|
on Banking |
|
Issue of 2022‒04‒04
thirty-two papers chosen by Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana |
| By: | Anne Duquerroy (Banque de France); Adrien Matray (Princeton & CEPR); Farzad Saidi (University of Bonn & CEPR) |
| Abstract: | We quantify how banks’ funding costs affect their lending behavior directly, and in-directly by feeding back to their net worth. For identification, we exploit banks’ het-erogeneous liability structure and the existence of regulated deposits in France whose rates are set by the government. Using administrative credit-registry and regulatory bank data, we find that a one-percentage-point increase in funding costs reduces credit by 17%. To insulate their profits, banks reach for yield and rebalance their lending towards smaller and riskier firms. These changes are not compensated for by less af-fected banks at the aggregate city level, with repercussions for firms’ investment. |
| Keywords: | bank funding costs, monetary-policy transmission, deposits, credit supply, SMEs, savings |
| JEL: | E23 E32 E44 G20 G21 L14 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:150&r= |
| By: | Martin Hodula; Milan Szabo; Lukas Pfeifer; Martin Melecky |
| Abstract: | This paper studies the effects of regulatory recommendations concerning maximum (i) loan-to-value (LTV), (ii) debt-to-income (DTI) and (iii) debt service-to-income ratios (DSTI) on new loans secured by residential property. It uses loan-level regulatory survey data on about 82,000 newly granted residential mortgage loans in the Czech Republic from 2016 to 2019 to estimate the average effects of the Czech National Bank's regulatory recommendations and their heterogeneous effects depending on borrower, loan, bank and regional characteristics. The studied response variables include the mortgage loan size and lending rate and the value of the property with which loans are secured. The machine learning method of causal forests is employed to estimate the effects of interest and to identify any heterogeneity and its likely drivers. We highlight two important facts: (i) value-based (LTV) and income-based (DTI and DSTI) limits have different impacts on the mortgage market and (ii) borrower, loan, bank and regional characteristics play an important role in the transmission of the recommended limits. |
| Keywords: | Borrower-based measures, causal forests, Czech Republic, macroprudential recommendations, residential mortgage loans |
| JEL: | E44 G21 G28 G51 R31 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2022/3&r= |
| By: | Joshua Aizenman; Yothin Jinjarak; Mark M. Spiegel |
| Abstract: | We investigate the implications of extra-normal government spending under the COVID-19 pandemic for commercial bank lending growth between 2019Q4 and 2020Q4 in a large sample of over 3000 banks from 71 countries. We control for pre-pandemic structural factors, bank characteristics and government debt. To address the likely endogeneity of government assistance under the pandemic, we instrument for extra-normal spending using disparities in pre-existing national political characteristics for identification. Our results indicate that while higher government spending was associated with higher commercial bank lending, higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity is higher among weaker banks, suggesting that bank lending responses to government spending under COVID-19 reflected the perceived implications of such spending for government assistance of the banking sector going forward. Our results are robust to a variety of sensitivity analyses, including perturbations in specification, sample, and estimation methodology. |
| Keywords: | fiscal multiplier; COVID-19; bank lending |
| JEL: | E62 F34 G21 H30 |
| Date: | 2022–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:93788&r= |
| By: | Miguel Cantillo (Universidad de Costa Rica); José Cascante (Carlos III University); Guillermo Pastrana (Toulouse School of Economics) |
| Abstract: | This paper analyzes the evolution of the Lerner index for Costa Rican banks between 2008 and 2019. We document a significant drop in market power during this period, which we relate to less concentration in loans and deposits. The market became less consolidated as a fringe of 29 small banks gained market share at the expense of large and medium banks. We find that for individual banks, a greater market share of loans, and greater loan specialization are related to higher profitability, while a greater market share of deposits and greater size are related to lower profit margins. |
| Keywords: | Banking structure, Latin American banking sector, Market power, Imperfect competition, Lerner index, Umbrella pricing. |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:fcr:wpaper:202202&r= |
| By: | Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva |
