nep-ban New Economics Papers
on Banking
Issue of 2022‒03‒21
fifteen papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Who Can Tell Which Banks Will Fail? By Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
  2. Public guarantees and credit additionality during the Covid-19 pandemic By Giuseppe Cascarino; Raffaele Gallo; Francesco Palazzo; Enrico Sette
  3. Fluctuating bail-in expectations and effects on market discipline, risk-taking and cost of capital By Giuliana, Raffaele
  4. Determinants of bank income smoothing using loan loss provisions in the United Kingdom By Ozili, Peterson K
  5. Racial Disparities in the Paycheck Protection Program By Sergey Chernenko; David S. Scharfstein
  6. The Distribution of Crisis Credit: Effects on Firm Indebtedness and Aggregate Risk By Federico Huneeus; Joseph P. Kaboski; Mauricio Larrain; Sergio L. Schmukler; Mario Vera
  7. The Dollar Debt of Companies in Latin America: the warning signs By Giraldo, Iader; Turner, Philip
  8. Monetary Architecture and the Green Transition By Murau, Steffen; Haas, Armin; Guter-Sandu, Andrei
  9. Managers versus Machines: Do Algorithms Replicate Human Intuition in Credit Ratings? By Matthew Harding; Gabriel F. R. Vasconcelos
  10. ¿Cual es el efecto de shocks de demanda interna sobre la inflacion en una economia pequena y abierta? Chile 2000-2021 By Ramon E. Lopez; Kevin Sepulveda
  11. Post-COVID fiscal rules: a central bank perspective By Hauptmeier, Sebastian; Leiner-Killinger, Nadine; Muggenthaler, Philip; Haroutunian, Stephan
  12. Ideology and monetary policy: the role of political parties’ stances in the ECB’s parliamentary hearings By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
  13. Application of Quantum Computers in Foreign Exchange Reserves Management By Martin Vesely
  14. The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States By Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
  15. Physical risks from climate change faced by Japan's financial institutions: Impact of floods on real economy, land prices, and FIs' financial conditions By Takuro Ashizawa; Kakuho Furukawa; Ryuichiro Hashimoto; Yoshiyasu Koide; Tomomi Naka; Kenji Nishizaki; Nao Sudo; Genichiro Suzuki

  1. By: Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
    Abstract: We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20% during the run and that there is an equal outflow of retail and non-financial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, we argue that it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.
    JEL: G20 G21
    Date: 2022–02
  2. By: Giuseppe Cascarino (Banca d'Italia); Raffaele Gallo (Banca d'Italia); Francesco Palazzo (Banca d'Italia); Enrico Sette (Banca d'Italia)
    Abstract: We study the public loan guarantee programs implemented in Italy in the aftermath of the Covid-19 pandemic. Guided by a theoretical model and relying on a unique loan-level dataset covering the period between December 2019 and March 2021, we quantify to what extent public guarantees created additional credit across programs with different coverage ratios and over time. We also document that bank capitalization affected additionality for loans with lower coverage, in which banks have more skin in the game. In contrast, the additionality of the public guarantees varied very little across firms with different levels of risk, liquidity, and size.
    Keywords: public loan guarantees, credit additionality, bank capital, pandemic.
    JEL: G21 G24
    Date: 2022–03
  3. By: Giuliana, Raffaele
    Abstract: Through the compulsory participation of junior investors in bearing losses of their failing bank, the bail-in attempts to limit bail-outs’ side-effects in terms of market discipline, too-big-to-fail, bank-sovereign nexus and risk-taking. This paper assesses the consequences of bail-in expectations along these dimensions ensuring – through a bond pricing study – that bail-in expectations are not confounded by other factors. Using hand-collected details of EU bail-in events, I study both positive and negative exogenous shocks to bail-in expectations, offering three sets of findings. First, bail-in events can reinforce (or weaken) bail-in expectations, as shown by Khwaja-Mian tests (validated by placebo analyses). Second, bail-in expectations promote market discipline, and mitigate too-big-to-fail and bank-sovereign nexus. Third, bail-in effects on bank resilience appear mixed. While it incentivises banks to reduce risk-taking (e.g., increasing risk-weighted equity by a third of Basel III requirement), it also remarkably exacerbates total funding costs through an increase in equity cost (partially off-set by a debt cost reduction). JEL Classification: G21, G28, H81, C23
    Keywords: Bail-in, Cost of Capital, Expectations, Financial Stability, Fixed-income Claims, Market Discipline, Rating, Risk-taking
    Date: 2022–03
  4. By: Ozili, Peterson K
    Abstract: This paper investigates the determinants of bank income smoothing using loan loss provisions in the United Kingdom from 1999 to 2017. The findings show that UK banks use loan loss provisions for income smoothing purposes. Income smoothing is greater in times of high economic policy uncertainty. The extent of bank income smoothing is reduced by foreign bank presence, UK GAAP adoption, IFRS9 adoption, and high levels of voice and accountability. Also, there is reduced income smoothing using loan loss provisions during a financial crisis and in periods of economic prosperity. The implication is that economic conditions, institutional governance and accounting disclosure rules influence the extent of bank income smoothing in the United Kingdom. The findings of the study contribute to several studies that explore the determinants of bank income smoothing in a single country context.
