nep-ban New Economics Papers
on Banking
Issue of 2022‒01‒17
34 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Debating Central Bank Mandates By Adam Tooze
  2. Identifying empty creditors with a shock and micro-data By Degryse, Hans; Gündüz, Yalin; O'Flynn, Kuchulain; Ongena, Steven
  3. The Sale of Failed Banks: The Characteristics of Acquirersas Well as of the Acquired -Matter By Pejman Abedifar; Amine Tarazi; Lawrence White
  4. Central bank digital currency can lead to the collapse of cryptocurrency By Ozili, Peterson K
  5. A model of financial bubbles and drawdowns with non-local behavioral self-referencing By Yannick Malevergne; Didier Sornette; Ran Wei
  6. The Determinants of Consumer Cash Usage in Turkey By Saygin Cevik; Dilan Teber
  7. Savings, efficiency and the nature of bank runs By Leonello, Agnese; Mendicino, Caterina; Panetti, Ettore; Porcellacchia, Davide
  8. Why are interest rates on bank deposits so low? By Busch, Ramona; Memmel, Christoph
  9. A Journey in the History of Sovereign Defaults on Domestic Law Public Debt, Sovereign Histories By Aitor Erce; Enrico Mallucci; Mattia Picarelli
  10. Bank risk-taking and impaired monetarypolicy transmission By Koenig, Philipp J.; Schliephake, Eva
  11. Managing Climate Change Risk: The Policy Options for Central Banks By Ozili, Peterson K
  12. News-Driven International Credit Cycles By Galip Kemal Ozhan
  13. Monetary policy and Bitcoin By Karau, Sören
  15. Regulating Credit Booms from Micro and Macro Perspectives By Ogawa, Toshiaki
  16. Stuck at home: Housing demand during the COVID- 19 pandemic By William Gamber; James Graham; Anirudh Yadav
  17. Steve Keen's The New Economics: A Manifesto By Bichler, Shimshon; Nitzan, Jonathan
  18. Central bank digital currency research around the World: a review of literature By Ozili, Peterson K
  19. Impact of Covid Pandemic on Foreign Exchange Reserves By Nikolova, Irena
  20. Monetary Policy and Endogenous Financial Crises By Collard, Fabrice; Boissay, Frédéric; Galì, Jordi; Manea, Cristina
  21. Eect of operating multiple aliates on the performance of subsidiaries in the same host country By Oskar Kowalewski
  22. Best Before? Expiring Central Bank Digital Currency and Loss Recovery By Charles M. Kahn; Maarten van Oordt; Yu Zhu
  23. Quantifying the Economic Benefits of Payments Modernization: the Case of the Large-Value Payment System By Neville Arjani; Fuchun Li; Zhentong Lu
  24. Predicting the Demand for Central Bank Digital Currency: A Structural Analysis with Survey Data By Jiaqi Li
  25. Revisiting monetary policy objectives and strategies: international experience and challenges from the ELB By Martina Cecioni; Adriana Grasso; Alessandro Notarpietro
  26. A Decentralized Central Bank Digital Currency By Rahman, Abdurrahman Arum
  27. Disruptive Technology of the Banking and Finance Market: Pedagogical guide to its labour design. By Tweneboah Senzu, Emmanuel
  28. Agile methods in the German banking sector - some evidence on expectations, experiences and success factors By Brühl, Volker
  29. Revisiting the link between systemic risk and competition based on network theory and interbank exposures By Enrique Bátiz-Zuk; José Luis Lara Sánchez
  30. Using Network-based Causal Inference to Detect the Sources of Contagion in the Currency Market By Katerina Rigana; Ernst-Jan Camiel Wit; Samantha Cook
  31. The Impact of Islamic Portfolio on Risk and Return By Alim, Wajid; Ali, Amjad
  32. Twenty Years of Data on China's Africa Lending By Acker, Kevin; Brautigam, Deborah
  33. The signalling channel of negative interest rates By Oliver de Groot; Alexander Haas
  34. Bubbles for Fama from Sornette By Dongshuai Zhao, CFA; Didier Sornette

  1. By: Adam Tooze (Columbia University)
    Abstract: Central banks are in the crosshairs of public debate about economic policy. Every minute of every day, interest rate decisions are debated and weighed in financial markets. The risks of inflation are assessed. Trillions of dollars hinge on correctly interpreting the next move by key central bankers. Central bank appointments are avidly discussed. Public campaigns are waged for and against particular candidates. This makes guardians of central bank independence nervous. Too much public scrutiny might put that independence at risk. But it should not be surprising that people want to debate the role of central banks. It is not because they are failing. It is because they have such massive effects. Furthermore, what is provocative is not just the scale of their interventions but the things that they are doing. Their role has visibly shifted. It is hard to claim that the status quo is set in tablets of stone, when the actual experience of recent decades is that what central banks do is very much a response to circumstances. Why then should we not go back to basics and ask fundamental questions about their mandate and their role?