| Abstract: | A core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the magnitude of regulatory spillovers and the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation. Following an expansionary monetary policy in the core, a countercyclical response in capital requirements induces the global bank to engage in regulatory arbitrage. The magnitude of the resulting cross-border capital flows depends on the degree of economies of scope in lending. Welfare gains associated with countercyclical capital buffers are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity---a regime in which capital ratios set in the core are imposed on branches operating in the periphery. If regulators set policies on the basis of a narrow financial stability mandate, and these policies are evaluated in terms of household welfare, reciprocity may perform better than Nash, and as well as coordination for all parties, when regulatory leakages are strong. |
| Keywords: | global banking, financial spillovers, regulatory leakages, macroprudential policy coordination. |
| JEL: | E58 F42 F62 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1007&r= |
| By: | Jushua Baldoceda (Central Reserve Bank of Peru); Anthony Meza (Central Reserve Bank of Peru) |
| Abstract: | The failure of a financial institution (banks and microfinance institutions) to meet its payment obligations can have implications, not only for its continuity, but also for the stability of payment systems, markets, and the financial system in general. Central banks, as monetary authorities, regulators, and overseers of a country's payment infrastructures must monitor the liquidity risk of participants in those systems in order to prevent in time any event of this nature. To do this, the liquidity needs of the entities must be identified and anticipated to mitigate the possible effects of their inability to pay and the possible consequences on the payment systems. This paper reviews the literature on liquidity risks and their systemic consequences. It also presents different indicators of liquidity and interdependence built with the transactional data of the RTGS System, administered by the Central Reserve Bank of Peru. These indicators are contrasted with the participant's intraday facilities operations in the RTGS (from Jan-2010 to Nov-2021), in order to assess the liquidity problem and its consequences from a systemic point of view. |
| Keywords: | RTGS; liquidity risk; systemic risk; indicators |
| JEL: | E42 E50 E58 |
| Date: | 2022–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp01-2022&r= |
| By: | Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (LUISS University); Peruzzi, Valentina (Sapienza University of Rome) |
| Abstract: | We investigate whether globally active firms are more likely to be credit constrained by banks during a financial crisis. Using data on 15,000 businesses from seven European countries, we find that firms with a stable involvement in global value chains were 25% less likely to be rationed by banks during the 2009 financial crisis. This contrasts with the stronger likelihood of credit rationing of firms engaging in plain vanilla export activities. Matching the firm-level information with bank-level data, we obtain that banks insulated global chain participants from the credit crunch, not only accounting for the beneficial effects of global supply chain participation, but also to minimize negative spillovers on their own activities abroad. |
| Keywords: | Banks; global value chains; firm export; financial crises |
| JEL: | D22 F10 G20 |
| Date: | 2022–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2022_002&r= |
| By: | Tobias Pforr (European University Institute); Fabian Pape (University of Warwick); Steffen Murau (Boston University) |
| Abstract: | In August 2021, the IMF made a new SDR allocation to help ease pandemic-induced financial strains in the Global South. This paper assesses the potential of the SDR system to address debt-related problems in global finance. We analyze the SDR system as a web of interlocking balance sheets whose members can use SDR holdings—the system's tradable assets—for conversion into usable currency as a perpetual low-interest loan or to make payments to each other. Using original IMF data, we study how the system has been practically used since 1990. Though widely perceived as a solution in search of a problem in the post-Bretton Woods era, we find that the SDR system provides three mechanisms through which IMF members borrow and lend usable currency to each other, with different strings attached: first, transactions by agreement; second, the IMF's core lending facilities for which the SDR system offers additional resources; and third, IMF-sponsored Trusts which seek to harness the SDR system for development purposes and are the basis for the current idea of 'voluntary channeling'. Overall, given the SDR system's idiosyncratic accounting rules, the new allocation can improve the liquidity position of a country and offer some limited avenues for sovereign debt restructuring but comes with new interest and exchange rate risks. Voluntary channeling cannot happen without a wealth transfer, neither the SDR allocation nor the use of Trusts can overcome this problem. Still, Trusts can be a useful instrument to help with debt forgiveness and to ensure that borrowed funds are used for their intended purpose. |
