nep-ban New Economics Papers
on Banking
Issue of 2022‒02‒07
fourteen papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. What drives the risk of European banks during crises? New evidence and insights By Ion LAPTEACRU
  2. The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union By Mr. Marc C Dobler; Mr. Atilla Arda
  3. Intermediation via Credit Chains By Zhiguo He; Jian Li
  4. The Financial Network Channel of Monetary Policy Transmission: An Agent-Based Model By Michel Alexandre; Gilberto Tadeu Lima, Luca Riccetti, Alberto Russo
  5. Relevance of the collateral constraint form in the analysis of financial crisis interventions By Carmiña O. Vargas; Julian A. Parra-Polania
  6. Collateral, Household Borrowing, and Income Distribution By Luisa Corrado; Aicha Kharazi
  7. New Evidence on Redlining by Federal Housing Programs in the 1930s By Price Fishback; Jonathan D. Rose; Kenneth A. Snowden; Thomas Storrs
  8. Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification By Pablo Ottonello; Wenting Song
  9. The of role economic growth in modulating mobile connectivity dynamics for financial inclusion in developing countries By Simplice A. Asongu; Nicholas M. Odhiambo
  10. The emergence of debt and secular stagnation in an unequal society: a stockflow consistent agent-based approach By Claudius Graebner-Radkowitsch; Anna Hornykewycz; Bernhard Schuetz
  11. Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework By William Barnett; Unal Eryilmaz
  12. Use of Alternative Data in the Bank of Japan's Research Activities By Seisaku Kameda
  13. You can’t always get what you want—An experiment on finance professionals' decisions for others By Matthias Stefan; Martin Holmén; Felix Holzmeister; Michael Kirchler; Erik Wengström
  14. A Modigliani-Miller Theorem for the Public Finances of Globalized Economies: Theory, Policy Implications, and Keynesian Reflections By Biagio Bossone

  1. By: Ion LAPTEACRU
    Abstract: Based on an extensive dataset of 1,156 European banks over the 1995-2015 period, we aim to provide new insights on the determinants of European banks’ risk-taking during crisis events, employing a novel asymmetric Z-score. Our results suggest that more capital, lower ratios of loans to deposits and of liquid assets to total assets and lower share of non-deposit and short-term funding in total funding are associated with lower bank risk and this relationship is stronger during the crises. Moreover, having low costs compared to their revenues reduces the risk of European banks in normal times and has the same impact during the crises. Being involved in non-interest-generating activities makes banks riskier. Finally, being large and having higher net interest margin make banks more stable, but this positive effect is diminished for the size and vanished for the profitability during crisis times. And some differences are observed between Western and Eastern European countries. countries exhibit less regulatory intensity than developed countries. This result suggests that it will require more technical and financial resources for developing countries to comply with measures imposed by developed countries that adopt more stringent technical measures than they do.
    Keywords: European banking; bank risk; financial crisis; Z-score
    JEL: G21
    Date: 2022
  2. By: Mr. Marc C Dobler; Mr. Atilla Arda
    Abstract: This paper argues that in the European Union (EU) deposit insurance funds are too difficult to use in bank resolution and too easy to use outside resolution. The paper proposes reforms in three areas for the effective management of bank failures of small and medium-sized banks in the European Union: making resolution the norm for dealing with failing banks; establishing a common DIS for the European Union; and increasing funding and backstops for deposit insurance while removing constraints on their use for resolution measures. Without these changes, the European Union will continue to be challenged by banks that are too small for resolution and too large for liquidation.
    Keywords: Deposit Insurance, Bank Resolution, Banking Union, Crisis Preparedness, Crisis Management, Euro Area, European Union, Financial Crisis, Financial Stability
    Date: 2022–01–07
  3. By: Zhiguo He; Jian Li
    Abstract: The modern financial system features complicated financial intermediation chains, with each layer performing a certain degree of credit/maturity transformation. We develop a dynamic model in which an entrepreneur borrows from overlapping-generation households via layers of funds, forming a credit chain. Each intermediary fund in the chain faces rollover risks from its lenders, and the optimal debt contracts among layers are time invariant and layer independent. The model delivers new insights regarding the benefits of intermediation via layers: the chain structure insulates interim negative fundamental shocks and protects the underlying cash flows from being discounted heavily during bad times, resulting in a greater borrowing capacity. We show that the equilibrium chain length minimizes the run risk for any given contract and find that restricting credit chain length can improve total welfare once the available funding from households has been endogenized.