    Keywords: Central banks, new mandates, ECB, Fed
    JEL: E5 E58
    Date: 2021–12
  2. By: Degryse, Hans; Gündüz, Yalin; O'Flynn, Kuchulain; Ongena, Steven
    Abstract: Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors" as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for CDS firms drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained and that are liquidity constrained embed the empty creditor effect into their probability of default estimates of affected firms to a larger extent. So do banks that monitor their creditors less and that earn a smaller portion of their income from interest activities.
    Keywords: Empty creditors,default,bankruptcy,credit default swaps,micro-data
    JEL: G21 G33 G38
    Date: 2021
  3. By: Pejman Abedifar (Tehran Institute for Advanced Studies, Khatam University, Tehran, Iran); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Lawrence White (Stern School of Business, New York University, New York, NY 10012-1126, USA)
    Abstract: This paper studies the pricing of assets and core deposits of insolvent banks that are sold under the purchase and assumption resolution method of the Federal Deposit Insurance Corporation (FDIC). We analyze 620 acquisitions of solvent and insolvent U.S. banks between 2007:Q1 and 2016:Q3 and find that acquirers pay higher prices for insolvent banks with more branches. Our findings hence show that the premium paid by acquirers is not only embedded in failed banks' core deposits but also in the size of their branch networks. Moreover, the core deposits of failed banks are better valued by more capitalized bidders. We also compare the financial strength of acquirers of failed banks with that of acquirers of healthy banks in non-assisted takeovers. The results show that the acquirers in the FDICassisted acquisitions are less efficient and have higher non-performing loans than the acquirers in non-assisted acquisitions.
    Keywords: Bank failures,Resolution,FDIC
    Date: 2021–12–13
  4. By: Ozili, Peterson K
    Abstract: Cryptocurrencies have become popular. Economic agents use cryptocurrency such as bitcoins to make payments and it pose a threat to fiat currency. Central banks have begun to respond to this threat. They realize that they need to join the race to offer a digital currency and dominate the digital currency landscape which can lead to the collapse of most private digital currencies that are not issued by a central bank or a monetary authority. In this paper, I show how the issuance of a central bank digital currency can lead to the collapse of private digital currencies such as bitcoin. I argue that central banks will leverage on their monetary powers, and the trust that citizens have in government-backed money. This may give central banks strong incentives to issue a central bank digital currency. The issuance of a central bank digital currency can erode trust in cryptocurrencies, and lead to lack of trust in cryptocurrency, thereby leading to the collapse of cryptocurrencies although not immediately.
    Keywords: central bank digital currency, cryptocurrency, bitcoin, blockchain, distributed ledger, payment system, central banks, CBDC, digital innovation, cryptoassets, stablecoin, Covid-19, fiat digital currency
    JEL: E42 E52 E58 G21 O31
    Date: 2021
  5. By: Yannick Malevergne (Université Paris I Panthéon-Sorbonne - Laboratoire PRISM; Labex ReFi); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology); Ran Wei (ETH Zurich)
    Abstract: We propose a novel class of models in which the crash hazard rate is determined by a function of a non-local estimation of mispricing. Rooted in behavioral finance, the non-local estimation embodies in particular the characteristic of "anchoring" on past price levels and the "probability judgment" about the likelihood of a crash as a function of the self-referential mispricing, enabling us to disentangle the risk-return relationship from its instantaneous connection. By describing drawdowns and crashes as market regimes with correlated negative jumps clustering over a finite period of time, our model provides a solution to the problem plaguing most crash jump models, which are in general rejected in calibrations of real financial time series because they assume that crashes occur in a single large negative jump, which is counterfactual. The model estimation is implemented on synthetic time series and real markets, shedding light on the estimation of the "true" expected return, which is usually confounded by the entanglement between volatility and jump risks. Estimated from the daily time series of three stock indexes, the hidden expected return exhibits a secular increase over time and tends to be larger than the realized return, suggesting that financial markets have been overall underpriced.
