; Subprime Consumer Debt; Banking; Bailouts; TARP; PPP; Financial
    JEL: G01 G28 D10 D12 E58
    Date: 2021–09–23
  11. By: König, Philipp Johann; Laux, Christian; Pothier, David
    Abstract: The general view underlying bank regulation is that bank disclosures providemarket discipline and reduce banks' risk-taking incentives. We show that bankdisclosures can increase bank leverage and bank risk. The reason stems from theinteraction between insured and uninsured debt. Bank disclosures reduce the agencyproblem between uninsured debt and equity, thereby lowering the cost of leverage forbanks. By issuing uninsured short-term debt that is repaid ahead of insured depositswhen economic conditions deteriorate, banks dilute insured deposits. Higher levelsof uninsured short-term debt increase the subsidy provided by deposit insurance,which increases banks' risk-taking incentives. We identify conditions under whichthis negative leverage effect dominates the standard market discipline effect, so thatproviding market discipline through bank disclosures increases banks' risk.
    Keywords: Bank Disclosures,Market Discipline,Bank Leverage
    JEL: D80 G21 G14
    Date: 2021
  12. By: Desi Volker
    Abstract: To bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve, with the backing of the Secretary of the Treasury, established the Paycheck Protection Program Liquidity Facility (PPPLF). The facility was intended to supply liquidity to financial institutions participating in the PPP and thereby provide relief to small businesses and help them maintain payroll. In this article, we lay out the background and rationale for the creation of the facility, cover the salient features of the PPP and the PPPLF, and analyze the facility’s loan take-up. Our findings suggest that the PPPLF played an important role in expanding the supply of credit to smaller banks and nondepository institutions and that these institutions were more likely to originate PPP loans to businesses on the smaller end of the scale.
    Keywords: PPP; PPPLF; SBA; CARES Act; Federal Reserve lending facilities
    JEL: G0 G2 G21 G23 G28
    Date: 2021–09–01
  13. By: Juliane Beganau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
    Abstract: We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market-leverage target that is reached slowly, and (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where notions of leverage differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals where different accounting rules produce novel policy tradeoffs.
    Keywords: Coronavirus disease (COVID-19); Domestic demand and components; Payment clearing and settlement systems; Recent economic and financial developments
    JEL: E44 G21 G33
    Date: 2021–09
  14. By: Kevin F. Kiernan; Vladimir Yankov; Filip Zikes
    Abstract: We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.
    Keywords: Liquidity insurance; Liquidity regulation; Interbank networks; Syndicated credit lines
    JEL: G21 G18 L14
    Date: 2021–09–24
  15. By: Jie Zhou
    Abstract: Earlier research has documented that debt at older ages has increased significantly in Canada over the period from 1999 to 2016. In this article, we explore the consequences of a growing proportion of older Canadian households experiencing financial vulnerability. After controlling for household characteristics, we find among older households that a high debt-to-asset ratio and very low liquid wealth are significantly and positively associated with skipping or delaying a mortgage or non-mortgage debt payment and with usually paying the minimum amount or less on credit cards in the previous year. The debt-to-income ratio, however, is not an important indicator of financial vulnerability for older households.
    JEL: D14 G51
    Date: 2021–09
  16. By: Andrew Metrick; Paul Schmelzing
    Abstract: We present a new database of banking-crisis interventions since the 13th century. The database includes 1886 interventions in 20 categories across 138 countries, covering interventions during all of the crises identified in the main banking-crisis chronologies, while also cataloguing a large number of interventions outside of those crises. The data show a gradual shift over the past centuries from the traditional interventions of a lender-of-last-resort, suspensions of convertibility, and bank holidays, towards a much more prominent role for capital injections and sweeping guarantees of bank liabilities. Furthermore, intervention frequencies and sizes suggest that the crisis problem in the financial sector has indeed reached an apex during the post-Bretton Woods era – but that such trends are part of a more deeply entrenched development that saw global intervention frequencies and sizes gradually rise since at least the late 17th century.
    JEL: G01 G28
    Date: 2021–09
  17. By: Sebastiaan Wijsman
    Abstract: This paper presents a game-theoretical model to assess whether banks will introduce negative interest rates to household deposits. This is modelled as a game of incomplete information between two banks which can decrease their interest rates to enhance their interest margins. Savers can decide to stay at their bank, switch to another bank against switching costs, or to use their savings alternatively, such as for investments. We find that banks are more likely to decrease their interest rates if switching costs are higher and the alternatives for savings accounts are less attractive. Surprisingly, we also find that higher switching costs and less attractive alternatives are not necessarily beneficial for banks’ profitability. High switching costs hinder banks to attract savers from competitors and unattractive alternatives may lead to an expensive war of attrition between banks.