    JEL: D85 E44 E51 G21 G23 G33
    Date: 2022–01
  4. By: Michel Alexandre; Gilberto Tadeu Lima, Luca Riccetti, Alberto Russo
    Abstract: The purpose of this paper is to contribute to a further understanding of the impact of monetary policy shocks on a financial network, which we dub the “financial network channel of monetary policy transmission†. To this aim, we develop an agent-based model (ABM) in which banks extend loans to firms. The bank-firm credit network is endogenously time-varying as determined by plausible behavioral assumptions, with both firms and banks being always willing to close a credit deal with the network partner perceived to be less risky. We then assess through simulations how exogenous shocks to the policy interest rate affect some key topological measures of the bank-firm credit network (density, assortativity, size of largest component, and degree distribution). Our simulations show that such topological features of the bank-firm credit network are significantly affected by shocks to the policy interest rate, and this impact varies quantitatively and qualitatively with the sign, magnitude, and duration of the shocks.
    Keywords: Financial network; monetary policy shocks; agent-based modeling.
    JEL: C63 E51 E52 G21
    Date: 2022–01–19
  5. By: Carmiña O. Vargas; Julian A. Parra-Polania
    Abstract: We combine two modifications to the standard (current and total income) collateral constraint that has been commonly used in models that analyze financial crisis interventions. Specifically, we consider an alternative constraint stated in terms of future and disposable income. We find that in this case a state-contingent debt tax (effective during crisis only, as opposed to a macroprudential tax) increases debt capacity and lowers the probability of crisis. This shows one more instance to call the attention of academics and policymakers to the fact that the specific form of the borrowing constraint is crucial in determining the appropriate crisis intervention. **** RESUMEN: Combinamos dos modificaciones a la restricción crediticia estándar (i.e., en términos de los ingresos corrientes y totales) que se ha utilizado comúnmente en los modelos que analizan las intervenciones en crisis financieras. Específicamente, consideramos una restricción alternativa expresada en términos de ingresos futuros y disponibles. Encontramos que, en este caso, un impuesto a la deuda dependiente del estado de la economía (efectivo solo durante las crisis, a diferencia de un impuesto macroprudencial) aumenta la capacidad de endeudamiento y reduce la probabilidad de crisis. Este resultado representa un ejemplo más para llamar la atención de académicos y formuladores de políticas sobre el hecho de que la forma específica de la restricción de endeudamiento es crucial para determinar la intervención de crisis adecuada.
    Keywords: Collateral constraint, financial crises, macroprudential tax, ex-post intervention, restricción crediticia, crisis financieras, impuesto macroprudencial, intervención ex post
    JEL: E44 F34 F41 G01 H21
    Date: 2022–01
  6. By: Luisa Corrado (University of Rome Tor Vergata, Italy); Aicha Kharazi (Free University of Bozen-Bolzano, Italy)
    Abstract: In this article, we integrate a collateral constraint into a model with heterogeneous agents to study the effect of collateral on wealth inequality. We use estimates from US microeconomic data and the simulated time series from our macro model to predict the wealth accumulation response at the top and bottom of the personal income distribution. Debt is modelled as collateral-dependent and its concentration poses a serious concern. Our results indicate that high collateral requirements benefit high-income more than low-income households.
    Keywords: Income distribution, household loans, collateral, inequality.
    JEL: E21 E25 D31 H31
    Date: 2022–01
  7. By: Price Fishback; Jonathan D. Rose; Kenneth A. Snowden; Thomas Storrs
    Abstract: We show that the Federal Housing Administration (FHA), from its inception in the 1930s, did not insure mortgages in low income urban neighborhoods where the vast majority of urban Black Americans lived. The agency evaluated neighborhoods using block-level information collected by New Deal relief programs and the Census in many cities. The FHA's exclusionary pattern predates the advent of the infamous maps later made by the Home Owners' Loan Corporation (HOLC) and shows little change after the drafting of those maps. In contrast, the HOLC itself broadly loaned to such neighborhoods and to Black homeowners. We conclude that the HOLC's redlining maps had little effect on the geographic distribution of either program's mortgage market activity, and that the FHA crafted and implemented its own redlining methodology prior to the HOLC.
