nep-ban New Economics Papers
on Banking
Issue of 2021‒11‒08
34 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Joined at the hip: monetary and fiscal policy in a liquidity-dependent world By Guillermo Calvo; Andrés Velasco
  2. With a little help from my friends: Debt renegotiation and climate change By Juan Camilo Cárdenas; Fernando Jaramillo; Diana León; María del Pilar López Uribe; Mauricio Rodriguez; Hernando Zuleta
  3. Why do Sovereign Borrowers Post Collateral? Evidence from the 19th Century By Marc Flandreau; Stefano Pietrosanti; Carlotta E. Schuster
  4. Does Default Pecking Order Impact Systemic Risk? Evidence from Brazilian data By Michel Alexandre; Thiago Christiano Silva; Krzysztof Michalak; Francisco A. Rodrigues
  5. The Riskiness of Outstanding Mortgages in the United States, 1999 - 2019 By William D. Larson
  6. Corruption and bank risk-taking: The deterring role of Shari'ah supervision By Mushtaq Hussain Khan; Mohammad Bitar; Amine Tarazi; Arshad Hassan; Ahmad Fraz
  7. Big techs in finance: on the new nexus between data privacy and competition By Frederic Boissay; Torsten Ehlers; Leonardo Gambacorta; Hyun Song Shin
  8. The global transmission of U.S. monetary policy By Riccardo Degasperi; Seokki Simon Hong; Giovanni Ricco
  9. Voluntary debt restructuring: the 2017 Greek €29.6 billion bond exchange explained By Jasper Aerts; Gabriela Olariu; Efstathios Sofos
  10. Evergreening By Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez
  11. Indebted Demand By Atif Mian; Ludwig Straub; Amir Sufi
  12. Bank risk-taking and monetary policy transmission : Evidence from China By Li, Xiaoming; Liu, Zheng; Peng, Yuchao; Xu, Zhiwei
  13. Sustainability, Trust and Blockchain Applications: Best Practices and Fintech Prospects By Ahmet Faruk Aysan; Fouad Bergigui
  14. FinTech Lending By Tobias Berg; Andreas Fuster; Manju Puri
  15. Asset concentration risk and insurance solvency regulation By Regele, Fabian; Gründl, Helmut
  16. China's Transition to a Digital Currency: Does It Threaten Dollarization? By Ahmet Faruk Aysan; Nawaz Farrukh
  17. Restoring growth and financial stability: how Greek banks contributed By Srichander Ramaswamy
  18. The anatomy of government bond yields synchronization in the Eurozone By Claudio Barbieri; Mattia Guerini; Mauro Napoletano
  19. Uncertainty and the Pandemic Shocks By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  20. Risky Financial Collateral, Firm Heterogeneity, and the Impact of Eligibility Requirements By Matthias Kaldorf; Florian Wicknig
  21. The Italian nominal interest rate conundrum: a problem of growth or public finance? By Giovanni Carnazza; Nicola Caravaggio
  22. Inter-agency coordination bodies and the speed of prudential policy responses to the Covid-19 pandemic By Michael Brei; Blaise Gadanecz
  23. European Central Bank and Banco de España measures against the effects of COVID-19 on the monetary policy collateral framework, and their impact on Spanish counterparties By Jorge Escolar; José Ramón Yribarren
  24. COVID-19 and Local Market Power in Credit Markets By Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra
  25. What to Target? Insights from a Lab Experiment By Isabelle Salle
  26. The ECB's Asset Purchase Programme: Theory, effects, and risks By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  27. FinTech adoption and household risk-taking By Hong, Claire Yurong; Lu, Xiaomeng; Pan, Jun
  28. Financing human-centred COVID-19 recovery and decisive climate action worldwide international cooperation’s twenty-first century moment of truth By Samans, Richard.
  29. Les ménages au cœur de la financiarisation. Sur Risking Together, de D. Bryan et M. Rafferty By Bruno Tinel
  30. Traspaso de la tasa de cambio a la inflación básica en Colombia: un análisis de parámetros cambiantes en el tiempo By Hernán Rincón-Castro; Pedro Rubiano-López; Lisseth Yaya-Garzón; Héctor M. Zárate-Solano
  31. Liquidity Regulation and Bank Risk By Foly Ananou; Dimitris Chronopoulos; Amine Tarazi; John Wilson
  32. Toward a Global Approach to Data in the Digital Age By Mr. Yan Carriere-Swallow; Mr. Vikram Haksar; Emanuel Kopp; Gabriel Quiros; Emran Islam; Andrew Giddings; Kathleen Kao
  33. The Role of (non-)Topological Features as Drivers of Systemic Risk: a machine learning approach By Michel Alexandre; Thiago Christiano Silva; Colm Connaughton; Francisco A. Rodrigues
  34. Sticky Deposit Rates and Allocative Effects of Monetary Policy By Anne Duquerroy; Adrien Matray; Farzad Saidi

  1. By: Guillermo Calvo; Andrés Velasco
    Abstract: We study the effects of monetary and fiscal policies when both money and government bonds provide liquidity services. Because money is the unit of account, the price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods, and this is one important reason why money is liquid and attractive. By contrast, the price of government bonds is free to jump and often does, especially in response to news about changes in fiscal policy and the supply of bonds. Those movements in government bond prices affect available liquidity, and that matters for aggregate demand, inflation and output. Under these conditions, bond-financed fiscal expansions can be contractionary, causing deflation and a temporary recession. To avoid those effects, changes in bond supply must be matched by changes in money supply and in the interest rate on money. We conclude that in a liquiditydependent world, fiscal and monetary policies are joined at the hip.