    Keywords: financial markets, bubbles, mispricing, faster-than-exponential growth, drawdowns, crashes, behavioral price anchoring, expected return
    JEL: C40 C51 G01 G17
    Date: 2021–12
  6. By: Saygin Cevik; Dilan Teber
    Abstract: This paper investigates the determinants of consumer cash usage in daily transactions in Turkey using a probit model. In doing so, we use the results of the Methods of Payment Survey conducted by the Central Bank of the Republic of Turkey in 2020. The survey results indicate that cash is still the most common form of payment in Turkey, despite recent technological innovations in payment systems. The results show that the likelihood of cash usage increases for the amounts that match currency denominations and convenient prices, while it decreases for the amounts for which the consumer receives a coin change. Also, the likelihood of cash usage decreases with education and income level and increases with age and being a paid employee. As for the transaction characteristics, we find that the likelihood of cash usage decreases with an increase in transaction size and that cash is more frequently used for low-value transactions. It is also worth noting that having greater cash balances at the beginning of the day increases the probability of using cash for all transaction amounts.
    Keywords: Cash; Payment behavior; Convenient prices; Probit model
    JEL: C25 E42 E58
    Date: 2021
  7. By: Leonello, Agnese; Mendicino, Caterina; Panetti, Ettore; Porcellacchia, Davide
    Abstract: Does the level of deposits matter for bank fragility and efficiency? In a banking model with endogenous bank runs and a consumption-saving decision, we show that the level of deposits has opposite effects on bank fragility depending on the nature of bank runs. In an economy with panic-driven runs, higher deposits make banks less fragile, while the opposite is true when runs are only driven by fundamentals. The effect of deposits is not internalized by depositors. A saving externality arises, leading to excessive fragility and insufficient liquidity provision. The economy features under-saving when runs are panic driven, and over-saving when fundamental driven. JEL Classification: G01, G21, G28
    Keywords: endogenous bank runs, fundamental runs, liquidity provision, panic runs, saving externality
    Date: 2022–01
  8. By: Busch, Ramona; Memmel, Christoph
    Abstract: Using granular data of German banks for the 2003 to 2018 period, we analyse the determinants of bank rates on retail deposits. We find that a bank's rate on sight deposits is especially low if the bank operates in rural districts, if it is not exposed to strong competition and if it provides much service. Regarding the rates on term deposits, we find that the bank's cost situation plays a role: if the bank's costs are high, its deposit rates are low. By transferring concepts from portfolio theory to the pass-through topic, we show that replicating portfolio approaches, which are used mainly by smallbanks, are often equivalent to regression approaches and that,under some assumptions, the classical regression approach corresponds to a replicating portfolio approach.
    Keywords: Pass through,bank deposits,replicating portfolio approach
    JEL: G21
    Date: 2021
  9. By: Aitor Erce (Universidad Pública de Navarra & LUISS School of European Policy); Enrico Mallucci (Board of Governors of the Federal Reserve System); Mattia Picarelli (European Stability Mechanism)
    Abstract: Did This document contains our collection of sovereign histories for the 74 domestic-law default episodes that we include in our database. Sovereign histories are meant to complement our database and the associated paper, providing the full details of domestic-law defaults and restructurings. As we detail in the paper, domestic-law default were identified consulting a large number of sournces including country reports and program reviews from the IMF, documents from the World Bank and the OECD, Public Information Notes, policy reports from development banks and other international institutions, accounts from Ministries and Central Banks, rating agencies publications, debt exchange offers, academic books,research papers, an extensive google search, and a press review through Factiva. The vastity and the diversity of the sources we consulted makes us confident that our coverage is close to the universe of domestic-law defaults from 1980 to 2018.
    Date: 2021
  10. By: Koenig, Philipp J.; Schliephake, Eva
    Abstract: We consider a standard banking model with agency frictions to simultaneously studythe weakening and reversal of monetary transmission and banks' risk-taking in alow-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks' net worth. The pass-throughto deposit rates, the level of excess reserves and the extent of the agency problembetween banks and depositors are crucial determinants of monetary transmission.If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policyrates below the reversal rate further interest rate reductions lead to a disproportionalincrease in risk-taking and a contraction in loan supply.
