nep-ban New Economics Papers
on Banking
Issue of 2022‒01‒03
eighteen papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Born to Run: Adaptive and Strategic Behavior in Experimental Bank-Run Games By Federico Belotti; Eloisa Campioni; Vittorio Larocca; Francesca Marazzi; Luca Panaccione; Andrea Piano Mortari
  2. Technology adoption and the bank lending channel of monetary policy transmission By Hasan, Iftekhar; Li, Xiang
  3. Addressing the challenges of digital lending for credit markets and the financial system in low- and middle-income countries By Sommer, Christoph
  4. Effects of Wildfire Destruction on Migration, Consumer Credit, and Financial Distress By Jennifer Balch; Katherine Curtis; Jack DeWaard; Elizabeth Fussell; Kathryn McConnell; Kobie Price; Lise St. Denis; Stephan Whitaker
  5. Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design By Jonathan Chiu; Mohammad Davoodalhosseini
  6. Estudos de História Empresarial de Portugal - Banca By Ana Tomás; Nuno Valério
  7. A Network Analysis of the JGB Repo Market By HORIKAWA Takumi; MATSUI Yujiro; GEMMA Yasufumi
  8. أهمية المصارف الإسلامية في تفادي الأزمات المالية By Billel Djeghri; Nabila Badis; Karim Zermane
  9. Mortgage finance across OECD countries By Frank van Hoenselaar; Boris Cournède; Federica De Pace; Volker Ziemann
  10. Dilemma and global financial cycle: Evidence from capital account liberalisation episodes By Li, Xiang
  11. Financial Development, Reforms and Growth By Spyridon Boikos; Theodore Panagiotidis; Georgios Voucharas
  12. Debt Maturity Heterogeneity and Investment Responses to Monetary Policy By Minjie Deng; Min Fang
  13. Monetary policy and endogenous financial crises By F. Boissay; F. Collard; Jordi Galí; C. Manea
  14. Remittance Flows and U.S. Monetary Policy By Immaculate Machasio; Peter Tillmann
  15. Does the Central Bank of Peru Respond to Exchange Rate Movements? A Bayesian Estimation of a New Keynesian DSGE Model with FX Interventions By Gabriel Rodríguez; Paul Castillo; Harumi Hasegawa; Hernán B. Garrafa-Aragón
  16. Revisiting the Monetary Sovereignty Rationale for CBDCs By Skylar Brooks
  17. Central Bank Transparency and Disagreement in Inflation Expectations By Shunichi Yoneyama
  18. Comparative analysis of quantitative easing and money-financed fiscal stimulus By Jan Lutynski

  1. By: Federico Belotti (CEIS & DEF, University of Rome "Tor Vergata"); Eloisa Campioni (CEIS & DEF, University of Rome "Tor Vergata"); Vittorio Larocca (Luiss Guido Carli); Francesca Marazzi (CEIS, University of Rome "Tor Vergata"); Luca Panaccione (University of Rome "La Sapienza"); Andrea Piano Mortari (CEIS, University of Rome "Tor Vergata")
    Abstract: We run a laboratory experiment to investigate how the size of the group affects coordination in a bank-run game played repeatedly by participants facing different fellow depositors. For comparability purposes, we keep the coordination tightness constant across different sizes. Participants exhibit an adaptive behavior, since the main drivers of their decisions to withdraw are: previous-round outcomes and own initial choice. Moreover, they mainly adopt the best response to previous-round feedback. However, a sizeable share of participants adopts the opposite mode of behavior, that we refer to as experimentation. The analysis of the determinants of experimentation suggest that subjects adopt this behavior when the probability to lead the group toward the efficient outcome is higher. Finally, our analysis shows that the size of the bank has a significant effect on participants’ decisions, since they withdraw more and experiment less in large banks.