    Keywords: Retail banking, Bank interest margin, Low interest rate environment, Bank profitability, Switching behavior,, Bank competition
    Date: 2021–08–30
  18. By: David M. Arseneau; Jose Fillat; Molly Mahar; Donald P. Morgan; Skander J. Van den Heuvel
    Abstract: The Main Street Lending Program was created to support credit to small and medium-sized businesses and nonprofit organizations that were harmed by the pandemic, particularly those that were unsupported by other pandemic-response programs. It was the most direct involvement in the business loan market by the Federal Reserve since the 1930s and 1940s. Main Street operated by buying 95 percent participations in standardized loans from lenders (mostly banks) and sharing the credit risk with them. It would end up supporting loans to more than 2,400 borrowers and co-borrowers across the United States, with an average loan size of $9.5 million and total volume of $17.5 billion. This article describes the facility's goals, its design, the challenges and constraints that shaped its reach, and the characteristics of its borrowers and lenders. We conclude with some lessons learned for future policymakers and facility designers.
    Keywords: Main Street Lending Program; COVID-19; credit demand; bank loans; bank capital; small businesses; Federal Reserve lending programs
    JEL: E3 E58 G2
    Date: 2021–09–01
  19. By: David M. Arseneau; Jose Fillat; Molly Mahar; Donald P. Morgan; Skander J. Van den Heuvel
    Abstract: The Main Street Lending Program was created to support credit to small and medium-sized businesses and nonprofit organizations that were harmed by the pandemic, particularly those that were unsupported by other pandemic-response programs. It was the most direct involvement in the business loan market by the Federal Reserve since the 1930s and 1940s. Main Street operated by buying 95 percent participations in standardized loans from lenders (mostly banks) and sharing the credit risk with them. It would end up supporting loans to more than 2,400 borrowers and co-borrowers across the United States with an average loan size of $9.5 million and total volume of $17.5 billion. This article describes its goals, its design, the challenges and constraints that shaped its reach, and the characteristics of its borrowers and lenders. We conclude with some lessons learned for future policymakers and facility designers.
    Keywords: Main Street Lending Program; COVID-19; emergency lending facilities; credit demand; bank loans; bank capital; small business
    JEL: E51 E65 G21 H12 H81
    Date: 2021–09–24
  20. By: Ozili, Peterson K
    Abstract: The purpose of this paper is to highlight some issues and proffer solutions that can make sustainable finance become sustainable. I present some solutions that can help to make sustainable finance become sustainable. One, there should be greater focus on how some aspect of finance can contribute to sustainability. Two, light-touch regulation may be needed to grow the relatively small sustainable finance sector. Three, there is need to adopt a bottom-up approach to grow the sustainable finance sector. Four, voluntary ESG disclosures and related sustainability reporting should be encouraged. Five, shortterm financial instruments can complement long term instruments in sustainable financing.
    Keywords: finance, sustainability, financial institutions, financial instruments, green finance, green bonds, light-touch regulation, bottom-up approach, sustainability reporting, sustainable development, ESG.
    JEL: G21 O31 Q01
    Date: 2021
  21. By: Chakraborty, Lekha S
    Abstract: Extraordinary time requires extraordinary policy responses. As the Reserve Bank of India Governor Shri Shaktikanta Das puts it upfront, RBI has responded to a pandemic with “whatever it takes to” narrative and has done “heavy lifting” in terms of policy rates adjustments, liquidity infusion, and the regulatory mechanisms. The covid-19 is a dual crisis - a public health crisis and a macroeconomic crisis. Through the Great Lockdown strategy, we have systematically flattened the curve and moving towards growth recovery. However, strengthening fiscal and monetary linkages is crucial for the sustainability of the economic recovery. The pandemic economics of central banks is twofold. One is the focus on measures that relate to instantaneous economic “firefighting”: for instance, how to adjust the policy rates and also to ensure liquidity infusion into the system to stabilize the market reactions. The second is the long-term policy imperatives, including the regulatory mechanisms. As this crisis is of an unprecedented scale, it calls for unprecedented policy responses. The central banks have responded to the crisis within a “life versus livelihood” framework. This paper analyses the pandemic responses by the central bank of India and its new monetary policy framework of inflation targeting; and concludes with policy suggestions.