    Keywords: Monetary policy,Bank lending,Risk-taking channel,Reversal rate
    JEL: G21 E44 E52
    Date: 2021
  11. By: Ozili, Peterson K
    Abstract: This article discusses some policy options that central banks may find useful in dealing with climate change risk in the financial sector. The effect of climate change on the financial sector are indirect but severe when they occur. Central banks play an important role in regulating the financial sector and in managing its inherent risks, yet there are no studies that suggest policy solutions to help central banks and other financial sector regulators deal with the risk that climate change pose to the financial sector. Five policy options are proposed in the paper, which includes: imposing a climate change capital surcharge; impose a fixed-rate risk capital - based on Tier 2 capital; a reduction in lending to industries whose activities destroy the environment and climate; creating a climate bank; and, requiring financial institutions to relocate their important assets to areas less prone to climate change events. Several policy experiments are needed to identify the best policy option that works best for each country while taking into account the unique financial sector, financial system and climate change history of each country
    Keywords: climate change, financial risk, financial institutions, central bank, financial system, financial sector, banks, capital surcharge, climate change risk, climate bank, bank regulation
    JEL: G21 G28 Q01 Q54
    Date: 2021
  12. By: Galip Kemal Ozhan
    Abstract: How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a financial sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital that turns out to be incorrect at a later date, the model captures the patterns of financial flows and current account dynamics in Spain between 2000-2010, including the changes in the sectoral allocation of bank credit and movements in cross-country borrowing during the boom and the bust. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E44 F32 F41 G15 G21
    Date: 2021–12
  13. By: Karau, Sören
    Abstract: Bitcoin was conceptualized in response to perceived shortcomings in the monetary and financialsystem, not only related to large financial institutions but also to discretionary decision makingin monetary policy. Using high-frequency data and a weekly proxy VAR model, I study theimpact of monetary policy on Bitcoin. The paper shows that monetary shocks have sizableeffects on Bitcoin prices, but that these differ in sign: a disinflationary monetary tightening bythe ECB lowers valuations - consistent with the notion of Bitcoin as a digital gold -, whereasa Fed tightening increases Bitcoin prices. I document similar differences with respect to cen-tral bank information shocks and explore potential explanations by studying various aspects ofthe Bitcoin ecosystem. Exploiting both differences in Bitcoin valuations across currencies andblockchain transaction data, the paper shows that the increased demand for Bitcoin following aUS monetary tightening is primarily driven by emerging markets. I argue that this likely reflectsthe technological and institutional particularities of Bitcoin that make it sought after as globaldigital cashwhen international economic and financial conditions deteriorate.
    Keywords: Bitcoin,Blockchain,Monetary policy,Proxy VAR
    JEL: E42 G32 L14 O16
    Date: 2021
  14. By: Christian Aubin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper reconsiders the Fisherian equation of exchange by explicitly distinguishing two types of transactions associated with industrial circulation, on the one hand, and financial circulation, on the other. In this context, a formal link can be established between the financialization of the economy and the downward trend in the income velocity of money during the last decades.
    Abstract: Ce papier reconsidère l'équation fisherienne des échanges en distinguant explicitement deux types de transactions associées, d'une part, à une circulation industrielle et, d'autre part, à une circulation financière. Dans ce cadre, un lien peut être établi entre la financiarisation de l'économie et la baisse tendancielle de la vitesse-revenu de circulation de la monnaie des dernières décennies.
    Keywords: money,quantity theory of money,equation of exchange,velocity of money,financialization,monetary policy
    Date: 2021–12–19
  15. By: Ogawa, Toshiaki
    Abstract: This study examines how micro- and macro-prudential policies work and interact with each other over the credit cycles using a dynamic general equilibrium model of financial intermediaries. Micro-prudential policies restrict the excess risk-taking of individual institutions, while taking real interest rates (prices) as given. By contrast, macro prudential policies control the aggregate credit supplied (equilibrium outcome) by internalizing prices or the general equilibrium effect. The proposed model indicates that: (i) micro-prudential policy alone cannot completely remove inefficient credit cycles; (ii) when macro-prudential policy is conducted jointly with the micro-prudential one, policymakers can improve banks' credit quality and remove inefficient credit cycles completely without sacrificing the total credit supply; and (iii) the contributions of micro and macro-prudential policies to the improvement in social welfare are roughly comparable.
    Keywords: Micro-prudential policy; Macro-prudential policy; Moral hazard problem; General equilibrium; Inefficient credit cycles
    JEL: E0 E44 G01 G21 G28
    Date: 2022–01–05
  16. By: William Gamber; James Graham; Anirudh Yadav
    Abstract: The COVID-19 pandemic induced an increase in both the amount of time that households spend at home and the share of expenditures allocated to at-home consumption. These changes coincided with a period of rapidly rising house prices. We interpret these facts as the result of stay-at-home shocks that increase demand for goods consumed at home as well as the homes that those goods are consumed in. We first test the hypothesis empirically using US cross-county panel data and instrumental variables regressions. We find that counties where households spent more time at home experienced faster increases in house prices. We then study various pandemic shocks using a heterogeneous agent model with general equilibrium in housing markets. Stay-at-home shocks explain around half of the increase in model house prices in 2020. Lower mortgage rates explain around one third of the price rise, while unemployment shocks and fiscal stimulus have relatively small effects on house prices. We find that young households and first-time home buyers account for much of the increase in housing demand during the pandemic, but they are largely crowded out of the housing market by the equilibrium rise in house prices.