    Keywords: banks, earnings management, United Kingdom, loan loss provisions, income smoothing, economic policy uncertainty, Great Britain, accounting disclosure, financial crisis.
    JEL: G21 G28 M0 M41 M42 M48 M49
    Date: 2022
  5. By: Sergey Chernenko; David S. Scharfstein
    Abstract: Using a large sample of Florida restaurants, we document significant racial disparities in borrowing through the Paycheck Protection Program (PPP) and investigate the causes of these disparities. Black-owned restaurants are 25% less likely to receive PPP loans. Restaurant location explains 5 percentage points of this differential. Restaurant characteristics explain an additional 10 percentage points of the gap in PPP borrowing. On average, prior borrowing relationships do not explain disparities. The remaining 10% disparity is driven by a 17% disparity in PPP borrowing from banks, which is partially offset by greater borrowing from nonbanks, largely fintechs. Disparities in PPP borrowing cannot be attributed to lower awareness of PPP loans or lower demand for PPP loans by minority-owned restaurants. Black-owned restaurants are significantly less likely to receive bank PPP loans in counties with more racial bias. In these counties, Black-owned restaurants are more likely to substitute to nonbank PPP loans. This substitution, however, is not strong enough to eliminate racial disparities in PPP borrowing. Finally, we show that our findings apply more broadly across industries in a sample of firms that were likely eligible for PPP.
    JEL: G01 G21 G23 G28
    Date: 2022–02
  6. By: Federico Huneeus; Joseph P. Kaboski; Mauricio Larrain; Sergio L. Schmukler; Mario Vera
    Abstract: We study the distribution of credit during crisis times and its impact on firm indebtedness and macroeconomic risk. Whereas policies can help firms in need of financing, they can lead to adverse selection from riskier firms and higher default risk. We analyze a large-scale program of public credit guarantees in Chile during the COVID-19 pandemic using unique transaction-level data of demand and supply of credit, matched with administrative tax data, for the universe of banks and firms. Credit demand channels loans toward riskier firms, distributing 4.6% of GDP and increasing firm leverage. Despite increased lending to riskier firms at the micro level, macroeconomic risks remain small. Several factors mitigate aggregate risk: the small weight of riskier firms, the exclusion of the riskiest firms, bank screening, contained expected defaults, and the government absorption of tail risk. We quantitatively confirm our empirical findings with a model of heterogeneous firms and endogenous default.
    JEL: E44 E5 G01
    Date: 2022–02
  7. By: Giraldo, Iader; Turner, Philip
    Abstract: A decade of low interest rates in the major currencies and failings in the regulatory oversight of international bond markets have led investors to take more and more risk in their search for higher yields. Non-financial corporations (NFC's) in Latin America have taken full advantage, and their dollar indebtedness is now heavier than for corporations in most other emerging market regions. This paper documents the many warning signs of macroeconomic and financial instability in the region from such indebtedness. Macroeconomic data show that the NFC sector has become much more leveraged and faces increased currency mismatches. Microeconomic data drawn from a sample of more than 160 companies confirm that several balance sheet indicators have deteriorated for firms in both the tradable and the non-tradable sectors. As dollar debts were rising, profits were declining, capital expenditures falling and solvency risk rising. This situation warrants careful and continuous monitoring by the authorities in the region. Macroprudential policies in Latin America need to address with urgency the vulnerabilities created by international market-based finance and ensure that local banks remain resilient to external financial shocks. Interest rates will rise and, given the recent warnings of the Bank for International Settlements (BIS) and the Financial Stability Board (FSB), some regulatory tightening affecting bond markets is likely.