| Keywords: | International Monetary Fund, balance sheets, critical macro-finance, Money View, central banks, development finance, Global South. |
| JEL: | E42 E58 F02 F33 F34 F53 F55 N10 N20 |
| Date: | 2022–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp180&r= |
| By: | Lawrence Christiano; Husnu Dalgic; Xiaoming Li |
| Abstract: | Our primary finding is that surprisingly small changes in assumptions which determine the amount of net worth available in a bank panic have an important impact on the nature of the equilibria: there may not be a bank panic at all, or there may be several di erent panics of di erent severity. The economic reasons for this sensitivity are clarified by transforming the market economy into a game and studying banker best response functions. To establish robustness to model details, we report similar quantitative results across three di erent model specifications and calibrations. A second, additional result, is displayed in a three-period version of the panic model of Gertler and Kiyotaki (2015). That model naturally suggests the idea that welfare can be improved by imposing a restriction on bank leverage. We compute the Ramsey-optimal leverage restriction, but find that there is an implementation problem: the restriction can be associated with more than one equilibrium, not just the desired one. We discuss one way to address the implementation problem. |
| Keywords: | Bank runs, financial crises, macroprudential policy |
| JEL: | E44 G01 G21 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_343&r= |
| By: | Giraldo, I.; Turner P |
| 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: | 2022–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000566:020025&r= |
| By: | Joel Bowman |
| Abstract: | Financial conditions eased after the global financial crisis and during the COVID-19 pandemic as policymakers across most countries adopted large scale monetary policy easing. This has increased concern amongst some that a prolonged period of accommodative financial conditions has fostered the growth of zombie companies − businesses that are consistently unable to meet their interest expenses from current profits. This paper finds that an easing in self-constructed measures of financial conditions is correlated with an increase in the share of resources sunk into zombie companies using a sample of listed companies across 20 OECD countries and 11 industries over the period 2003 to 2019. However, the size of this relationship is higher for countries with banking systems that are in poorer financial health. As a result, fears that accommodative financial conditions foster more capital being sunk into inefficient zombie companies is likely to be less of a concern for countries with healthy banking systems. |
| Keywords: | Financial Conditions, Zombie Companies, Bank Health |
| JEL: | E44 E52 G21 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-22&r= |
| By: | Antoine Bouveret; Antoine Martin; Patrick E. McCabe |
| Abstract: | Money market funds (MMFs) are popular around the world, with over $9 trillion in assets under management globally. From their origins in the 1970s, MMFs have operated in a niche between the capital markets and the banking system, as investment funds that offer private money-like assets with features similar to those of bank deposits. Hence, they are vulnerable to runs that arise from liquidity transformation and from sudden changes in investor perceptions of the funds’ ability to serve as money-like assets. Since 2000, MMF runs have occurred in many countries and under many regulatory regimes. The global pattern of runs and crises shows that MMF vulnerabilities are not unique to a particular set of governing arrangements, and that mitigating these vulnerabilities requires fundamental reforms that either place MMFs more clearly within the investment-fund sector or establish protections for MMFs similar to those for deposits. |
| Keywords: | money market funds; liquidity transformation; runs; nonbank financial institutions; short-term funding markets; information-insensitive assets; financial stability |
| JEL: | G20 G23 G28 |
| Date: | 2022–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:93851&r= |
| By: | Monetary Policy Committee, Taskforce on Rate Forward Guidance and Reinvestment |