    Keywords: COVID-19, Pandemic, Stay at Home, Housing, House Prices, Consumption, Mortgage Interest Rates, Unemployment, Fiscal Stimulus
    JEL: E21 E32 E60 E62 E65 R21 R30
    Date: 2021–12
  17. By: Bichler, Shimshon; Nitzan, Jonathan
    Abstract: Neoclassical economics is the official scientific underpinning of capitalism as well as its main ideological defence, and according to Keen, it fails in both tasks. Contrary to received opinion, neoclassicism cannot explain capitalism – either in detail or in the aggregate – and the policies it prescribes do not support but undermine the very system it defends. It must be scrapped, says Keen, and the purpose of his book is to explain why and outline what should come in its stead.
    Keywords: banks,climate,complex systems,credit,debt,finance,macroeconomics,money,neoclassical economics,policy
    JEL: P16 E4 G21 E61 G01 G E13 Q54
    Date: 2021
  18. By: Ozili, Peterson K
    Abstract: This paper reviews the recent advances in central bank digital currency research in a way that would help researchers, policy makers and practitioners to take a closer look at central bank digital currency (CBDC). The review shows a general consensus that a central bank digital currency is a liability of the issuing central bank and it has cash-like attributes. The review also presents the motivation and benefits of issuing a central bank digital currency such as the need to improve the conduct of monetary policy, the need to enhance the efficiency of digital payments and the need to increase financial inclusion. The review also shows that many central banks are researching the potential to issue CBDCs due to its many benefits. However, a number of studies have called for caution against over-optimism about the potential benefits of CBDC due to the limiting nature of CBDC design and its inability to meet multiple competing goals. Suggested areas for future research are identified such as the need to find the optimal CBDC design that meets all competing objectives, the need for empirical evidence on the effect of CBDC on the cost of credit and financial stability, the need to undertake country-specific and regional case studies of CBDC design, and the need to find a balance between limiting the CBDC holdings of users and allowing users to hold as much CBDC as they want. The implication of the findings of this review is that central bankers need to pay more attention to the design features of CBDC. Central bankers need to first identify the goals they want to achieve with CBDC, and design the CBDC to have those features. Where possible, there should be opportunities to re-design and re-invent the CBDC to meet changing central bank objectives.
    Keywords: Keywords: Digital currency, Money, Central bank digital currency, CBDC, Digital finance, Cryptocurrency, Financial inclusion, CBDC design, Blockchain, Distributed ledger technology.
    JEL: E42 E51 E52 E58 E59 G21 G28
    Date: 2022–01
  19. By: Nikolova, Irena
    Abstract: The foreign exchange reserves are part of the central bank tools for maintaining the stability of the national legal tender. Several issues are of great importance when analysing the foreign exchange reserves. Firstly, the structure and size of the reserves is determined by the monetary policy of the central bank. Secondly, the monetary policy is different in regards with the applied exchange rate arrangement in the country as the central bank plays a significant role in maintaining the selected exchange rate. These issues are considered when reviewing the impact of the pandemic on the foreign exchange reserves. The aim of the paper is to review the role of the foreign exchange reserves in pandemic and to analyse the opportunities for their future implementation. The statistical methods are applied to assess the present situation compared to the pre-pandemic period, and the data is from the Bank for International Settlements and the International Monetary Fund databases. The conclusion is that the foreign exchange reserves are necessary for the central banks and governments, especially in times of crises and in pandemic. They are applied as a “buffer” for maintaining the stability of the domestic currency and the whole national financial system. Moreover, in recent years the role of the foreign exchange reserves is reviewed as an additional tool of the governments and central banks for introducing new digital currencies on the market.
    Keywords: foreign exchange reserves, covid pandemic, currencies, central bank, exchange rate arrangements
    JEL: F3 F30 F31
    Date: 2021
  20. By: Collard, Fabrice; Boissay, Frédéric; Galì, Jordi; Manea, Cristina
    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: 2021–12–20
  21. By: Oskar Kowalewski (Institute of Economics, Polish Academy of Sciences, Poland IESEG School of Management, UMR 9221 - LEM - Lille Economie Management, France ´ Univ. Lille, UMR 9221 - LEM - Lille Economie Management, France ´ CNRS, UMR 9221 - LEM - Lille Economie Management, France)
    Abstract: Lile has been reported on the eect of aliates on their foreign subsidiary performance. In the context of multinational banks (MNBs), we empirically investigate how the establishment of multiple aliate forms aects the performance of their subsidiaries in the same host country. We also examine the factors inuencing and eective entry mode choices. Based on the transaction cost theory, we hypothesize that MNBs can benet foreign subsidiaries using entry modes based on cost minimization and value maximization. For the period 2005–2015, we test this hypothesis on a sample of 897 subsidiaries established by 98 MNBs across 147 countries. e results show that the simultaneous operation of multiple aliate forms positively inuences their foreign subsidiary’s performance. e transaction costs determine MNBs’ entry choices. MNBs can enhance their subsidiary’s performance using entry modes considering institutional and cultural contexts and achieving cost and value targets in the host country. is study has policy implications in that it calls for collaboration between host and home countries to develop eective supervision and resolution regimes for MNBs operating multiple aliate forms in host countries.