    JEL: E52 E62 E63
    Date: 2021–10
  2. By: Juan Camilo Cárdenas; Fernando Jaramillo; Diana León; María del Pilar López Uribe; Mauricio Rodriguez; Hernando Zuleta
    Abstract: The economic crisis from the Covid-19 pandemic has generated a fall in tax revenues and an increase in the need for public spending in most economies throughout the world. This situation has led to a substantial increase in the sovereign debt levels and has dramatically reduced the fiscal space of governments. For upper- middle-income countries (UMICs), current access to financing is limited and this can potentially limit the space for climate action in the short and medium run. However, delaying climate action can generate a negative signal on fiscal sustainability due to the physical and transition risks of climate change. Unsustainable production practices will result in a deterioration of the productive capacity of natural assets reducing potential tax income. Simultaneously there will be a stronger need for public spending to face the future damages associated to greenhouse gases emissions. Therefore, in order to address the current crisis, we need an integral approach that considers the climate crisis as a challenge with a high degree of urgency. For this approach to be feasible, sufficient international climate finance needs to be available, and it should help to steer relief and recovery efforts into a direction in which these are also compatible with climate targets. In this document, we propose a sovereign debt negotiation scheme in which the conditions of the debt depend on the climate policies undertaken by the debtor countries. Likewise, we point out that the feasibility of beneficial agreements for debtors and the implementation of good climate policies depend positively on the size of the debt and each country's potential to affect the current trend of climate change. For these reasons, the formation of coalitions of debtor countries can be a key factor for debt relief and the implementation of climate policies
    Keywords: Covid 19, Climate Change, Sovereign Debt, Coalitions, Climate Policy
    JEL: D62 D71 F34 G23 H63 Q50 Q54 Q58
    Date: 2021–10–20
  3. By: Marc Flandreau (University of Pennsylvania); Stefano Pietrosanti (Bank of Italy); Carlotta E. Schuster (UNCTAD)
    Abstract: This paper explores the reasons why sovereign borrowers post collateral. Such behavior is paradoxical because conventional interpretations of collateral stress repossession of the assets pledged as the key to securing lenders against information asymmetries and moral hazard. However, repossession is generally difficult in the case of sovereign debt and in some cases impossible. Nevertheless, such sovereign `hypothecations` have a long history and are again becoming very popular today in developing countries. To explain sovereign collateralization, we emphasize an informational channel. Posting collateral produces information on opaque borrowers by displaying borrowers` behavior and resources. We support this interpretation by examining the hypothecation `mania` of 1849-1875, when sovereigns borrowing in the London Stock Exchange pledged all kinds of intangible revenues. Yet, at that time, sovereign immunity fully protected both sovereigns and their assets and possessions. Still, we show that hypothecations significantly decreased the cost of sovereign debt. To explain how, we stress the pledges` role in documenting sovereigns` wealth and the management of revenue streams. Based on an exhaustive library of bond prospectuses collected from primary sources, matched with a panel of sovereign bond yields and an innovative measure of sovereign fiscal transparency, we show that collateral minutely described in debt covenants served to document and monitor sovereign resources and development prospects. Encasing this information in contracts written by lawyers served to certify the quality of the resulting data disclosure process, explaining investors` readiness to pay a premium.
    Keywords: Collateral, Information, Sovereign debt, Informal enforcement, Financial innovation, Contract innovation
    JEL: N20 G24 K12 K33 H63
    Date: 2021–10–07
  4. By: Michel Alexandre; Thiago Christiano Silva; Krzysztof Michalak; Francisco A. Rodrigues
    Abstract: In network models of systemic risk, the loss distribution of a distressed debtor among its creditors follows a pro-rata fashion. It is proportional to the loan granted to the debtor. Despite its simplicity, this assumption is unrealistic. In this study, we create a framework for the computation of the systemic risk assuming a heterogeneous pattern of loss distribution, the default pecking order. Distressed debtors employ some criterion (equity, out-degree, or loan extended) to rank the creditors they are willing to default on first. Applying this framework to an extensive Brazilian data set, we found out the adoption of the default pecking order increases significantly the systemic risk. The rise in the systemic risk brought by the heterogeneous distribution over the homogeneous case decreases with the level of the initial shock and is higher for small-sized agents. This result can be interpreted in the light of the dual role of the financial network, which can be a channel for both risk-sharing and shock propagation. We test this hypothesis by assessing the role of interconnectedness (as measured by the network density) in driving the systemic risk. The results corroborate this hypothesis. When the homogeneous loss distribution (which maximizes risk-sharing) is abandoned, the density has a positive impact on the systemic risk. It suggests in this case the financial network acts mainly as a channel for shock propagation rather than for risk-sharing.
