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on Banking |
| By: | M. Ayhan Kose (World Bank, Prospects Group, Brookings Institution, CEPR, and CAMA); Franziska Ohnsorge (World Bank, Prospects Group, CEPR, and CAMA); Carmen Reinhart (World Bank, Harvard Kennedy School, NBER, CEPR); Kenneth Rogoff (Harvard University, NBER) |
| Abstract: | Debt in emerging market and developing economies (EMDEs) is at its highest level in half a century. In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percentage points of gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign. This paper reviews an encompassing menu of options that have, in the past, helped lower debt burdens. Specifically, it examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. Some options may ultimately be ineffective unless vigorously implemented. Policy reversals in difficult times have been common. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can cast their net wider to cushion prospective shocks to EMDEs. |
| Keywords: | Debt restructuring; growth; inflation; fiscal consolidation; financial repression; wealth taxes. |
| JEL: | F62 F34 F44 E32 E63 H6 H63 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2119&r= |
| By: | Thakkar, Parth (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise) |
| Abstract: | The late 1940s to the 1960s featured a sustained debate about currency boards in underdeveloped (or, in today’s parlance, developing) economies and their desirability compared to the alternative of central banking. Critics of currency boards found fault with them for the foregone cost of their “idle reserves,” their implied deflationary bias, their lack of discretionary monetary policy, and their lack of a lender of last resort, among other things. Defenders of the currency board system argued that the criticisms were either incorrect or irrelevant. After carefully reviewing the debate, I opine on it, coming down mainly on the side of the defenders of currency boards. |
| Keywords: | Currency board; debate |
| JEL: | B27 E59 F33 N10 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ris:jhisae:0192&r= |
| By: | Maurice Obstfeld (Peterson Institute for International Economics) |
| Abstract: | As the US economy rebounds amid elevated inflationary pressures and Europe grows at a rapid clip, an uneven global rebound looms. Although emerging-market and developing economies (EMDEs) generally retain good access to global capital markets for now, their relatively slow pace of COVID-19 vaccination will continue to hamper their economic recoveries and strain their public finances—already stretched owing to the fiscal pressures of the pandemic over the past year and a half. Higher interest rates in the rich countries, particularly the United States, could tip EMDEs into liquidity and even solvency crises. The likelihood of crises is higher if advanced-economy central banks move abruptly, surprising markets. Global policymakers should prepare now by enhancing mechanisms for providing liquidity to EMDEs and, in cases of insolvency, for restructuring their sovereign debts. Perhaps even more important, the scope for uneven recovery can be limited if rich countries make an all-out effort to deliver vaccines globally and enhance less prosperous countries’ infrastructures for getting shots into arms. |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb21-21&r= |
| By: | Iwasaki, Ichiro |
| Abstract: | This paper performs a meta-analysis of the effect of financial development and liberalization on macroeconomic growth in Latin America and the Caribbean using a total of 233 estimates collected from 21 previous works. Meta-synthesis of the collected estimates demonstrates that it is probable that financial development and liberalization enhance economic growth in the region, and these policy measures have the potential to have a meaningful impact on the real economy. The synthesis results also reveal that the choice of financial variables significantly affects reported estimates in the literature. Meta-regression analysis of literature heterogeneity and test for publication selection bias produce findings that are compatible with the synthesis results. The test results of publication selection bias also confirm that the existing literature contains genuine empirical evidence of the growth-promoting effect of finance in the region. |
| Keywords: | financial development and liberalization, economic growth, meta-analysis, publication selection bias, Latin America and the Caribbean |
| JEL: | E44 G10 O11 O16 O54 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2021-04&r= |
| By: | Andreas Kakridis (Bank of Greece and Ionian University) |