    Keywords: Non-financial corporate debt, Latin America, currency mismatches, global liquidity, corporate balance sheets, FSB, IMF, BIS
    JEL: D25 E44 F30 F34 F65 G15 G18 G28
    Date: 2022–03
  8. By: Murau, Steffen; Haas, Armin; Guter-Sandu, Andrei
    Abstract: How to finance the Green Transition towards net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for a Pigou tax to help markets correct themselves, or via war finance analogies that offer a ‘triad’ of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualisation of endogenous credit money creation, for instance when resorting to loanable funds theory, and disregard the systemic and procedural dimensions of financing the Green Transition. We propose that ‘monetary architecture’, which perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets, offers a more comprehensive framework to conceptualize the systemic and procedural financing challenges. Using the US as an example, we draw implications of a systemic financing view while considering a division of labor between ‘firefighting’ institutions such as the Federal Reserve and the Treasury, and ‘workhorse’ institutions such as off-balance-sheet fiscal agencies, commercial banks, and shadow banks. We argue further that financing the Green Transition must undergo three ideal-typical phases—initial balance sheet expansion, long-term funding, and possibly final contraction—that require diligent macro-financial management to avoid financial instability.
    Date: 2022–02–16
  9. By: Matthew Harding; Gabriel F. R. Vasconcelos
    Abstract: We use machine learning techniques to investigate whether it is possible to replicate the behavior of bank managers who assess the risk of commercial loans made by a large commercial US bank. Even though a typical bank already relies on an algorithmic scorecard process to evaluate risk, bank managers are given significant latitude in adjusting the risk score in order to account for other holistic factors based on their intuition and experience. We show that it is possible to find machine learning algorithms that can replicate the behavior of the bank managers. The input to the algorithms consists of a combination of standard financials and soft information available to bank managers as part of the typical loan review process. We also document the presence of significant heterogeneity in the adjustment process that can be traced to differences across managers and industries. Our results highlight the effectiveness of machine learning based analytic approaches to banking and the potential challenges to high-skill jobs in the financial sector.
    Date: 2022–02
  10. By: Ramon E. Lopez; Kevin Sepulveda
    Abstract: Este estudio intenta descomponer los diversos factores que determinan la inflacion en Chile durante el periodo 2000-2021. Encontramos que los principales determinantes de la inflacion interna son de origen externo y el tipo de cambio. La demanda interna ha jugado un rol mas bien limitado como factor inflacionario. En general en periodos normales los aumentos de demanda interna explican no mas de un 20% de la inflacion observada. La inflacion promedio mensual observada durante el periodo 2000-2021 alcanzo un 0,3%. De eso estimamos que los aumentos de demanda en periodos normales explican una inflacion de 0.06% mensual. Sorprendentemente, los extraordinarios periodos de rapida aceleracion de la demanda como efecto de politicas fiscales altamente expansivas y/o retiros de AFP tuvieron un efecto mas bien modesto en la aceleracion de la inflacion. Solamente en los ultimos 5 meses de 2021 podemos detectar un efecto de expansion de la demanda cuando explica casi un 33% de la aceleracion inflacionaria que ocurre en esos meses. Este estudio corrobora un hecho esperable para una economia pequena y abierta como la chilena; la mayor parte de la inflacion domestica esta determinada por la inflacion externa.