    Keywords: : multinational banks, transaction cost theory, entry mode choice, cultural and institutional proximity
    JEL: G01 G21 G28
    Date: 2022–01
  22. By: Charles M. Kahn; Maarten van Oordt; Yu Zhu
    Abstract: An important feature of physical cash payments is resilience, due to their indifference to power outages or network coverage. Many central banks are exploring issuing digital cash substitutes with similar online payment functionality. Such substitutes could incorporate novel features, making them more desirable than physical cash. This paper considers introducing an expiry date for online digital currency balances to automate personal loss recovery. We show that this functionality could substantially increase consumer demand for digital cash, with the time to expiration playing an important role. Having more information available to the central bank improves accuracy of loss recovery but may decrease welfare.
    Keywords: Digital currencies and fintech
    JEL: E42
    Date: 2021–12
  23. By: Neville Arjani; Fuchun Li; Zhentong Lu
    Abstract: In this paper, we develop a discrete choice framework to quantify the economic benefits of payments modernization in Canada. Focusing on Canada’s large-value transfer system (LVTS), we first estimate participants’ preferences for liquidity cost, payment safety and the network effect by exploiting intraday variations in the relative choice probabilities of the two substitutable sub-systems in the LVTS (i.e., Tranches 1 and 2). Then, with the estimated model, we conduct counterfactual simulations to calculate the changes in participants’ welfare when the LVTS is replaced by a real-time gross settlement system (RTGS), like Lynx (as an important part of the payments modernization initiative). The results show that, first, compared to the old system, Lynx has higher liquidity costs but is more secure, while the former is considered a more important factor by system participants. Second, when over 90% of current LVTS payments migrate to Lynx, there is an overall welfare gain; however, it maybe difficult to achieve such a high migration ratio in the new market equilibrium. Third, accounting for equilibrium adjustment, about a 75% service level improvement is needed to generate overall net economic benefits to participants. Among other things, adopting a liquidity savings mechanism and reducing risks in the new system could help achieve this improvement. Finally, the welfare changes are quite heterogeneous, especially between large and small participants.
    Keywords: Financial institutions; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: C3 E42 G1 G28
    Date: 2021–12
  24. By: Jiaqi Li
    Abstract: This paper predicts households’ demand for central bank digital currency (CBDC) with different design attributes by applying a structural demand model to a unique Canadian survey dataset. CBDC and its close alternatives, cash and demand deposits, are viewed as product bundles of different attributes. I estimate households’ preferences towards these attributes from how they allocate their liquid assets between cash and demand deposits. The estimated preferences are used to predict the demand for CBDC with a set of design attributes and quantify the impacts of CBDC design choices on CBDC demand. Under a baseline design for CBDC, the aggregate CBDC holdings out of households’ liquid assets could range from 4 to 52%, depending on whether households would perceive CBDC to be closer to cash or deposits. I find that important design attributes include budgeting usefulness, anonymity, bundling of bank services, and rate of return.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E58
    Date: 2021–12
  25. By: Martina Cecioni (Bank of Italy); Adriana Grasso (ECB); Alessandro Notarpietro (Bank of Italy; Bank of Italy)
    Abstract: We review the experience of central banks in 12 advanced economies in formulating their price stability objectives during the last 20 years. All central banks under review target a small and positive inflation rate (typically 2%). In most cases, they set a point target, in some a range or a point with bands around it. Range and bands are more common among small open economies. We also conduct a model-based analysis of the macroeconomic performance of different monetary policy strategies when the policy rate is constrained by the effective lower bound (ELB). Under standard inflation targeting, inflation remains, on average, below target (disinflationary bias). ELB incidence and duration are higher the lower the target. A point inflation target performs better than a range, especially if compared to an asymmetric one with the focal point close to the ceiling. Makeup strategies (price level targeting and average inflation targeting) and asymmetric inflation targeting strategies, in which the central bank’s reaction to below-target inflation is stronger compared with the case of above-target inflation, reduce the disinflationary effects of the ELB and have better macroeconomic stabilization properties compared with standard inflation targeting.