| Abstract: | Neither history nor economic historians have been kind to Greece’s central bank in the interwar years. Born at the behest of the League of Nations to help the country secure a new international loan, the Bank of Greece was treated with a mixture of suspicion and hostility. The onset of the Great Depression pitted its statutory objective to defend the exchange rate against the incentive to reflate the domestic economy. Its policy response has generally been criticized as either ineffectual or detrimental: the Bank is accused of having pursued an unduly orthodox and restrictive policy, both during but also after the country’s exit from the gold exchange standard, some going as far as to argue that the 1932 devaluation failed to produce genuine recovery. Relying primarily on archival material, this paper combines qualitative and quantitative sources to revisit the Bank of Greece’s birth and operation during the Great Depression. In doing so, it hopes to put Greece on the map of international comparisons of the Great Depression and debates on the role of the League of Nations, the effectiveness of money doctoring and foreign policy interventions more generally. What is more, the paper seeks to revise several aspects of the conventional narrative surrounding the Bank’s role. First, it argues that monetary policy was neither as ineffective nor as restrictive as critics suggest; this was largely thanks to a continued trickle of foreign lending, but also to the Bank’s own decision to sterilize foreign exchange outflows, thus breaking the ‘rules of the game’. Second, it revisits Greece’s attempt to cling to gold after sterling’s devaluation, a decision routinely denounced as a critical policy mistake. Last but not least, it challenges the notion that Greece constitutes an exception to the rule that wants countries who shed their ‘golden fetters’ recovering faster. |
| Keywords: | central bank; Greece;gold standard; Great Depression; League of Nations |
| JEL: | E58 E65 N14 N24 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:290&r= |
| By: | Dimitriadou, Athanasia (University of Derby); Agrapetidou, Anna (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics) |
| Abstract: | Credit Rating Agencies (CRAs) have been around for more than 150 years. Their role evolved from mere information collectors and providers to quasi-official arbitrators of credit risk throughout the global financial system. They compiled information that -at the time- was too difficult and costly for their clients to gather on their own. After the 1929 big market crash, they started to play a more formal role. Since then, we see a growing reliance of investors on the CRAs ratings. After the global financial crisis of 2007, the CRAs became the focal point of criticism by economists, politicians, the media, market participants and official regulatory agencies. The reason was obvious: the CRAs failed to perform the job they were supposed to do financial markets, i.e. efficient, effective and prompt measuring and signaling of financial (default) risk. The main criticism was focusing on the “issuer-pays system”, the relatively loose regulatory oversight from the relevant government agencies, the fact that often ratings change ex-post and the limited liability of CRAs. Many changes were implemented to the operational framework of the CRAs, including public disclosure of CRA information. This is designed to facilitate "unsolicited" ratings of structured securities by rating agencies that are not paid by the issuers. This combined with the abundance of data and the availability of powerful new methodologies and inexpensive computing power can bring us to the new era of independent ratings: The not-for-profit Independent Credit Rating Agencies (ICRAs). These can either compete or be used as an auxiliary risk gauging mechanism free from the problems inherent in the traditional CRAs. This role can be assumed by either public or governmental authorities, national or international specialized entities or universities, research institutions, etc. Several factors facilitate today the transition to the ICRAs: the abundance data, cheaper and faster computer processing the progress in traditional forecasting techniques and the wide use of new forecasting techniques i.e. Machine Learning methodologies and Artificial Intelligence systems. |
| Keywords: | Credit rating agencies; banking; forecasting; support vector machines; artificial intelligence |
| JEL: | C02 C15 C40 C45 C54 E02 E17 E27 E44 E58 E61 G20 G23 G28 |
| Date: | 2021–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2021_009&r= |
| By: | Israel Santos Felipe (Federal University of Ouro Preto/Brazil and NIPE/Portugal); Wesley Mendes-da-Silva (Sao Paulo School of Business Administration of The Fundação Getulio Vargas); Cristiana Cerqueira Leal (School of Economics and Management & NIPE - Center for Research in Economics and Finance, University of Minho); Danilo Braun Santos (Federal University of Sao Paulo/Brazil) |
| Abstract: | The time-to-success of reward crowdfunding campaigns constitutes a relevant topic that has been neglected in business literature. In this study, we employ parametric and semi-parametric models of survival analysis to identify the determining factors of the duration of success of these campaigns. Based on more than 4,200 reward crowdfunding campaigns, our results are robust for controls and reveal that the campaigns that attain success most rapidly are located predominantly in cities with greater income inequality. These are cities that are characterized by lower fundraising targets and receive a larger number of pledges. In addition, our covariates indicate a non-constant influence on time-to-success during the fundraising period. |
| Keywords: | crowdfunding; entrepreneurial finance; fintech; survival analysis; financial innovation |
| JEL: | L26 G32 G41 O31 C41 I31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:10/2021&r= |
| By: | Yavuz Arslan (University of Liverpool Management School); Bulent Guler (Indiana University, Department of Economics); Burhan Kuruscu (University of Toronto, Department of Economics) |