    Keywords: Coordination Games, Experimental Studies, Bank Runs
    JEL: C70 C92 D80 G21
    Date: 2021–12–13
  2. By: Hasan, Iftekhar; Li, Xiang
    Abstract: This paper studies whether and how banks' technology adoption affects the bank lending channel of monetary policy transmission. We construct a new measurement of bank-level technology adoption, which can tell whether the technology is related to the bank's lending business and which specific technology is adopted. We find that lending-related technology adoption significantly strengthens the transmission of the bank lending channel, meanwhile, adopting technologies that are not related to lending activities significantly mitigates that. By technology categories, the adoption of cloud computing technology displays the largest impact on strengthening the bank lending channel. Moreover, higher exposure to BigTech competition is significantly associated with a weaker reaction to monetary policy shocks.
    Keywords: bank lending channel,monetary policy transmission,technology adoption
    JEL: G21 G23
    Date: 2021
  3. By: Sommer, Christoph
    Abstract: The demand for digital financial services has risen significantly over recent years. The COVID-19 pandemic has accelerated this trend and since the focus has shifted towards economic recovery, digital lending has become central. Digital credit products exploit traditional and alternative financial and non-financial data to provide access to finance for households and micro, small and medium enterprises (MSMEs). While it makes lending more inclusive for underserved or unserved households and firms, its increasing influence also brings forth challenges that need to be addressed by policy-makers and regulators in order to guarantee well-functioning credit markets and broader financial systems that foster sustainable economic development. A central concern is the adverse effect of digital lending on the stability and integrity of credit markets (and potentially the wider financial systems). The rise in non-performing loans, even before the COVID-19 crisis, has been associated with an increase in digital credits. New players with little experience enter the market and exploit regulatory arbitrage, but often these players have no (or only a partial) obligation to report to respective systems for sharing credit information or to supervisory bodies, which introduces severe vulnerabilities. In addition, the low entry threshold of digital financial products, due to their convenience and simplicity for customers, provides fertile ground for exploitative financialisation. Underserved households and MSMEs with limited financial literacy may be lured into taking up unsuitable and unaffordable digital credits, leading to over-indebtedness and bankruptcy. The last challenge arises from significantly shorter loan maturities in MSME lending if current forms of digital lending are scaled up. This is problematic, as firms need loans with longer maturities to realise productivity-enhancing medium- and long-term investments, many of which include complementary investments in labour, thereby contributing to an improvement in job quality. Governments and regulators need to strike a balance between leveraging the potential of digital lending for inclusive finance and economic recovery from the COVID-19 crisis, and mitigating associated risks. In particular, they should, together with providers of technical and financial development cooperation, consider the following: - Fostering the integrity of (digital) credit markets. Regulators should establish specific licenses and regulations for all digital financial service providers, and introduce obligatory reporting requirements to supervisory bodies and national systems for sharing credit information. - Preventing exploitative financialisation. Regulators need to require digital lenders to present the costs and risks of their loan products in a manner comprehensible to consumers with little financial literacy, and extend consumer protection policies to digital financial services. - Ensuring availability of loans with longer maturities. Development finance institutions and other national and international promoters of (M)SMEs should assist local banks in the provision of longer-term loans, e.g. by offering respective funds or partial credit guarantees. - Establishing regulatory sandboxes. Regulators should launch regulatory sandboxes to test legislation in a closed setting and to learn about risks without hindering innovation.
    Date: 2021
  4. By: Jennifer Balch; Katherine Curtis; Jack DeWaard; Elizabeth Fussell; Kathryn McConnell; Kobie Price; Lise St. Denis; Stephan Whitaker
    Abstract: The scale of wildfire destruction has grown exponentially in recent years, destroying nearly 25,000 buildings in the United States during 2018 alone. However, there is still limited research exploring how wildfires affect migration patterns and household finances. In this study, we evaluate the effects of wildfire destruction on in-migration and out-migration probability at the Census tract level in the United States from 1999 to 2018. We then shift to the individual level and examine changes in homeownership, consumer credit usage, and financial distress among people whose neighborhood suffered damaging fires. We pair quarterly observations from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel with building destruction counts from the US National Incident Management System/Incident Command System database of wildfire events. Our findings show significantly heightened out-migration probability among tracts that experienced the most destructive wildfires, but no effect on in-migration probability. Among the consumer credit measures, we find a significant drop in homeownership among those treated by major fires. This is concentrated in people over the age of 60. Measures of credit distress, including delinquencies, bankruptcies, and foreclosures, improve rather than deteriorate after the fire, but the changes are not statistically significant. While wildfire effects on migration and borrowing are measurable, they are not yet as large as those observed following other natural disasters such as hurricanes.