    Date: 2022–03
  11. By: Hauptmeier, Sebastian; Leiner-Killinger, Nadine; Muggenthaler, Philip; Haroutunian, Stephan
    Abstract: Regarding a prospective reform of the European Stability and Growth Pact (SGP) it seems rather consensual that a simplified framework should take account of the prevailing macroeconomic context and enhance the balancing of sustainability and stabilisation considerations. This paper provides simulation analysis for the euro area and individual countries with a view to assessing the short- and longer-term budgetary and macroeconomic implications of a move to a two-tier system with an expenditure growth rule as single operational indicator linked to a debt anchor. Compared to the status quo, our analysis suggests that expenditure growth targets which take account of the ECB’s symmetric 2% inflation target can improve the cyclical properties of the framework. Fiscal policy would be tighter when inflation is above the target but looser when inflation is below target, resulting in a better synchronisation of fiscal and monetary policies. Providing additional fiscal accommodation in a low inflation environment would enable monetary policy to operate more effectively especially in the vicinity of the effective lower bound. The link to a longer-term debt anchor at the same time ensures a transition towards the Treaty’s debt reference level. JEL Classification: E63, H50, H60
    Keywords: debt sustainability, European fiscal rules, monetary and fiscal policy interactions
    Date: 2022–03
  12. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
    Abstract: We investigate whether ideology drives the sentiments of parliamentarians when they speak to the central bank they hold accountable. To this end, we collect textual data on the quarterly hearings of the ECB President before the European Parliament from 1999 to 2019. We apply sentiment analysis to more than 1,900 speeches of individual Members of the European Parliament (MEPs) from 128 parties. We find robust evidence that MEPs’ sentiments toward the ECB are correlated with the ideological stance predominantly on a pro-/anti-European dimension rather than on a left-right dimension. JEL Classification: E02, E52, E58
    Keywords: Central Bank Accountability, Central Bank Independence, Party Ideology, Sentiment Analysis
    Date: 2022–03
  13. By: Martin Vesely
    Abstract: The main purpose of this article is to evaluate possible applications of quantum computers in foreign exchange reserves management. The capabilities of quantum computers are demonstrated by means of risk measurement using the quantum Monte Carlo method and portfolio optimization using a linear equations system solver (the Harrow-Hassidim-Lloyd algorithm) and quadratic unconstrained binary optimization (the quantum approximate optimization algorithm). All demonstrations are carried out on the cloud-based IBM QuantumTM platform. Despite the fact that real-world applications are impossible under the current state of development of quantum computers, it is proven that in principle it will be possible to apply such computers in FX reserves management in the future. In addition, the article serves as an introduction to quantum computing for the staff of central banks and financial market supervisory authorities.
    Keywords: Foreign exchange reserves, HHL algorithm, portfolio optimization, QAOA algorithm, quantum computing, risk measurement
    JEL: C61 C63 G11
    Date: 2022–03
  14. By: Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
    Abstract: The US net foreign asset position has deteriorated sharply in the years following the Global Financial Crisis and is currently negative 65 percent of US GDP. This deterioration primarily reflects changes in the relative values of large gross international equity positions, as opposed to net new borrowing. In particular, a sharp increase in equity prices that has been US specific has inflated the value of US foreign liabilities. We develop an international macro finance model to interpret these trends, and argue that the rise in equity prices in the United States likely reflects rising profitability of domestic firms rather than a substantial accumulation of unmeasured capital by those firms. Under that interpretation, the revaluation effects that have driven down the US net foreign asset position are associated with large unanticipated transfers of US output to foreign investors.
    JEL: F30 F40
    Date: 2022–02
  15. By: Takuro Ashizawa (Bank of Japan); Kakuho Furukawa (Bank of Japan); Ryuichiro Hashimoto (Bank of Japan); Yoshiyasu Koide (Bank of Japan); Tomomi Naka (Bank of Japan); Kenji Nishizaki (Bank of Japan); Nao Sudo (Bank of Japan); Genichiro Suzuki (Bank of Japan)
    Abstract: This article overviews implications of physical risks from climate change to Japan's financial institutions (FIs), focusing on the impacts of floods on the real economy, land prices and FIs' financial conditions. Floods cause massive direct damage to human lives and material resources. The empirical analyses using Japan's data suggest that the indirect effect of such damage on the real economy, land prices, and FIs' financial conditions has not been sizable over the analysis period, as the effect diminishes over time with the progress of reconstruction. The long-term simulation using a medium-scale macroeconomic model that takes into consideration possible climate changes and increases in flood damage in the future, however, suggests that the indirect effect can have a non-negligible impact on real GDP and FIs' net worth going forward. The outlook for the physical risks is extremely uncertain, varying depending on multiple factors including the pace of transition to a de-carbonized economy and interactions between the global average temperature and the frequency and scale of disasters, as well as productivity of the economy.
    Keywords: Climate change; Natural disaster; Physical risk; Financial stability
    JEL: E37 G21 Q54 R30
    Date: 2022–03–14

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