| Abstract: | Can shifts in the credit supply generate a boom-bust cycle similar to the one observed in the US around 2008? To answer this question, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks’ leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macroeconomy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. A comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks. |
| Keywords: | Credit Supply, House Prices, Financial Crises, Household and Bank Balance Sheets, Leverage, Foreclosures, Mortgage Valuations, Consumption, and Output |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2021005&r= |
| By: | Silvia Miranda-Agrippino; Hélène Rey |
| Abstract: | We review the literature on the empirical characteristics of the global financial cycle and associated stylized facts on international capital flows, asset prices, risk aversion and liquidity in the financial system. We analyse the co-movements of global factors in asset prices and capital flows with commodity prices, international trade and world output as well as the sensitivity of different parts of the world to the Global Financial Cycle. We present evidence of the causal effects of the monetary policies of the US Federal Reserve, the European Central Bank and of the People's Bank of China on the Global Financial Cycle. We then assess whether the 2008 financial crisis has altered the transmission channels of monetary policies on the Global Financial Cycle. Finally, we discuss the theoretical modelling of the Global Financial Cycle and avenues for future research. |
| JEL: | E5 F3 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29327&r= |
| By: | Farnè, Matteo; Vouldis, Angelos |
| Abstract: | We study the relationship between banks’ size and risk-taking in the context of supranational banking supervision. Consistently with theoretical work on banking unions and in contrast to analyses emphasising incentives underpinned by the too-big-to-fail effect, we find an inverse relationship between banks’ size and non-performing loan growth for a sample of European banks. Evidence is provided that the mechanism operates through the enhanced organisational efficiency of the supranational set-up rather than incentives alignment among the supervisors and the banks. JEL Classification: F33, G21, G28, G32, C20 |
| Keywords: | banking union, euro area, non-performing loans, supervision, too-big-to-fail |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212595&r= |
| By: | Adam Copeland; Darrell Duffie; Yilin Yang |
| Abstract: | A concern of the Federal Reserve is how to manage its balance sheet and whether, over the long run, the balance sheet should be small or large. In this post, we highlight results from a recent paper in which we show how, even during a period of “ample” reserves, the Fed’s management of its balance sheet had material impacts on funding markets and especially the repo market. We argue that the Fed’s “balance-sheet normalization” from March 2017 to September 2019—under which aggregate reserves declined by more than $950 billion—combined with post-crisis liquidity regulations, stressed the intraday management of reserves of large bank holding companies that are active in wholesale funding markets resulting in higher repo rates and spikes in such. |
| Keywords: | repo rates; reserves; Treasuries; Treasurys; payments; central bank balance sheet |
| JEL: | G1 E58 |
| Date: | 2021–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93089&r= |
| By: | Jose J. Canals-Cerda; Raluca Roman |
| Abstract: | Extant research shows that climate change can impose significant costs on consumers’ wealth and finances. Both sea-level rise and flooding from hurricane events led to high price declines and thus wealth loss for homes in coastal areas or in disaster-struck areas, with effects lingering for a number of years in some cases. In terms of consumer finance, while the average consumer is not always significantly negatively affected by a disaster, the vulnerable groups (those with low credit scores and who are low income) can be severely affected, experiencing higher rates of delinquencies and bankruptcies in the aftermath. Banks help mitigate the negative effects in highly impacted areas by increasing their supply of credit, with more beneficial effects found among small and local lenders. Finally, the impacts of natural disasters and climate change on consumer finance can be further influenced by factors such as government assistance and insurance, which can both improve outcomes and induce moral hazard. We caution, however, that evidence reviewed here may be incomplete and calls for further work on all these important issues. |
| Keywords: | climate change; natural disasters; sea-level rise; consumer finance; house prices |
| JEL: | D10 D14 G50 Q50 Q54 R21 R31 |
| Date: | 2021–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:93140&r= |
| By: | Thierry Roncalli |