    Date: 2021–10
  5. By: William D. Larson (Federal Housing Finance Agency)
    Abstract: This paper introduces summary measures of credit risk for the stock of all outstanding mortgages in the United States for each quarter between 1999 and 2019. Mortgage terminations play a fundamental role in offsetting risk introduced by the flow of new originations because of refinance activity and the often dual nature of home buyers as concurrent sellers. To illustrate these concepts in a policy setting, I show the Home Affordable Refinance Program increased origination risk metrics but reduced overall risk due to the associated terminations of even riskier loans. Generally, book-level risk tends to lag behind originations: while origination risk peaked in 2006, the risk of outstanding mortgages peaked in 2007, and while origination risk bottomed out in 2011 and has been rising since, book-level risk continued its downward trend in 2019. Other results highlight previously rarely-examined market segments, including credit unions, the Federal Home Loan Bank system, and loans guaranteed by the Farm Service Agency/Rural Housing Service.
    Keywords: mortgage risk, systemic risk, housing cycles, stress test
    JEL: E32 G21 G28 H22 R31
    Date: 2021–10
  6. By: Mushtaq Hussain Khan (Department of Management Sciences, University of Azad Jammu & Kashmir, Muzaffarabad, Pakistan); Mohammad Bitar (University of Nottingham Business School, Nottingham, UK); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Arshad Hassan (Faculty of Management & Social Sciences, Capital University of Science & Technology, Islamabad, Pakistan); Ahmad Fraz (Pakistan Institute of Development Economics, Islamabad, Pakistan)
    Abstract: This paper investigates whether the risk-taking of Islamic banks is differently affected by corruption compared to conventional banks. Indeed, the presence of Shari'ah supervisory boards (SSBs), as a cornerstone of Islamic banking, is expected to deter the influence of corruption on risk-taking for Islamic banks. We consider a matched sample of 70 Islamic and conventional banks operating in 10 OIC (Organization of Islamic Cooperation) countries over the 2012-2017 period. We find consistent evidence that higher levels of corruption are associated with higher bank risk for both conventional and Islamic banks. However, this association is stronger for conventional banks. Furthermore, for Islamic banks, the impact of corruption on risk-taking is significantly reduced with higher representation of females in Shari'ah supervisory boards and higher academic qualifications of board members. The role played by such board members in mitigating the impact of corruption on risk-taking is more effective for Islamic banks than for conventional banks.
    Keywords: Bank risk taking,Corruption,Ethical banking,Shari'ah supervision
    Date: 2021–10–05
  7. By: Frederic Boissay; Torsten Ehlers; Leonardo Gambacorta; Hyun Song Shin
    Abstract: The business model of big techs rests on enabling direct interactions among a large number of users on digital platforms, such as in e-commerce, search and social media. An essential by-product is their large stock of user data, which they use to offer a wide range of services and exploit natural network effects, generating further user activity. Increased user activity completes the circle, as it generates yet more data. Building on the self-reinforcing nature of the data- network-activities loop, some big techs have ventured into financial services, including payments, money management, insurance and lending. The entry of big techs into finance promises efficiency gains and greater financial inclusion. At the same time, it introduces new risks associated with market power and data privacy. The nature of the new trade-off between efficiency and privacy will depend on societal preferences, and will vary across jurisdictions. This increases the need to coordinate policies both at the domestic and international level.
    JEL: E51 G23 O31
    Date: 2021–10
  8. By: Riccardo Degasperi; Seokki Simon Hong; Giovanni Ricco (Departement of Economics - University of Warwick - University of Warwick [Coventry])
    Abstract: We quantify global US monetary policy spillovers by employing a high-frequency identification and big data techniques, in conjunction with a large harmonised dataset covering 30 economies. We report three novel stylised facts. First, a US monetary policy tightening has large contractionary effects onto both advanced and emerging economies. Second, flexible exchange rates cannot fully insulate domestic economies, due to movements in risk premia that limit central banks' ability to control the yield curve. Third, financial channels dominate over demand and exchange rate channels in the transmission to real variables, while the transmission via oil and commodity prices determines nominal spillovers.