    Keywords: Wildfire; Migration; Consumer Credit
    JEL: D12 Q54 R23
    Date: 2021–12–27
  5. By: Jonathan Chiu; Mohammad Davoodalhosseini
    Abstract: Should a central bank digital currency (CBDC) be issued? Should its design be cash- or deposit-like? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking and welfare. Our model introduces new general equilibrium linkages across different types of retail transactions as well as a novel feedback effect from transactions to deposit creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 5.8% and capture up to 25% of the payment market. In contrast, a deposit-like CBDC can crowd out banking by up to 2.6%, thereby grabbing a market share of about 16.7%.
    Keywords: Digital currencies and fintech; Monetary policy; Monetary policy framework
    JEL: E58
    Date: 2021–12
  6. By: Ana Tomás; Nuno Valério
    Abstract: This working paper summarizes the evolution of the banking sector in Portugal, both from the perspective of the regime established by the government, and from the perspective of the main firms that worked in the sector. This is the third working paper of a set that already includes working paper no. 68 on the railroad sector and working paper no. 69 on the tobacco sector, with the final purpose of preparing a Business History of Portugal.
    Keywords: Portugal, setor bancário, empresas bancárias JEL classification: G21 bancos — banks
    Date: 2021
  7. By: HORIKAWA Takumi (Bank of Japan); MATSUI Yujiro (Bank of Japan); GEMMA Yasufumi (Bank of Japan)
    Abstract: In this paper, we attempt to understand the characteristics of the Japanese government bond (JGB) repo market by applying network analysis methods to highly granular data on JGB repo transactions. We especially use a measure of "network centrality" which quantitatively identifies financial institutions that play an important role in the transaction network and a "community detection" method which identifies groups of financial institutions that have close transactional relationships with each other. From the results, it was observed that some highly important financial institutions functioned as intermediaries for transactions and that continuous transaction relationships within groups were built around them. These characteristics may contribute to the efficient matching of cash borrowing and lending needs, and to the smooth execution of large-lot transactions. We also conducted some analysis of the behavior of the network structure of the JGB repo market under market stress using the data from March 2020, when the repo rate fluctuated significantly due to the spread of the COVID-19 pandemic. The results of the analysis in this paper indicate the importance of continuously monitoring the functioning of the JGB repo market, and also provide clues for maintaining and improving the functioning and robustness of the market.
    Keywords: Network analysis; Financial markets; Repo transactions; PageRank; Bow-tie decomposition; Community detection
    JEL: D85 G14 G20 L14
    Date: 2021–12–21
  8. By: Billel Djeghri (Université de Constantine 2 Abdelhamid Mehri [Constantine]); Nabila Badis (Universite Abbes Laghrour [Khenchela]); Karim Zermane (Universite Abbes Laghrour [Khenchela])
    Abstract: نهدف الى ابراز المصارف الإسلامية كظاهرة إقتصادية جديدة ميزت الثلث الأخير من القرن العشرين، حيث اعتبرت رد فعل حضاري واقتصادي للأمة الإسلامية، وإدراك المسلمين قصور النظام المصرفي الغربي في ملائمة المعتقدات الدينية، إضافة لوعيهم أهمية استغلال ثرواتهم من قبل مؤسسات مالية تنطلق من عقيدة الأمة وثقافتها بدل الركون إلى المصارف والمؤسسات المالية التي تتبنى النظام الغربي القائم على الفائدة المصرفية. بينت الدراسة أن المصارف الإسلامية نجحت في توفير قنوات تمويلية واستثمارية لم يعهدها العمل المصرفي من قبل، وعلى أسس ترتكز على مبدأ المشاركة في الأرباح والخسائر وتختلف عن الفائدة الربوية، لكن بالرغم من أهميته إلا أنه واجه الكثير من التحديات التي تركت أثارت على مسيرته وتطور عمله. كلمات مفتاحية: المصارف الإسلامية؛ الأزمات المالية؛ الأثر والعلاج.