| Abstract: | This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers the modeling of the liability liquidity risk (or funding liquidity), the second dimension is dedicated to the modeling of the asset liquidity risk (or market liquidity), whereas the third dimension considers the management of the asset-liability liquidity risk (or asset-liability matching). The purpose of this research is to propose a methodological and practical framework in order to perform liquidity stress testing programs, which comply with regulatory guidelines (ESMA, 2019, 2020) and are useful for fund managers. In this third and last research paper focused on managing the asset-liability liquidity risk, we explore the ALM tools that can be put in place to control the liquidity gap. These ALM tools can be split into three categories: measurement tools, management tools and monitoring tools. In terms of measurement tools, we focus on the computation of the redemption coverage ratio (RCR), which is the central instrument of liquidity stress testing programs. We also study the redemption liquidation policy and the different implementation methodologies, and we show how reverse stress testing can be developed. In terms of liquidity management tools, we study the calibration of liquidity buffers, the pros and cons of special arrangements (redemption suspensions, gates, side pockets and in-kind redemptions) and the effectiveness of swing pricing. In terms of liquidity monitoring tools, we compare the macro- and micro-approaches of liquidity monitoring in order to identify the transmission channels of liquidity risk. |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2110.01302&r= |
| By: | K. S. Naik |
| Abstract: | Since the 1990s, there have been significant advances in the technology space and the e-Commerce area, leading to an exponential increase in demand for cashless payment solutions. This has led to increased demand for credit cards, bringing along with it the possibility of higher credit defaults and hence higher delinquency rates, over a period of time. The purpose of this research paper is to build a contemporary credit scoring model to forecast credit defaults for unsecured lending (credit cards), by employing machine learning techniques. As much of the customer payments data available to lenders, for forecasting Credit defaults, is imbalanced (skewed), on account of a limited subset of default instances, this poses a challenge for predictive modelling. In this research, this challenge is addressed by deploying Synthetic Minority Oversampling Technique (SMOTE), a proven technique to iron out such imbalances, from a given dataset. On running the research dataset through seven different machine learning models, the results indicate that the Light Gradient Boosting Machine (LGBM) Classifier model outperforms the other six classification techniques. Thus, our research indicates that the LGBM classifier model is better equipped to deliver higher learning speeds, better efficiencies and manage larger data volumes. We expect that deployment of this model will enable better and timely prediction of credit defaults for decision-makers in commercial lending institutions and banks. |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2110.02206&r= |
| By: | Yasin Kürsat Önder (-) |
| Abstract: | This paper quantitatively investigates the trade-offs of introducing an extra line of credit in an emergency situation. I show that temporary access to these lines for up to 3 percent of mean annual income during low liquidity periods yields long-term effects with a lower cost of borrowing but with incentives to accumulate higher debt. Permanent access, however, has only short-lived effects because temporal arrangement better completes the markets and induces market discipline as the government worries about rollover risk once the low liquidity period ends. I also present in an event analysis that Mexico’s arrangement of swap lines with the Federal Reserve amid the global financial crisis in 2008 helped avoid a potential debt crisis. |
| Keywords: | sovereign default, liquidity shocks, swap lines, sudden stops |
| JEL: | F30 F34 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:21/1029&r= |
| By: | Dunne, Peter G.; Giuliana, Raffaele |
| Abstract: | Regulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption-liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress. JEL Classification: G01, G15, G23, G28, G18, G20, F30 |
| Keywords: | liquidity limits, money market funds |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2021127&r= |
| By: | Calo, Silvia (Central Bank of Ireland); Gregori, Wildmer Daniel (European Commission); Petracco Giudici, Marco (European Commission); Rancan, Michela (Marche Polytechnic University) |
| Abstract: | What has been the impact of the Comprehensive Assessment (CA) carried out by the ECB on banks' resilience? Implementing a difference-indifference approach, we analyse a non-risk based measure defined as the ratio of Tier 1 capital over total assets of European banks’ balance sheets during the years 2007-2018. This wide time span, compared to previous literature, allows a better analysis of CA's medium-term effects. We find that banks under the CA have a higher ratio, suggesting that the CA has contributed to foster banks' resilience. Importantly, this seems to have been achieved by banks increasing their capitalization level without shrinking their assets. In addition, this impact appears to be driven by banks located in countries where the regulatory environment and property rights are relatively less strong. |
| Keywords: | Comprehensive assessment, European banks, Financial stability, Regulation |
| JEL: | G21 G28 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:202108&r= |
| By: | Lucas Marc Fuhrer; Matthias Jüttner; Jan Wrampelmeyer; Matthias Zwicker |