    Keywords: Redlining; mortgage history
    JEL: G21 J15 N22 R38
    Date: 2022–01–03
  8. By: Pablo Ottonello; Wenting Song
    Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries' net worth in the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries' net worth in a narrow window around their earnings announcements, based on U.S. tick-by-tick data. Using these shocks, we estimate that news of a 1-percent decline in intermediaries' net worth leads to a 0.2-0.4 percent decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
    JEL: E30 E5 G01 G2
    Date: 2022–01
  9. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This study establishes economic growth needed for supply-side mobile money drivers in developing countries to be positively related to mobile money innovations in the perspectives of mobile money accounts, the mobile phone used to send money, and the mobile phone used to receive money. The empirical evidence is based on Tobit regressions. For the negative net relationships that are computed, minimum economic growth thresholds are established above which the net negative relationships become net positive relationships. The following minimum economic growth rates are required for nexuses between supply-side mobile money drivers and mobile money innovations to be positive: (i) 6.109% (6.193%) of GDP growth for mobile connectivity performance to be positively associated with the mobile phone used to send (receive) money and (ii) 4.590 % (4.259%) of GDP growth for mobile connectivity coverage to be positively associated with the mobile phone used to send (receive) money.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2022–01
  10. By: Claudius Graebner-Radkowitsch (Institute for Socio-Economics, University of Duisburg-Essen, Germany; Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria; ZOE Institute for future-fit Economies, Bonn, Germany; International lnstitute of Management and Economic Education, Europa-Universitaet Flennsburg, Germany); Anna Hornykewycz (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Bernhard Schuetz (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria)
    Abstract: We use an agent-based stock-flow consistent model of a closed economy without technological change that considers different classes of households, status consumption and a Minskyan banking sector to analyze the relationship between rising saving rates, the accumulation and distribution of private financial wealth and the evolution of public debt. Conducting a series of experiments, we find evidence for Keynes’ famous claim that a rise in the propensity to save will not necessarily be matched by a rise in the propensity to invest, culminating in either chronic government deficits or consistently high unemployment rates if the government refuses to accept those deficits. The result emerges endogenously from the interaction of fully decentralized agents. The model indicates that promoting consumer credit can at best provide a very short-lived relief to this problem.
    Keywords: propensity to save; wealth accumulation; public debt; unequal distribution of income and wealth; consumer credit; household bankruptcy; agent-based stock-flow consistent modeling
    Date: 2022–01
  11. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Unal Eryilmaz (Ministry of Treasury and Finance, Ankara, Turkey)
    Abstract: We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality.
    Keywords: Bifurcation; Determinacy; Dynamic systems; New Keynesian; Stability; Open economy; Taylor Principle
    JEL: C14 C22 C52 C61 C62 E32 E37 E61 L16
    Date: 2022–01
  12. By: Seisaku Kameda (Bank of Japan)
    Abstract: The Bank of Japan (BOJ) has recently launched a new page on its website titled, "Alternative Data Analysis." In light of the launch of this page, this paper outlines initiatives taken by the BOJ's research divisions (including but not limited to the Research and Statistics Department) in the field of alternative data analysis. Since the spread of COVID-19, the BOJ has been making active use of high-frequency data - such as mobility trends based on location data - in assessing economic conditions to conduct monetary policy. Moreover, in light of the lessons from the Global Financial Crisis of the late 2000s, the BOJ also has been continuing its efforts to strengthen the collection and use of various individual transaction data in the financial field. Such new forms of big data are called alternative data as opposed to traditional economic and financial statistics. The alternative data employed at the BOJ have been wide-ranging, including high-frequency data, textual data, and granular data; recently, the range of these data has been extending further to cover, for example, climate-related data.
    Date: 2022–01–21
  13. By: Matthias Stefan; Martin Holmén; Felix Holzmeister; Michael Kirchler; Erik Wengström
    Abstract: To study whether clients benefit from delegating financial investment decisions to an agent, we run an investment allocation experiment with 408 finance professionals (agents) and 550 participants from the general population (clients). In several between-subjects treatments, we vary the mode of decision-making (investment on one's own account vs. investments on behalf of clients) and the agents' incentives (aligned vs. fixed). We find that finance professionals show higher decision-making quality than participants from the general population when investing on their own account. However, when deciding on behalf of clients, professionals' decision-making quality does not significantly differ from their clients', neither when compensated with a fixed payment nor when facing aligned incentives. Our results further identify a considerable challenge in risk communication between agents and clients: While finance professionals tend to take into account principals' desired risk levels, the constructed portfolios by professionals show considerable overlaps in portfolio risk across different risk levels requested by principals. We argue that this result is due to differences in risk perception.
    Keywords: Experimental finance, finance professionals, delegated decision-making, risk communication
    JEL: C93 G11 G41
    Date: 2022–02
  14. By: Biagio Bossone
    Abstract: This article is about the economics of the power of global finance to enforce its own interests over national economies. In line with the capital structure irrelevance principle of Modigliani and Miller (1958) as applied to corporate finance, the article shows that the value of the public sector claims (money and debt) of a financially globalized economy is independent of the capital structure of the government’s finances. In particular, the article transposes the Modigliani-Miller approach (enhanced as needed) to public finances and proves a new "neutrality theorem" (and two important related corollaries) whereby, in an economy that is internationally highly financially integrated, the cost of the capital needed by governments to finance their deficits is independent of whether: i) financing originates from debt or money, ii) debt is denominated in domestic or foreign currency, and iii) money and debt are issued under floating or fixed exchange rates. The two corollaries show that governments seeking to monetize their deficits must remunerate money holdings with a return that vary inversely with credibility is lower and directly with the stock of money (eventually defying the original policy objective). The article discusses the options available for countries to approach financial globalization.
    Keywords: capital structure; credibility; debt, equity, and money; global financial investors; credibility; policy space; public sector claims
    Date: 2022–01

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