    Keywords: Central Bank , Pandemic policy , Covid19, Inflation Targeting, New Monetary Policy framework
    JEL: E52 G28 H63
    Date: 2021
  22. By: Heon Lee
    Abstract: This paper develops a monetary-search model where the money multiplier is endogenously determined. I show that when the central bank pays interest on reserves, the money multiplier and the quantity of the reserve can depend on the nominal interest rate and the interest on reserves. The calibrated model can explain the evolution of the money multiplier and the excess reserve-deposit ratio in the pre-2008 and post-2008 periods. The quantitative analysis suggests that the dramatic changes in the money multiplier after 2008 are driven by the introduction of the interest on reserves with a low nominal interest rate.
    Date: 2021–09
  23. By: Schnakenberg, Keith; Turner, Ian R (Yale University); Uribe-McGuire, Alicia
    Abstract: We present a model of executive-legislative bargaining over appointments to independent cen-tral banks in the face of an uncertain economy with strategic economic actors. The model highlights the contrast between two idealized views of Federal Reserve appointments. In one view, politicians prefer to appoint conservatively biased central bankers to overcome credible commitment problems that arise in monetary policy. In the other, politicians prefer to appoint allies, and appointments are well described by the spatial model used to describe appointments to other agencies. Both ideals are limiting cases of our model, which depend on the level of economic uncertainty. When economic uncertainty is extremely low, politicians prefer very conservative appointments. When economic uncertainty increases, politicians’ prefer central bank appointees closer to their own ideal points. In the typical case, the results are somewhere in between: equilibrium appointments move in the direction of politician’s preferences but with a moderate conservative bias.
    Date: 2021–09–22
  24. By: Pongpitch Amatyakul (Bank of Thailand); Tosapol Apaitan (Bank of Thailand); Savaphol Hiruntiaranakul (Bank of Thailand); Nuwat Nookhwun (Bank of Thailand)
    Abstract: The constraints facing conventional monetary policy during the recent COVID-19 pandemic accelerate the central banks' use of integrated policy, using multiple tools to fulfill their macroeconomic objectives. This paper, therefore, aims to improve Thailand's monetary policy model for conducting policy analyses involving multiple tools. We embed macro-financial linkages into our model, which facilitate the identification of various policy tools at the central bank's disposal. The model also features multiple sources of nonlinearity, including an effective lower bound (ELB) constraint, to better capture economic dynamics during crises. We allow for a joint calibration of several tools, including conventional interest rate policy, foreign exchange (FX) intervention, macroprudential regulations and financial measures. Last, given a greater emphasis on financial stability, we attempt to measure macro-financial tail risks, which permit an analysis of policy trade-offs in addressing risks to financial stability. We show three applications of our model to shed light on potential gains from policy complementarity during the aftermath of COVID-19 pandemic: first, assessing the role of financial measures and FX intervention in supporting economic recovery; second, evaluating the interactions of monetary and macroprudential policies in maintaining financial stability; third, showing roles of fiscal policy as the ELB constraint binds.
    Keywords: Monetary Policy, Integrated Policy Framework, Semi-structural Model, Financial Stability
    JEL: C32 E37 E52 E58
    Date: 2021–09
  25. By: Kenechukwu E. Anadu; Marco Cipriani; Ryan M. Craver; Gabriele La Spada
    Abstract: In this article, we discuss the run on prime money market funds (MMFs) that occurred in March 2020, at the onset of the COVID-19 pandemic, and describe the Money Market Mutual Fund Liquidity Facility (MMLF), which the Federal Reserve established in response to it. We show that the MMLF, like a similarly structured Federal Reserve facility established during the 2008 financial crisis, was an important tool in stemming investor outflows from MMFs and restoring calm in short-term funding markets. The usage of the facility was higher by funds that suffered larger outflows. After the facility’s introduction, outflows from prime MMFs decreased more for those funds that had a larger share of illiquid securities. Importantly, following the introduction of the MMLF, interest rates on MMLF-ineligible securities decreased at a slower rate than those on MMLF-eligible securities, even after controlling for credit risk.
    Keywords: COVID-19; money market funds; runs; Federal Reserve lending facilities
    JEL: G23 G28 G11
    Date: 2021–09–01
  26. By: Enrique Bátiz-Zuk Enrique; Abdulkadir Mohamed; Fátima Sánchez-Cajal
    Abstract: This paper investigates whether three microeconomic loan characteristics are sources of loan default clustering in the Mexican banking sector by employing survival analysis with frailty. Using a large sample of bank loan level data granted to micro, small and medium sized firms from January 2010 to 2018, we test whether classifying loans by the bank's systemic importance, industry or at individual firm level enhances the predictions of loans defaults. Our results show that loans granted by Domestic Systemically Important Banks contribute to the default clustering in micro and small firm loans. This is due to aggregate default rate levels and clusters that are large for these firms loans compared with loans provided to medium-sized firms. These findings have important implications for bank's expected loss management related to the correlated loan default risk.