| Abstract: | Since the financial crisis, major central banks have introduced negative interest rates with the help of tiered reserve remuneration. We theoretically and empirically investigate monetary policy implementation via reserve tiering using a unique bank-level dataset from Switzerland. We find that reserve tiering can successfully be used to steer short-term interest rates. Furthermore, reserve tiering helps maintain sufficient activity in the interbank market, which is key for financial stability and reliable interest rate benchmarks. Due to frictions such as collateral constraints, trading costs, and window dressing around regulatory reporting dates, not only the aggregate level of reserves but also the reserve distribution matters for monetary policy implementation. |
| Keywords: | Interbank market, reserve tiering, negative rates, monetary policy |
| JEL: | E43 E58 G12 G21 |
| Date: | 2021–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2021-17&r= |
| By: | Comunale, Mariarosaria; Mongelli, Francesco Paolo |
| Abstract: | We investigate which variables have supported growth in the euro area over the last 30 years. This is a challenging task due to dimensionality problems: a large set of potential determinants, limited data, and the prospect that some variables could be non-stationary. We assemble a set of 35 real, financial, monetary, and institutional variables for nine of the original euro area countries covering the period between 1990Q1 and 2016Q4. Using the Weighted-Average Least Squares method, we gather clues about which variables to select. We quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of EU institutional integration on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run, as well as a decline in sovereign and systemic stress. Debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to non-financial corporations positively affect the core euro area. An increase in global GDP also supports growth in the euro area. JEL Classification: C23, E40, F33, F43 |
| Keywords: | euro area, fiscal policy, GDP growth, institutional integration, institutional reforms, monetary policy, systemic stress |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212591&r= |
| By: | Ehrmann, Michael; Wabitsch, Alena |
| Abstract: | Central banks have intensified their communication with non-experts – an endeavour which some have argued is bound to fail. This paper studies English and German Twitter traffic about the ECB to understand whether its communication is received by non-experts and how it affects their views. It shows that Twitter traffic is responsive to ECB communication, also for non-experts. For several ECB communication events, Twitter constitutes primarily a channel to relay information: tweets become more factual and the views expressed more moderate and homogeneous. Other communication events, such as former President Draghi’s “Whatever it takes” statement, trigger persistent traffic and a divergence in views. Also, ECB-related tweets are more likely to get retweeted or liked if they express stronger or more subjective views. Thus, Twitter also serves as a platform for controversial discussions. The findings suggest that central banks manage to reach non-experts, i.e. their communication is not a road to nowhere. JEL Classification: E52, E58 |
| Keywords: | central bank communication, monetary policy, non-experts, social media |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212594&r= |
| By: | Hansson, Magnus (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This paper studies the content of central bank speech communication from 1997 through 2020 and asks the following questions: (i) What global topics do central banks talk about? (ii) How do these topics evolve over time? I turn to natural language processing, and more specifically Dynamic Topic Models, to answer these questions. The analysis consists of an aggregate study of nine major central banks and a case study of the Federal Reserve, which allows for region specific control variables. I show that: (i) Central banks address a broad range of topics. (ii) The topics are well captured by Dynamic Topic Models. (iii) The global topics exhibit strong and significant autoregressive properties not easily explained by financial control variables. |
| Keywords: | Central bank communication; Monetary policy; Textual analysis; Dynamic topic models; Narratives |
| JEL: | C38 C55 E52 E58 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0811&r= |
| By: | Harashima, Taiji |
| Abstract: | Sovereign defaults have occurred more frequently in emerging countries and accompany significant currency depreciation and high inflation. The standard model of sovereign default cannot necessarily explain these facts sufficiently. In this paper, I examine the root cause of sovereign default on the basis of a model of inflation that is built on a micro-foundation of government behavior and conclude that the root cause of sovereign default is an insufficiently independent central bank. Without a sufficiently independent central bank, the government inevitably borrows money excessively, and as a result, inflation and currency depreciation accelerate. This situation will frustrate and anger the population, and the government may then declare a sovereign default in an attempt to place the blame on foreign lenders, at least temporarily. |
| Keywords: | Central bank; Exchange rate; Government bond; Inflation; International debt; Sovereign default |
| JEL: | E58 F31 F34 F53 H63 |
| Date: | 2021–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110010&r= |
| By: | Fleischman, Tomaž; Dini, Paolo |