    Abstract: Islamic banks emerged as a new economic phenomenon that characterized the last third of the twentieth century as it represented a cultural reaction and an economic need for the Islamic nation, when Muslims realized the shortcomings of the Western banking system on the appropriateness of their religious beliefs as well as their awareness of the importance of exploiting their wealth by financial institutions based on the nation's creed and culture Dependent on Western banks and financial institutions, or those that adopt the Western system based on banking interest. These banks have succeeded in providing financing and investment channels that were not previously entrusted to banking, and on the basis of bank interest and in accordance with the principle of participation in profits and losses. Islamic banking has faced many challenges that left its mark on the process of its inception and the development of this work.
    Keywords: المصارف الإسلامية,الأزمات المالية,الأثر والعلاج,financial crises,Islamic banks,Impact and Treatment
    Date: 2021
  9. By: Frank van Hoenselaar; Boris Cournède; Federica De Pace; Volker Ziemann
    Abstract: The landscapes of housing loan markets vary considerably across OECD countries, reflecting differences in preferences and policy settings. This paper first draws a topography of disparities in mortgage structure, documenting considerable variation across OECD countries in key features such as in use of fixed vs variable interest rates and typical maturities. The paper then discusses policies that can influence these outcomes. It highlights the scope for encouraging inclusive access to housing through tax-and-spending programmes that are neutral between renting and owning rather than through often very costly tax advantages for mortgage borrowing. The paper finally proposes a novel indicator to measure the balance between the rights of borrowers and lenders. Mortgage markets are deepest in countries where the index shows that creditor and borrower rights are balanced rather than severely tilted to one side.
    Keywords: finance, housing, mortgage markets
    JEL: G21 R21
    Date: 2021–12–14
  10. By: Li, Xiang
    Abstract: By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows.
    Keywords: average treatment effect,capital control,global financial cycle,monetary policy autonomy,propensity score matching,trilemma
    JEL: E52 F32 F33 F42
    Date: 2021
  11. By: Spyridon Boikos (Department of Economics, University of Macedonia, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece); Georgios Voucharas (Department of Economics, University of Macedonia, Greece)
    Abstract: Is there any specific structure of the financial system which promotes economic growth or does this structure depend on the level of economic growth itself? Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. We account for unobserved heterogeneity and operate within alternative econometric approaches. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. Financial development does matter for growth, however, the size and significance of the effect vary. Financial reforms affect economic growth more than financial development. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.
    Keywords: Financial Development, Financial Reforms, Economic Growth, Quantile Regression, Panel Data
    JEL: O16 O40 G10 G20 C21 C23
    Date: 2021–12
  12. By: Minjie Deng (Simon Fraser University); Min Fang (University of Lausanne & University of Geneva)
    Abstract: We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.
    Date: 2021–12
  13. By: F. Boissay; F. Collard; Jordi Galí; C. Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: Financial crisis, monetary policy
    Date: 2021–12
  14. By: Immaculate Machasio (World Bank); Peter Tillmann (University of Giessen)
    Abstract: Remittance inflows are driven by macroeconomic conditions in the home and the host economies, respectively. In this paper, we study the effect of U.S. monetary policy on remittance flows into economies in Latin American and the Caribbean. The role of Fed policy for remittances has not yet been studied. We estimate a series of panel local projections for remittance inflows into eight countries. A surprise change in U.S. monetary conditions has a strong and highly significant negative effect on inflows. Our finding remains robust if we change the sample period or include additional variables. Hence, our paper establishes a remittance-channel through which the Fed affects the business cycle abroad.