    JEL: C53 C41 C25 G38
    Date: 2021–09
  27. By: Kanis Saengchote (Chulalongkorn University)
    Abstract: Decentralized finance (DeFi) has recently gained much attention and scrutiny because of its rapid growth. DeFi services replicate traditional financial services such as lending, exchange, and asset management, but they are currently unregulated, unlike their traditional counterparts. We investigate Compound – one of the earliest and largest DeFi lending protocol – to show how it works, who the users are and the potential motivations behind their uses. We find that the loan durations are short (31 days on average), borrowing rates volatile and borrowers are concerned about liquidation risk. Further analyses reveal that some loan demand may arise from leveraged investment strategies. Taken together with the tacit leverage in DeFi yield farming, further availability of on-chain lending could potentially transpire into DeFi systemic risk.
    Keywords: DeFi, Lending, Incentives
    JEL: G10 G21
    Date: 2021–09
  28. By: Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
    Abstract: We examine the effects of active international reserve management (IRM) conducted by central banks of emerging market economies (EMEs) on firm investment in the presence of global financial shocks. Using firm level data from 46 EMEs from 2000 to 2018, we document four findings. First, active IRM positively affects firm investment - the effect strengthens with the magnitude of adverse external financial shocks. Second, financially constrained firms, compared with unconstrained ones, are less responsive to active IRM. Third, our results suggest that the country credit spread is a plausible causal channel of the positive IRM effect on firm investment. Fourth, the policies of capital controls and exchange rate managements are complementary to the IRM – it is beneficial to form a macro policy mix including active IRM to safeguard firm investment against global financial shocks. Further, our results indicate the IRM effect on firm investment is both statistical and economical significance and is relevant to the aggregate economy.
    JEL: F36 F42 F61 G31
    Date: 2021–09
  29. By: Falko Fecht; José-Luis Peydró; Günseli Tümer-Alkan; Yuejuan Yu
    Abstract: We analyze how banks' equity stakes in firms influence their credit supply in crisis times. For identification, we exploit the 2008 Global Financial Crisis and merge unique supervisory data from the German credit register on individual bank-firm credit exposures with the security register data that include banks' equity holdings. We find that a large and ex-ante persistent equity position held by a bank in a firm is associated with a larger credit provision from the respective bank to that firm. In crisis times, however, equity stakes only foster credit supply to ex-ante riskier firms especially from relatively weak banks. This ex-ante risk-taking may be due to better (insider) information by the bank, including a traditional lending relationship over the crisis. However, this ex-ante riskier lending translates also into higher ex-post loan defaults, worse firm-level stock market returns and even more firm bankruptcy or restructuring cases. Our results therefore suggest that banks' equity stakes in their borrowers do not mitigate debt overhang problems of distressed firms in crisis times, but rather foster evergreening of banks' outstanding credit to those (zombie) firms.
    Keywords: Universal banks; credit supply; bank equity holdings; debt overhang; evergreening
    JEL: G01 G21 G28 G30
    Date: 2021–09
  30. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We explore how changes in capital-based macroprudential regulation affect theexposure of national banking sectors to domestic government debt in the euro area,thus strengthening or weakening the sovereign-bank nexus. To do so, we construct ameasure of macroprudential policy based on theMacroprudential Policy EvaluationDatabaseand estimate responses to theunsystematiccomponent of macroprudentialpolicy in panel vector autoregressive models for euro area 'core" and 'periphery"countries. Our main finding suggests that an unsystematic capital-based macro-prudential policy tightening increases banks' exposure to domestic sovereign bondsin the periphery countries and so deepens the sovereign-bank nexus. By contrast,banks in the core countries expand their loan portfolios rather than adjusting theirdomestic sovereign bond holdings in response to the shock. We show that this re-sult can be tied to the theoretical literature and investigate several transmissionchannels. Our results are highly robust to changes in the econometric setup and themacroprudential indicator used.
    Keywords: macroprudential policy,euro area,sovereign-bank nexus,panel vector autore-gressive model
    JEL: C33 G21 G28
    Date: 2021
  31. By: Bernadette A. Minton; Alvaro G. Taboada; Rohan Williamson
    Abstract: We examine the effects of bank merger and local market characteristics on local small business lending. Mergers involving small, in-state acquirers are positively associated with small business loan (SBL) originations in counties where target banks are located. Conversely, mergers involving large, out-of-state acquirers are associated with fewer SBL originations. The analysis suggests that the results are driven by acquirer’s choice of target. Small and in-state acquirers target banks that focus more on SBL and targets with strong relationships while large, out-of-state acquirers pursue better performing banks with stronger balance sheets and less focus on SBL. Results are particularly strong in counties with a large number of small firms. Post-merger activity supports banks expanding on their acquisition strategy decisions. The findings suggest that acquirer strategy is important for evaluating the impact of acquisitions on local community development and that one-size-fits-all policy solutions for bank mergers may not produce common local outcomes.