    Keywords: monetary policy,trilemma,exchange rates,monetary policy spillovers
    Date: 2021
  9. By: Jasper Aerts (ESM); Gabriela Olariu (ESM); Efstathios Sofos (ESM)
    Abstract: This paper showcases the Greek 2017 liability management exercise as an example of a successful voluntary debt restructuring by a sovereign with active participation from both public and private sector creditors. The exercise, one of the largest in financial history, saw Greece restructure some €29.6 billion in outstanding debt to the ESM and EFSF using a bond exchange involving the four main Greek banks. The paper describes the exchange structure and the need to respect conflicting public policy objectives. It aims to contribute to the debate about sovereign debt restructuring generated by the IMF’s September 2020 discussion paper, The International Architecture for Resolving Sovereign Debt Involving Private-sector Creditors. It highlights how useful the ESM approach was in helping overcome financial difficulties by combining capital markets operations with stability support.
    Date: 2021–03–03
  10. By: Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez
    Abstract: We develop a simple model of relationship lending where lenders have an incentive to evergreen loans by offering better terms to less productive and more indebted firms. We detect such lending distortions using loan-level supervisory data for the United States. Low-capitalized banks systematically distort their risk assessments of firms to window-dress their balance sheets and extend relatively more credit to underreported borrowers. Consistent with our theoretical predictions, these effects are driven by larger outstanding loans and low-productivity firms. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening can affect aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower aggregate productivity.
    Keywords: Evergreening; Zombie-Lending; Misallocation; COVID-19
    JEL: E32 E43 E44 E52 E60 G21 G32
    Date: 2021–10–22
  11. By: Atif Mian; Ludwig Straub; Amir Sufi
    Abstract: We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet under-appreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
    JEL: E21 E44 E6
    Date: 2021–10
  12. By: Li, Xiaoming; Liu, Zheng; Peng, Yuchao; Xu, Zhiwei
    Abstract: We study the impact of China’s 2013 implementation of Basel III on bank risk-taking and its responses to monetary policy shocks using confidential loan-level data from a large Chinese bank. Guided by theory, we use a difference-in-difference identification, exploiting cross-sectional differences in lending behaviors between high-risk and low-risk bank branches before and after the new regulations. We find that, through a risk-weighting channel, changes in regulations significantly reduced bank risk-taking, both on average and conditional on monetary policy easing. However, banks reduce risk-taking by increasing lending to ostensibly low-risk state-owned enterprises (SOEs) under government guarantees, despite their low average productivity.
    JEL: E52 G21 G28
    Date: 2021–10–29
  13. By: Ahmet Faruk Aysan (HBKU - Hamad Bin Khalifa University); Fouad Bergigui
    Abstract: Since the adoption of the SDGs in 2015, it has been a 5-year journey of trial and error experimentations all over the world to come up with innovative solutions beyond business-as-usual and get the job done. In this paper, we assess blockchain-backed solutions beyond the hype. While the technology has a promising potential to trigger disruptive innovations to fulfill the SGDs, it is not mature yet with many gaps in terms of approaches and tools to develop blockchain use cases, monitor and evaluate blockchain experiments, mitigate associated risks and ethical considerations while managing changes within organizations leading blockchain-powered platforms. It is only by filing these gaps that blockchain can deliver its promises and may be effectively used as an SDG accelerator. Islamic finance can play a key role in shaping the transition towards a more circular economy. One promising way of doing so, is by scaling-up the use of blockchainenabled solutions in the practices of circular economy and Islamic finance. As the technology is still getting mature, more innovative and applied research is needed to capitalize on the lessons learned within various geographies and across a wide range of economic, social, and environmental spectrums.
    Keywords: Blockchain,SDGs,innovation,Islamic finance,circular economy
    Date: 2021–10–05
  14. By: Tobias Berg (Frankfurt School of Finance & Management); Andreas Fuster (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Manju Puri (Duke University - Fuqua School of Business; NBER)
    Abstract: In this paper, we review the growing literature on FinTech lending – the provision of credit facilitated by technology that improves the customer-lender interaction or lenders’ screening and monitoring of borrowers. FinTech lending has grown rapidly, though in developed economies like the U.S. it still only accounts for a small share of total credit. An increase in convenience and speed appears to have been more central to FinTech lending’s growth than improved screening or monitoring, though there is certainly potential for the latter, as is the case for increased financial inclusion. The COVID 19 pandemic has shown potential vulnerabilities of FinTech lenders, although in certain segments they have displayed rapid growth.
    Keywords: FinTech, lending, COVID-19
    JEL: G21 G23 G51
    Date: 2021–10
  15. By: Regele, Fabian; Gründl, Helmut
    Abstract: Historical evidence like the global financial crisis from 2007-09 highlights that sector concentration risk can play an important role for the solvency of insurers. However, current microprudential frameworks like the US RBC framework and Solvency II consider only name concentration risk explicitly in their solvency capital requirements for asset concentration risk and neglect sector concentration risk. We show by means of US insurers' asset holdings from 2009 to 2018 that substantial sectoral asset concentrations exist in the financial, public and real estate sector, and find indicative evidence for a sectoral search for yield behavior. Based on a theoretical solvency capital allocation scheme, we demonstrate that the current regulatory approaches can lead to inappropriate and biased levels of solvency capital for asset concentration risk, and should be revised. Our findings have also important implications on the ongoing discussion of asset concentration risk in the context of macroprudential insurance regulation.