    Keywords: remittances, migration, business cycle, monetary policy, spillovers
    JEL: F24 F41 E52 O11
    Date: 2021
  15. By: Gabriel Rodríguez (Departamnento de Economía, Pontificia Universidad Católica del Perú.); Paul Castillo (Banco Central de Reserva, Pontificia Universidad Católica del Perú.); Harumi Hasegawa (Pontificia Universidad Católica de Chile); Hernán B. Garrafa-Aragón (Escuela de Ingeniería Estadística de la Universidad Nacional de Ingeniería)
    Abstract: This paper assess the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier et al. (2017). The main empirical results show, for the pre Inflation Targeting (IT) and IT periods, that the model that clearly outperforms in terms of marginal log density, features a Taylor rule that does not respond to changes in the nominal exchange rate and an active use of FX intervention by the Central Bank. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1; and that FX intervention has become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs shows that FX intervention has contributed to reduce the volatility of GDP in response to productivity and terms of trade shocks in Peru. JEL Classification-JE: C22, C52, F41.
    Keywords: Small Open Economy; Taylor Rule; Monetary Policy Rule; Exchange Rate; Bayesian Methodology; Peruvian Economy; FX interventions; New Keynesian DSGE Model.
    Date: 2021
  16. By: Skylar Brooks
    Abstract: As currently articulated, the monetary sovereignty argument for central bank digital currencies (CBDCs) rests on the idea that without them, private and foreign digital monies could displace domestic currencies (a process called currency substitution), threatening the central bank’s monetary policy and lender-of-last-resort (LLR) capabilities. This rationale provides a crucial but incomplete picture of what is at stake in terms of monetary sovereignty. This paper seeks to expand and enhance this picture in three ways. The first is by looking at the consequences of currency substitution that go beyond the functions of a central bank—important considerations that have received less attention in public CBDC discussions. The second is by exploring key differences in monetary policy and LLR capabilities across currency-issuing countries or regions. More specifically, the paper highlights the variation in the degree of monetary sovereignty and the consequences that different countries face should they lose it. The third way is by assessing not only the implications but also the risks of currency substitution and showing how these are also likely to vary across countries. Contrasting the consequences and risks of substitution, the paper concludes by noting a potential inverse relationship between the impact and probability of losing monetary sovereignty.
    Keywords: Debt management; Digital currencies and fintech; Exchange rate regimes; Financial stability; Monetary policy
    JEL: E41 E42 E52 E58 H12 H63
    Date: 2021–12
  17. By: Shunichi Yoneyama (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper measures the transparency of the Federal Reserve Board (FRB) regarding its target inflation rate before its adoption of inflation targeting using data on the disagreement in inflation expectations among U.S. consumers. We construct a model of inflation forecasters employing the frameworks of both an unobserved components model and a noisy information model. We estimate the model and extract the transparency of the FRB regarding the target as the standard deviation of the heterogeneous noise in the inflation trend signal, where the trend proxies the FRB's inflation target. The results show a great improvement in transparency after the mid-1990s as well as its significant contribution to the decline in the disagreement in long- horizon inflation expectations.
    Keywords: Central bank transparency, forecast disagreement, inflation dynamics, imperfect information
    JEL: E50 E37 D83
    Date: 2021–12
  18. By: Jan Lutynski (Group for Research in Applied Economics (GRAPE))
    Abstract: I study two types of unconventional monetary policy: quantitative easing (QE) and money-financed fiscal stimulus (MFFS), in a modified New Keynesian framework. I compare their effectiveness in stabilizing output and inflation when monetary policy is constrained by the effective lower bound. Money-financed fiscal stimulus performs better than quantitative easing, except the case of the TFP shock. It tends to cause lower inflation and output volatility. Nevertheless, it might be substantially more problematic in implementation as it demands cooperation between the central bank and the fiscal authority. Real reserve targeting (RRT) delivers similar outcomes as quantitative easing but is easier to implement.
    Keywords: unconventional monetary policy, quantitative easing, money-financed fiscal stimulus,
    JEL: E21 E30 E50 E58 E61
    Date: 2021

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