    JEL: G21 G34 O1
    Date: 2021–09
  32. By: John Kandrac
    Abstract: Modern central bankers confront a challenge of providing economic stimulus even when the policy rate is constrained by a lower bound. This challenge has led to substantial innovation by policymakers and a proliferation of new policy tools. In this paper, I offer evidence on the efficacy of a new tool known as funding for lending, which provides banks with subsidized funding to make additional loans. I focus on a historical episode from the United States in which the Federal Reserve provided banks with steeply subsidized loans to promote the expansion of credit within their local communities. I show that the cheap funding succeeded in generating more lending by countering banks' excessive liquidity preference. The additional credit benefited the real economy. Local areas enjoyed higher rates of small business formation and more rapid employment growth. Finally, I show that the cost of the subsidy provided by the government was more than offset by the additional payroll taxes paid out of higher wages and salaries. These results suggest that funding for lending programs deserve consideration for the modern central banker's toolkit and demonstrate that certain unconventional tools can offer monetary policymakers the means to pursue more targeted objectives.
    Keywords: Monetary policy; Funding for lending; Bank lending; Countercyclical policy; Discount window
    JEL: G28 G21 E58 E52
    Date: 2021–09–24
  33. By: Mark Choi; Linda S. Goldberg; Robert Lerman; Fabiola Ravazzolo
    Abstract: Building on the facility design and application experience from the period of the global financial crisis, in March 2020 the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) repo facility. While these facilities share similarities, they are different in their operations, breadth of counterparties and potential span of effects. This article provides key details on these facilities and evidence that the central bank swap lines and FIMA repo facility can reduce strains in global dollar funding markets and U.S. Treasury markets during extreme stress events.
    Keywords: swap line; dollar; liquidity; repo; Federal Reserve lending facilities
    JEL: F33 F34 G28
    Date: 2021–09–01
  34. By: Luigi Bonatti Roberto Tamborini; Roberto Tamborini
    Abstract: In this paper we briefly review the macroeconomic theory of inflation, relating it to the recent developments in the advanced economies. Then, we analyse the drivers of the rise in inflation observed in 2021 in the United States and in Europe, and we illustrate the factors that may affect the inflationary scenario of the advanced economies in the longer term. Finally, we discuss what challenges the Federal Reserve and the European Central Bank have to meet in the face of current inflationary pressures. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 27 September 2021.
    Date: 2021
  35. By: Juan Flores Zendejas (UNIGE - Université de Genève); Pierre Pénet (ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Christian Suter (UNINE - Université de Neuchâtel)
    Abstract: The postwar era holds a special and important place in the long history of sovereign debt disputes. The majority of states suspended interest payments on their foreign obligations after 1931. In 1945, nearly half of all countries representing 40 per cent of the world income were in default (Reinhart & Rogoff, 2009, p. 73; Suter, 1992). Never before had creditors faced a wave of defaults of this magnitude. Previous scholarship has demonstrated that the economic consequences of the Great Depression were the main causes of debt defaults, and the Second World War further delayed the negotiations between borrowers and bondholders in certain cases (Eichengreen, 1991; Eichengreen & Portes, 1989). Less well known, however, are the important changes affecting the actors, tools, and forums governing the settlement of debt disputes. For debtors and creditors, the postwar settlement of debt disputes represented an enormous task not only because of the sheer amount of debt in default but also because old methods of debt settlement no longer applied. The methods that debtors and creditors use to settle debt disputes have greatly varied over time. Since the mid-nineteenth century, bondholder committees had furnished creditors with their most efficient method to protect their rights against recalcitrant states. Bondholder committees derived their authority from the capacity to sponsor market access to preferred customers and to refuse to list new bonds from a creditor in default through stock exchange regulations (Hautcoeur & Riva, 2012; Flandreau, 2013). Yet, when the question of debt repayment resurfaced in 1945, capital markets were virtually shut down. Having abandoned bond markets, states borrowed domestically or through public lending schemes from Export Promotion Agencies and multilateral organizations. Syndicate bank lending emerged as the main source of private external finance, while sovereign bond issuances would not return to prewar levels until the post Brady-plan era of financial globalization. This major shift in the structure of debt financing critically
    Date: 2021–03–12

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