    Keywords: Microprudential Insurance Regulation,Asset Concentration Risk,Systematic Risk,Idiosyncratic Risk,Sectoral Asset Diversification
    JEL: G01 G11 G22 G28
    Date: 2021
  16. By: Ahmet Faruk Aysan (HBKU - Hamad Bin Khalifa University); Nawaz Farrukh
    Abstract: This article provides a detailed introduction to China's launching of a digital currency. We conduct a comparative analysis concerning whether digital currency is a more stable and reliable currency than cryptocurrency and investigate whether a digital renminbi (or yuan) could replace the US dollar as a medium of exchange in international transactions. China has gained a first-mover advantage by rolling out a central bank digital currency (CBDC). But the outcome will depend on the US response as well as the future evolution of the US and Chinese economies. Most other articles on this topic focus on domestic use of the Chinese CBDC. But this study is unique in analyzing the prospects of a digital renminbi as a replacement for the US dollar in international commerce.
    Keywords: China,cryptocurrency,digital yuan,People's Bank of China,US. JEL Classifications: E42,E58,G28
    Date: 2021–10–05
  17. By: Srichander Ramaswamy
    Abstract: The European Stability Mechanism (ESM) is evaluating the Greek financial assistance programmes to learn lessons that could enhance its ability to address possible future crises. This discussion paper provides input for this exercise by focusing on banking sector reforms within European Financial Stability Facility (EFSF) and ESM programmes. It examines how the banking sector performed, problems in implementing some reforms, and how banks contributed to Greek economic growth, performance, and the financial system’s resilience to counter potential future shocks.
    Date: 2020–06–11
  18. By: Claudio Barbieri; Mattia Guerini; Mauro Napoletano (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po)
    Abstract: We investigate the synchronization of Eurozone's government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased significantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and flight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monet ary policy in the Eurozone.
    Keywords: synchronization,bond yields,factor models,random matrix theory,monetary policy
    Date: 2021
  19. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: The Covid-19 pandemic shocks are an important source of uncertainty on several dimensions. These shocks influence the landscape, in which policymakers operates, and create further uncertainty on policy decisions and on their effectiveness. The aim of this paper is to offer some relative measures of the pandemic uncertainty, and to discuss the impact of this uncertainty on the possible evolution of European economies during the second wave of Covid-19. The emphasis is on the effectiveness of the policies implemented.
    Keywords: Covid19; Central banking; Recessions
    JEL: E32 E58 E65
    Date: 2021–10
  20. By: Matthias Kaldorf (University of Cologne, Center for Macroeconomic Research); Florian Wicknig (University of Cologne, Center for Macroeconomic Research)
    Abstract: This paper studies how collateral premia affect the supply and quality of bonds issued by non-financial firms. Banks increase demand for bonds eligible as collateral, to which eligible firms respond by increasing their debt issuance and default risk. We characterize firm responses and aggregate collateral supply in a heterogeneous firm model with collat-eral premia and endogenous default risk. Using a calibration to euro area data, we study the impact of collateral easing, consistent with the ECB’s policy during the 2008 financial crisis and evaluate the quantitative relevance of firm responses. We find that firm responses substantially deteriorate collateral quality and dampen the total increase in collateral sup-ply. Our analysis suggests that an eligibility covenant conditioning eligibility on leverage and current default risk, is a potentially powerful instrument to mitigate the adverse impact of eligibility requirements on collateral quality while maintaining a high level of collateral supply.
    Keywords: Eligibility Premia, Corporate Bonds, Firm Heterogeneity, Collateral Policy
    JEL: E44 E58 G12 G32 G33
    Date: 2021–10
  21. By: Giovanni Carnazza (Università di Roma Tre); Nicola Caravaggio (Università di Roma Tre)
    Abstract: In the economic literature, there has been a large heterogeneity of results in relation to the impact of fiscal variables on interest rates. Focusing on the Italian economy and considering the nature of our interest rate determinants (public finance variables and nominal GDP growth), we decided to undertake a cointegration analysis relying on the Autoregressive Distributed Lag (ARDL) bound test approach, a particular suitable procedure within this peculiar framework, able to disentangle short-run and long-run dynamics. Our results are quite controversial, shedding new light on the role of gross debt and primary balance as a share of GDP in relation to the long-term Italian nominal interest rate. In this context, the ECB has probably played a crucial role, especially in the most severe phases of the Sovereign debt crisis. The European fiscal framework then shows further critical issues in relation to the new role that fiscal variables play within our econometric analysis.
    Keywords: Italian economy; Sovereign bond yield; European Monetary Union; Public finance
    JEL: E43 E58 E62 G12 C13 C22
    Date: 2021–11
  22. By: Michael Brei; Blaise Gadanecz
    Abstract: This paper investigates whether the presence of inter-agency coordination bodies for financial stability (IABs) has been associated with faster prudential policy responses to the Covid-19 pandemic. Using econometric analysis, we provide evidence that countries with IABs have enacted microprudential measures more quickly than countries without. This is not the case for macroprudential measures for which we find that IABs have been associated with slower responses. We conclude that IABs may have been useful as catalysts for the deployment of microprudential tools for macroprudential purposes.