    Keywords: central banking, monetary policy rules, effective lower bound
    JEL: E31 E32 E52 E58
    Date: 2021–12
  26. By: Rahman, Abdurrahman Arum
    Abstract: Central bank digital currency (CBDC) is a digitized fiat currency. As the nature of the central bank is centralized, the CBDC is also centralized. This paper proposes a decentralized CBDC that is controlled by many central banks together or countries in the world. It is only for international transactions between member countries. While domestic transactions continue to use the national currency of each country. A decentralized CBDC can explore the advantages of digital technologies more deeply than the centralized ones by making reconciliations between central banks in real-time. Furthermore, this system provides international liquidity for all (member) countries in the world sustainably and free of charge. This system eliminates global imbalances, makes the exchange rate more stable, and so makes the whole international monetary system naturally more stable. In doing so, the system does not require economic integration so that all countries in the world may join without many conditions.
    Keywords: Cryptocurrency, organic system, global currency, international monetary system, global imbalances.
    JEL: E40 E50 O3
    Date: 2022–01–03
  27. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper critically examines the elementary drivers of the technologically driven financial market, with a special focus on the fragile financial market, and evaluates the expected impact of emerging disruptive technology of the fourth industrial revolution. It then proceeds to make a subjective proposition of policy framework and pedagogical guidelines required for its successful management under a sovereign economy. The phenomenon under study resulted in a theoretical proposition of a labour competency and assessment index model to assess labour capacity of any technologically driven industrial market.
    Keywords: Disruptive Technology, Banking and Finance, Labour Capacity, Policy, Pedagogy
    JEL: O17 O25 O31 O32 O33 O35
    Date: 2022–01–06
  28. By: Brühl, Volker
    Abstract: The importance of agile methods has increased in recent years, not only to manage software development processes but also to establish flexible and adaptive organisational structures, which are essential to deal with disruptive changes and build successful digital business strategies. This paper takes an industry-specific perspective by analysing the dissemination, objectives and relative popularity of agile frameworks in the German banking sector. The data provides insights into expectations and experiences associated with agile methods and indicates possible implementation hurdles and success factors. Our research provides the first comprehensive analysis of agile methods in the German banking sector. The comparison with a selected number of fintechs has revealed some differences between banks and fintechs. We found that almost all banks and fintechs apply agile methods in IT-related projects. However, fintechs have relatively more experience with agile methods than banks and use them more intensively. Scrum is the most relevant framework used in practice. Scaled agile frameworks are so far negligible in the German banking sector. Acceleration of projects is apparently the most important objective of deploying agile methods. In addition, agile methods can contribute to cost savings and lead to improved quality and innovation performance, though for banks it is evidently more challenging to reach their respective targets than for fintechs. Overall our findings suggest that German banks are still in a maturing process of becoming more agile and that there is room for an accelerated adoption of agile methods in general and scaled agile frameworks in particular.
    Keywords: Agile Methods,Scrum,Banking,FinTechs
    JEL: G20 G21
    Date: 2021
  29. By: Enrique Bátiz-Zuk; José Luis Lara Sánchez
    Abstract: This paper examines the link between bank competition measures and risk indicators using quarterly interbank exposures data for all banks in Mexico during 2008Q1-2019Q1. The classical literature focuses on disentangling the link between competition and individual bank solvency risk. In this paper, we take one step forward in analyzing the relationship between competition and systemic risk. We use counterfactual bank-level contagion risk indicators as a proxy of systemic risk to assess their relationship with traditional competition measures. Our main finding indicates a negative relationship between the bank-level Lerner index and systemic risk. This means that an increase in competition is associated with an increase in systemic risk. Additionally, we find that the implementation of regulatory reform during the period studied does not affect this relationship.
    JEL: C23 D40 G21 G28 L14 L16 L22
    Date: 2021–12
  30. By: Katerina Rigana; Ernst-Jan Camiel Wit; Samantha Cook
    Abstract: Contagion is an extremely important topic in finance. Contagion is at the core of most major financial crises, in particular the 2008 financial crisis. Although various approaches to quantifying contagion have been proposed, many of them lack a causal interpretation. We will present a new measure for contagion among individual currencies within the Foreign exchange market and show how the paths of contagion work within the Forex using causal inference. This approach will allow us to pinpoint sources of contagion and to find which currencies offer good options for diversification and which are more susceptible to systemic risk, ultimately resulting in feedback on the level of global systemic risk.