| 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 make it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, interbank balancing and clearing methods (such as real-time gross settlement) can also be applied to private payments, complementary currencies, and trade credit clearing to provide better liquidity and risk management. The paper defines the concept of a balanced payment system mathematically and demonstrates the effects of balancing on a few small examples. It then derives the construction of a balanced payment subsystem that can be settled in full and therefore that can be removed in toto to achieve debt reduction and payment gridlock resolution. Using well-known results from graph theory, the main output of the paper is the proof—for the general formulation of a payment system with an arbitrary number of liquidity sources—that the amount of liquidity saved is maximum, along with a detailed discussion of the practical steps that a lending institution can take to provide different levels of service subject to the constraints of available liquidity and its own cap on total overdraft exposure. From an applied mathematics point of view, the original contribution of the paper is two-fold: (1) the introduction of a liquidity node with a store of value function in obligation-clearing; and (2) the demonstration that the case with one or more liquidity sources can be solved with the same mathematical machinery that is used for obligation-clearing without liquidity. The clearing and balancing methods presented are based on the experience of a specific application (Tetris Core Technologies), whose wider adoption in the trade credit market could contribute to the financial stability of the whole economy and a better management of liquidity and risk overall. |
| Keywords: | obligation-clearing; invoice-netting; liquidity-saving; graph theory |
| JEL: | F3 G3 |
| Date: | 2021–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:112151&r= |
| By: | Randal K. Quarles |
| Date: | 2021–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:93138&r= |
| By: | Brühl, Volker |
| Abstract: | The "European Green Deal" stipulates that the EU will become climate-neutral by 2050. This transformation requires enormous investments in all major sectors including energy, mobility, industrial manufacturing, real estate and farming. Although the EU Commission has announced that a total of EUR 1 trillion will be invested into the green transformation of the European economy over the next ten years, the majority of the investments must be financed by the private sector. Alongside many factors affecting a successful implementation of the Green Deal, a regulatory framework for the financial industry has to be established to facilitate the financing of sustainable investments. To that end, the European Sustainable Finance Strategy lays the foundation for a complex set of different measures that have been launched in recent years. This article provides a comprehensive overview of key regulatory initiatives such as the taxonomy regulation, the disclosure frameworks for both corporates and financial institutions and other aspects of financial market regulation that have already significantly improved the regulatory framework for sustainable finance. Nevertheless, some additional instruments could be considered, such as a reform of top management remuneration or the provision of tax incentives for green investments in the real economy, and these are briefly discussed. |
| JEL: | G10 G20 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:657&r= |
| By: | Mike Tsionas (Montpellier Business School Université de Montpellier, Montpellier Research in Management and Lancaster University Management School); Christopher F. Parmeter (Miami Herbert Business School, University of Miami, Miami FL); Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia) |
| Abstract: | The literature on firm efficiency has seen its share of research comparing and contrasting Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA), the two workhorse estimators. These studies rely on both Monte Carlo experiments and actual data sets to examine a range of performance issues which can be used to elucidate insights on the benefits or weaknesses of one method over the other. As can be imagined, neither method is universally better than the other. The present paper proposes an alternative approach that is quite flexible in terms of functional form and distributional assumptions and it amalgamates the benefits of both DEA and SFA. Specifically, we bridge these two popular approaches via Bayesian Artificial Neural Networks. We examine the performance of this new approach using Monte Carlo experiments. The performance is found to be very good, comparable or often better than the current standards in the literature. To illustrate the new techniques, we provide an application of this approach to a recent data set of large US banks. |
| Keywords: | Simulation; OR in Banking; Stochastic Frontier Models; Data Envelopment Analysis; Flexible Functional Forms. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqcepa:162&r= |
| By: | Sami Alpanda (University of Central Florida, Department of Economics); Hyunji Song (Texas A&M University, Department of Economics); Sarah Zubairy (Texas A&M University, Department of Economics) |