    JEL: D02 D78 E58
    Date: 2021–10
  23. By: Jorge Escolar (Banco de España); José Ramón Yribarren (Banco de España)
    Abstract: In March and April 2020, the European Central Bank adopted a series of monetary policy measures aimed at providing liquidity support to the financial system and facilitating access to financing for the real economy to mitigate the adverse economic effects of COVID-19. Some of these measures focused on preserving and expanding the universe of assets that counterparties can use as collateral to participate in Eurosystem financing operations. This paper, after a brief summary of the collateral framework for monetary policy operations, studies the measures adopted in this connection by the European Central Bank and the Banco de España and their impact on Spanish counterparties. This study finds that, in overall terms, two measures stand out over the others in terms of the amount of collateral provided: the acceptance of partially government-guaranteed credit claims and the reduction in haircuts. Although all counterparties have been affected by the measures, the extent of the impact has differed widely, determined by the characteristics of the assets used as collateral and their management. Finally, the interaction between the different measures is analysed, since more than one can affect the eligibility and valuation of the same asset.
    Keywords: European Central Bank, Eurosystem, collateral, monetary policy, counterpartie.
    JEL: E42 E52 E58 G21 G32
    Date: 2021–10
  24. By: Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra
    Abstract: This paper investigates how COVID-19 affected the local market power of Brazilian credit markets. We first propose a novel methodology to estimate bank market power at the local level. We design a data-intensive method for computing a local Lerner index by developing heuristics to allocate national-level bank inputs, products, and costs to each branch locality using data from many sources. We then explore the exogenous variation in COVID-19 prevalence across Brazilian localities to analyze how the pandemic influenced local market power through the effective price and marginal cost channels. Despite reducing the economic activity substantially in more affected localities, COVID-19 did not significantly impact the effective price channel: bank branches offset the decrease in credit income by reducing credit concessions. However, bank branches more affected by COVID-19 experienced increased marginal costs as they could not rapidly adjust their cost factors in response to the decrease in credit concessions. Consequently, COVID-19 reduced banks’ local market power via the marginal cost channel. However, banks that spent more in IT before the COVID-19 outbreak suffered less replacing more easily local borrowers with remote ones. We then design a bank-specific measure of exposure to COVID-19 to examine how the pandemic affected different banks within the same locality. Banks more exposed to COVID-19 increased their local market power mainly via the effective price channel, which operated through a negative supply shock and not increased credit income. The paper provides new insights as to how crises can affect local market power in non-trivial ways.
    Date: 2021–10
  25. By: Isabelle Salle
    Abstract: This paper compares alternative monetary policy regimes within a controlled lab environment, where groups of participants are tasked with repeatedly forecasting inflation in a simple macroeconomic model featuring only the dynamics of interest rates, inflation and inflation expectations. Average-inflation targeting can approximate the price path observed under price-level targeting in the presence of disinflationary shocks and enable subjects to coordinate on simple heuristics that reflect the concern of the central bank for past inflation gaps. However, this depends on the exact specification of the policy rule. In particular, if the central bank considers more than two lags, subjects fail to form expectations that are consistent with the monetary policy rule, which results in greater inflation volatility. Reinforcing communication around the target helps somewhat anchor long-run inflation expectations.
    Keywords: Inflation targets; Monetary policy communications; Monetary policy framework
    JEL: C92 E31 E52 E7
    Date: 2021–10
  26. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: In response to the COVID-19 crisis, the ECB has relaunched a massive asset purchase programme within its combined-arms monetary strategy. This paper presents and discusses the theory and the evidence of the central bank’s asset purchases, mainly in the euro area. It analyses the role of asset purchase programmes in the ECB’s toolkit and the potential associated risks, focusing specifically on the problems of the programmes’ unwinding. Finally, the paper offers some possible alternatives to the asset purchase programme.
    Keywords: Unconventional monetary policies; Central banking; Zero-lower bound
    JEL: E32 E43 E44
    Date: 2021–10
  27. By: Hong, Claire Yurong; Lu, Xiaomeng; Pan, Jun
    Abstract: Using a unique FinTech data containing monthly individual-level consumption, investments, and payments, we examine how FinTech can lower investment barriers and improve risk-taking. Seizing on the rapid expansion of offline usages of Alipay in China, we measure individuals’ FinTech adoption by the speed and intensity with which they adopt the new technology. Our hypothesis is that individuals with high FinTech adoption, through repeated usages of the Alipay app, would build familiarity and trust, reducing the psychological barriers against investing in risky assets. Measuring risk-taking by individuals’ mutual-fund investments on the FinTech platform, we find that higher FinTech adoption results in higher participation and more risk-taking. Using the distance to Hangzhou as an instrument variable to capture the exogenous variation in FinTech adoption yields results of similar economic and statistical significance. Focusing on the welfare-improving aspect of FinTech inclusion, we find that individuals with high risk tolerance, hence more risk-taking capacity, and those living in under-banked cities stand to benefit more from the advent of FinTech.