    Date: 2021–12
  31. By: Alim, Wajid; Ali, Amjad
    Abstract: The purpose of this study is to investigate the comparative impact of conventional and Islamic bonds over returns. It provides useful insights to investors to diversify investment by lowering the risk to the optimum level. This study examines the impact of the conventional and Islamic portfolios on returns through simple OLS regression, suggesting that Sukuk returns are positive and significant. Simultaneously, conventional bonds show a negative trend, but in the long run, the returns are significant. It indicates that the market is volatile due to macroeconomic factors that can reduce risks through portfolio diversification. Thus, this research suggests that investment can be secured by taking a rational portfolio decision that confirms robustness. Therefore, it is a good opportunity for the investors to get high margins over the investment tenure.
    Keywords: Financial Instruments, Portfolio Diversification, Islamic Finance, Sukuk, Conventional Bonds
    JEL: M0 M4
    Date: 2021
  32. By: Acker, Kevin; Brautigam, Deborah
    Abstract: China's lending to Africa remained significant in 2019, but its nature is changing. Chinese financiers have committed US$ 153 billion to African public sector borrowers between 2000 and 2019. At least 80 percent of these loans financed economic and social infrastructure projects: mainly transport, power, telecoms, and water. In 2019, Chinese financiers committed US$ 7 billion to African borrowers, down 30 percent from US$ 9.9 billion in 2018. We expect this dip to continue through 2020, reflecting the impact of the pandemic and associated economic dislocation. Yet we do not predict a sustained drop in Chinese lending to Africa. Like other lenders, Chinese banks are interested in the profits available in emerging and frontier markets. - Down but not out. China's loan commitments (2000- 2019) in Africa now total US$ 153 billion. New Chinese loan commitments of US$ 7 billion dipped 30% in 2019 compared with 2018. - Avoiding risk. Countries where China reprofiled, restructured, or refinanced existing debt between 2015 and 2019, including Angola, Cameroon, Djibouti, Ethiopia, Mozambique, and Republic of Congo, received far less Chinese finance in subsequent years. In 2019, China's top borrowers were Ghana, South Africa, Egypt, Côte d'Ivoire and Nigeria. - Changing creditors. In 2019, CARI data included over 30 Chinese banks and other lenders. Lending from China Eximbank, China's only source of concessional loans and preferential export credits, peaked in 2013. Commercial loans from China Development Bank and other banks have filled the gap. - Resource-backed finance is evolving. Although accounting for only 8% of total Chinese lending to Africa (aside from Angola), the controversial resource-backed infrastructure financing model is not dead; it lives on in Ghana and Guinea.
    Date: 2021
  33. By: Oliver de Groot; Alexander Haas
    Abstract: Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker’s toolkit. We prove two necessary conditions for the opti mality of negative rates: a time-consistent policy setting and a preference for policy smoothing. These conditions allow negative rates to signal policy easing, even with deposit rates constrained at zero. In an estimated model, the signalling channel dominates the costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.
    Keywords: Monetary policy, Taylor rule, Forward guidance, Liquidity trap
    Date: 2021–12–16
  34. By: Dongshuai Zhao, CFA (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology)
    Abstract: Galvanized by the claims of Greenwood et al. in Bubbles for Fama that “a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward”, and Fama’s quote (June, 2016) that “Statistically, people have not come up with ways of identifying bubbles”, we present significant evidence to the contrary of both statements. Using a methodology called logperiodic power law singularity (LPPLS), which has been developed by the Sornette group over more than two decades, we show that a LPPLS-based “bubble confidence indicator” allows one to diagnose ex-ante the presence of a bubble. Using superposed epoch analysis, we find an excellent timing performance of price regime shifts, and more so, the larger the bubble confidence indicator. Moreover, we identify two classes of regime shifts following an accelerated price growth qualified by LPPLS: (i) bubbles followed by a large drawdown or crash, and (ii) price catch-up followed by a plateau, associated with the convergence to a stable price level. Indiscriminately mixing these two types of accelerated transient price increases may explain in part previous failures to diagnose bubbles and their aftermath. While the existence of the first class of transient accelerated price increases followed by crashes is a long-standing puzzle, the existence of the second class of transient accelerated price increases followed by a plateau poses a challenge to the efficient market hypothesis, thus constituting a new puzzle: the convergence to a stable price level, while accelerating, is slow, with investors and the market taking weeks to months to digest available information and to progressively converge to the final higher valuation consensus.
    Keywords: financial bubbles, superposed epoch analysis, log-periodic power law singularity, confidence indicator, crash, drawdown, precursors, super-exponential
    JEL: C20 C40 C53 G01 G17
    Date: 2021–12

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