| Abstract: | This paper examines how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, we find that in response to a positive government spending shock, households with mortgage debt have a large, positive consumption response, while renters have a smaller rise in consumption. Homeowners without mortgage debt, in contrast, have an insignificant expenditure response. We consider a dynamic stochastic general equilibrium (DSGE) model with three types of households: savers who own their housing, borrowers with mortgage debt, and rule-of-thumb consumers who rent housing, and show that it can successfully account for these findings. The model suggests that liquidity constraints and wealth effects, tied to the persistence of public spending, play a crucial role in the propagation of government spending shocks. Our findings provide both empirical and theoretical support for the notion that household mortgage debt position plays an important role in the transmission mechanism of fiscal policy. |
| Keywords: | Fiscal shocks, Government spending, Household balance sheets, Household debt. |
| JEL: | E21 E32 E62 |
| Date: | 2021–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:txm:wpaper:20210928-001&r= |
| By: | Gary B. Gorton; Ping He |
| Abstract: | Based on archival and survey data we show that the maturity of U.S. business loans has been continuously increasing since the mid-1930s when banks invented the term loan. Concurrently, bank innovation first involved the invention of credit analysis and covenant design. Later, bank innovation included the advent of loan sales, increased loan syndications, the opening of the leveraged loan market, and the securitization of loans in collateralized loan obligations. We estimate and calibrate a model of bank innovation to determine the quantitative contribution of bank innovation to economic growth. |
| JEL: | O0 O11 O30 O43 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29326&r= |
| By: | Kyle Fee; Erik Tiersten-Nyman |
| Abstract: | The consolidation that took place in the banking industry during the 2000s and 2010s led to an increase in the total number of bank branches per institution and resulted in a larger number of branches to meet customers’ banking needs. |
| Keywords: | banks; branch; consolidation |
| Date: | 2021–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:c00034:93136&r= |
| By: | Fatica, Serena (European Commission); Panzica, Roberto (European Commission) |
| Abstract: | Using data on institutional investors' bond holdings, we investigate the resilience of green bonds to the COVID-19 shock in a difference-in-differences framework. We find that during the COVID outbreak green bonds experience lower sales, on average, while in normal times no significant differences emerge compared with ordinary bonds. The result is robust across different investor classes and is not driven by those that have a longer-term investment horizon. Furthermore, we find that sustainability-oriented funds sell less of green bonds than their peers without a sustainability mandate. We also document that the ownership of green fixed income securities is more concentrated than that of comparable conventional bonds, and that concentration has increased in the first quarter of 2020. |
| Keywords: | Sustainable finance, climate change, green bonds, institutional investors |
| JEL: | G12 G20 Q52 Q53 Q54 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:202107&r= |
| By: | Heider, Florian; Leonello, Agnese |
| Abstract: | This paper develops a simple analytical framework to study the impact of central bank policy-rate changes on banks’ credit supply and risk-taking incentives. Unobservable expost bank monitoring of loans creates an external-financing constraint, which determines bank leverage. Unobservable, costly ex-ante screening of borrowers determines the level of bank risk-taking. More risk-taking tightens the external-financing constraint. The policy rate affects the external-financing constraint because it affects both the return on outside investors’ alternative investments and loan rates. In a low rate environment, a policy-rate cut reduces bank funding costs less because of a zero lower bound (ZLB) on retail deposit rates. Bank risk-taking is a necessary but not sufficient for a policy-rate cut to become contractionary ("reversal"). Reversal can occur even though banks’ net-interest margins increase. Credit market competition plays an important role for the interplay of monetary policy and financing stability. When banks have market power, a policy-rate cut can increase lending and still lead to risk-taking. We use our analytical framework to discuss the literature on how monetary policy affects the credit supply of banks, with special emphasis on low and negative rates. JEL Classification: E44, E52, E58, G20, G21 |
| Keywords: | bank lending, deposits, equity multiplier, zero-lower bound |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212593&r= |
| By: | David P. Glancy; Robert J. Kurtzman; Lara Loewenstein; Joseph B. Nichols |
| Abstract: | We study the role that recourse plays the in commercial real estate loan contracts in the portfolios of the largest US banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans receive loan rate spreads that are at least 20 basis points lower and loan-to-value ratios that are at least 3 percentage points higher. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Loans with recourse were half as likely to receive accommodation during the COVID-19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments. |
| Keywords: | commercial real estate; recourse; LTV |
| JEL: | G21 G22 G23 R33 |
| Date: | 2021–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:93084&r= |