    JEL: G11 G50
    Date: 2021–10–25
  28. By: Samans, Richard.
    Abstract: International cooperation and financing for development in particular face a moment of truth. A lack of national capacity to combat the COVID-19 pandemic and climate change anywhere is a threat to the security and well-being of people everywhere. The most feasible way to mobilize the large additional sums required to advance a fully inclusive, human-centred recovery from the pandemic and a rapid acceleration of climate action on a worldwide basis – including in resource-constrained low-and lower-middle-income countries – is for the international community to apply the public capital it has already invested in the International Monetary Fund and multilateral development banks more efficiently and expansively. This could be achieved by applying the balance sheets and tools of these institutions just as imaginatively for such common purposes as those of central banks and treasuries in advanced countries have been applied for domestic purposes during the pandemic. The paper proposes a set of initiatives to this end in order to fully fund the WHO ACT-A/COVAX Initiative, adequately resource debt relief and restructuring, social protection floors and job-rich sustainable infrastructure and industry in these countries, and finance a global effort to avoid a lock-in of greenhouse gas emissions from coal-fired power generation, which represents the single largest and most time sensitive aspect of the climate action required to achieve the goals of the Paris climate agreement. This fuller utilization of the existing international financial architecture to implement multilaterally agreed objectives would generate an average increase in annual external flows of about 4% of GDP to 82 poorer developing countries during the next seven years, exceeding the Marshall Plan’s support of Europe’s efforts to “build back better” from World War II, while using such additional international assistance in a similar manner to generate complementary increases in domestic resource mobilization.
    Keywords: international cooperation, aid financing, economic recovery, COVID-19, climate change
    Date: 2021
  29. By: Bruno Tinel (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In Risking Together, Bryan and Rafferty think in the manner of behavioural finance, but they think against it and invent Marxist behavioural finance. They show how households' subjectivity is reshaped by finance in their daily life, and how they unwittingly have become a key player in the production process of derivatives. Households are now integrated into finance on the supply side, through the securitization of their debt but also of their payments, and on the demand side through their savings. Households have collectively become net risk absorbers. What about the systemic issues of the financial loop in which households are now inserted? Considering the omnipotence of finance that transfers risks to households, the social institutionalization of default risk is now required.
    Abstract: Bryan et M. Rafferty Résumé Dans Risking together, Bryan et Rafferty pensent à la manière de la finance comportementale, mais ils pensent contre elle et inventent la Marxian behavioural finance. Ils montrent en quoi les ménages, amenés à penser à la manière de la finance dans leur vie quotidienne, sont devenus malgré eux un acteur clé du processus de production des produits dérivés. Les ménages sont désormais intégrés à la finance du côté offre, par la titrisation de leur dette mais aussi de leurs paiements, et du côté demande par leur épargne. Il convient alors de préciser les enjeux systémiques de la boucle financière dans laquelle s'insèrent désormais les ménages, devenus collectivement absorbeurs nets de risque. Face à la toute-puissance d'une finance qui transfère les risques aux ménages, s'impose désormais l'institutionnalisation sociale du risque de défaut.
    Keywords: Produits dérivés,titrisation,financiarisation,ménages,transfert du risque Derivatives,securitisation,financialization,households,risk transfer
    Date: 2021–08–12
  30. By: Hernán Rincón-Castro; Pedro Rubiano-López; Lisseth Yaya-Garzón; Héctor M. Zárate-Solano
    Abstract: Cuánto de las variaciones de la tasa de cambio se traspasa a la inflación es una pregunta de principal interés para la autoridad monetaria, los inversionistas, el sector real y el mismo gobierno. Este documento estima el grado de traspaso de choques de la tasa de cambio del peso sobre la inflación básica en Colombia para cuatro momentos cambiarios críticos que enfrentó la economía: crisis internacional de las (2002), profundización de la crisis financiera internacional ante la quiebra de Lehman-Brothers (2008), colapso del precio internacional del petróleo (2014) y explosión mundial de la pandemia de la Covid-19 (2020). Para lograr el objetivo se utiliza información trimestral del período 2000 a 2020 y un modelo de vectores autorregresivos con parámetros cambiantes estimado por métodos Bayesianos. Los resultados indican que, primero, el grado de traspaso del choque cambiario a la inflación depende del choque y del tiempo. Segundo, un choque de 1% de la tasa de cambio del peso tuvo un traspaso máximo de 0,05% a la inflación básica en la destorcida del precio internacional del petróleo de 2014, de 0,03% en la crisis de las, de 0,02% en la quiebra de Lehman-Brothers y de 0,01% en el estallido de la pandemia del COVID-19. **** ABSTRACT: How much of the changes in the exchange rate is passed through to inflation is a question of main interest to the monetary authority, investors, the real sector, and the government itself. This document estimates the degree of pass-through of shocks from the peso exchange rate to core inflation in Colombia for four critical exchange moments faced by the economy: the international crisis (2002), the deepening of the international financial crisis in the face of the Lehman-Brothers bankruptcy (2008), the international oil price collapse (2014) and the global explosion of the Covid-19 pandemic (2020). To achieve the objective, quarterly information from the period 2000 to 2020 and Bayesian estimates of an autoregressive vector model with changing parameters are used. The results indicate, first, that the degree of pass-through from the exchange shock to inflation depends on the shock and changes over time. Second, a 1% shock to the peso exchange rate passed through 0.05% to core inflation in the detorsion of the international oil price of 2014, 0.03% in the crisis, 0,02% in the bankruptcy of Lehman-Brothers and 0.01% in the outbreak of the COVID-19 pandemic.
    Keywords: Choque de la tasa de cambio del peso, inflación básica, grado de traspaso o pass-through, modelo TPV-VAR-SV, Shock to the exchange rate of the peso, core inflation, degree of pass-through, TPV-VAR-SV model.
    JEL: C15 C52 E31 E52 F31
    Date: 2021–10
  31. By: Foly Ananou (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Dimitris Chronopoulos (University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); John Wilson (University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK)
    Abstract: In this paper, we investigate the impact of liquidity requirements on bank risk. We take advantage of the implementation of the Liquidity Balance Rule (LBR) in the Netherlands in 2003 and analyze its impact on bank default risk. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns, we find that following the introduction of the LBR, the risk of Dutch banks declined relatively to counterparts not affected by the rule. Concomitantly, despite the lower cost of funding driven by the LBR, the profitability of Dutch banks decreased in comparison with other banks in Europe, as a result of a decrease in income accruing from interest-bearing activities. Our findings also indicate that relatively to unaffected banks, Dutch banks might not have actively tried to offset their loss in interest income by increasing interest rates of loans. However, better financing conditions allowed Dutch banks to increase the shares of deposits and capital on the liability side of their balance sheets.
    Keywords: Banking,liquidity regulation,Netherlands,propensity score matching,quasi-natural experiment,risk,stability
    Date: 2021–10–05
  32. By: Mr. Yan Carriere-Swallow; Mr. Vikram Haksar; Emanuel Kopp; Gabriel Quiros; Emran Islam; Andrew Giddings; Kathleen Kao
    Abstract: The ongoing economic and financial digitalization is making individual data a key input and source of value for companies across sectors, from bigtechs and pharmaceuticals to manufacturers and financial services providers. Data on human behavior and choices—our “likes,” purchase patterns, locations, social activities, biometrics, and financing choices—are being generated, collected, stored, and processed at an unprecedented scale.
    Keywords: Data, finance, bigtech, competition, privacy, trade, policy coordination, global principles
    Date: 2021–10–06
  33. By: Michel Alexandre; Thiago Christiano Silva; Colm Connaughton; Francisco A. Rodrigues
    Abstract: The purpose of this paper is to assess the role of financial and topological variables as determinants of systemic risk (SR). The SR, for different levels of the initial shock, is computed for institutions in the Brazilian interbank market by applying the differential DebtRank methodology. The financial institution(FI)-specific determinants of SR are evaluated through two machine learning techniques: XGBoost and random forest. Shapley values analysis provided a better interpretability for our results. Furthermore, we performed this analysis separately for banks and credit unions. We have found the importance of a given feature in driving SR varies with i) the level of the initial shock, ii) the type of FI, and iii) the dimension of the risk which is being assessed – i.e., potential loss caused by (systemic impact) or imputed to (systemic vulnerability) the FI. Systemic impact is mainly driven by topological features for both types of FIs. However, while the importance of topological features to the prediction of systemic impact of banks increases with the level of the initial shock, it decreases for credit unions. Concerning systemic vulnerability, this is mainly determined by financial features, whose importance increases with the initial shock level for both types of FIs.
    Date: 2021–10
  34. By: Anne Duquerroy (Banque de France); Adrien Matray (Princeton University); Farzad Saidi (Boston University and CEPR)
    Abstract: This paper documents that monetary policy affects credit supply through banks’ cost of funding. Using administrative credit-registry and regulatory bank data, we find that banks can incur an increase in their funding costs of at least 30 basis points before they adjust their lending. For identification, we exploit the existence of regulated-deposit accounts in France whose interest rates are set by the government and are, thus, not directly affected by the monetary-policy rate.When banks’ funding cost increases and they contract their lending, we observe portfolio reallocations consistent with risk shifting: banks that depend on regulated deposits lend less to large firms, and relatively more to small firms and entrepreneurs.
    Keywords: Monetary-policy transmission; deposits; credit supply; SMEs; savings
    JEL: E23 E32 E44 G20 G21 L14
    Date: 2020–12

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