| Abstract: | In the aftermath of the global financial crisis, central banks started being confronted with severe challenges that led to an unprecedented policy response in terms of the size and variety of monetary policy measures. One such measure centred on central banks communicating to the public more explicitly their future policy actions in order to influence expectations. In the case of interest rates, as the standard policy rate approached the effective lower bound, major central banks began providing forward guidance (FG) on interest rates with the intention of lowering expectations of future short-term rates. While FG had been used in certain jurisdictions before the crisis, its prominence in the monetary policy toolkit grew substantially in the aftermath of the crisis. This occasional paper summarises the work carried-out by the Eurosystem Taskforce on the macroeconomic impact of rate forward guidance (FG) in an environment of large central bank balance sheets. The analysis presented covers the period up to February 2020 so the implications of the pandemic as well as the ECB’s strategy review are beyond the scope of the Taskforce’s mandate. The paper describes the analytical challenges associated with assessing rate FG on account of the relative novelty of these policies, the lack of well-established empirical results and the sensitivity of model predictions to the expectations formation process. To overcome and address these challenges, the Taskforce took stock of all the available infrastructure and analysis within in the Eurosystem, and where needed, developed structural and empirical models and approaches to assess the macroeconomic impact of rate FG in an environment of large central bank balance sheets. JEL Classification: E37, E43, E52, E58 |
| Keywords: | ECB policy, effective lower bound, forward guidance, monetary policy |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2022290&r= |
| By: | KOBAYASHI Keiichiro |
| Abstract: | This paper reviews the history of Japan's experience on the prolonged disposal of the nonperforming loans and summarizes a new theory of debt overhang. The disposal of the nonperforming loans was delayed because of the existence of the persistent expectations that any day, land price and stock prices will both rise, and the perception that the nonperforming loans are not the cause of the recession, but the result of it. Compartmentalized thinking and moral inconsistency or paternalism in the mindset of the policymakers is also a factor. The nonperforming loans cause the inefficiency of debt overhang. In the existing research, debt overhang is modeled as inefficiency due to the lack of borrower's commitment. In the new theory, we focus on the lack of lender's commitment, which discourages the borrowers and stagnates the economy. Debt reduction due to the disposal of nonperforming loans reduces the inefficiency of the lack of lender commitment and increase the payoffs of both the lender and borrower. |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rpdpjp:22003&r= |
| By: | Angeloni, Ignazio; Daase, Christopher; Deitelhoff, Nicole; Goldmann, Matthias; Krahnen, Jan Pieter; Kroll, Stefan; Luft, Carl-Georg Christoph; Nölke, Andreas; Peez, Anton; Pelizzon, Loriana |
| Abstract: | This policy note summarizes our assessment of financial sanctions against Russia. We see an increase in sanctions severity starting from (1) the widely discussed SWIFT exclusions, followed by (2) blocking of correspondent banking relationships with Russian banks, including the Central Bank, alongside secondary sanctions, and (3) a full blacklisting of the 'real' export-import flows underlying the financial transactions. We assess option (1) as being less impactful than often believed yet sending a strong signal of EU unity; option (2) as an effective way to isolate the Russian banking system, particularly if secondary sanctions are in place, to avoid workarounds. Option (3) represents possibly the most effective way to apply economic and financial pressure, interrupting trade relationships. |
| Keywords: | SWIFT,Russian Sanctions |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safepl:95&r= |
| By: | Mario Tirelli; Stefano Castaldo (University of Padua) |
| Abstract: | Econometric studies have produced conflicting results on the relevance of precautionary saving. This ambiguity has been often ascribed to i) the difficulty of measuring key variables, like households’ subjective risk in income and permanent income; ii) the occurrence of certain kinds of endogeneity bias associated to the unobservability of individual characteristics, like preferences and trade opportunities. In the present work we investigate these estimation problems exploiting a particular wave of the Italian Survey of Household Income and Wealth which contains both type of information. Our results quantify the average precautionary saving as 4-6 percent of total net wealth. Robustness check are carried out considering two more liquid measures of wealth, and alternative sample definitions. Finally, we use our data set to assess the relevance of the endogeneity bias related to the omission of preference characteristics, like patience and risk-aversion, and of indicators of the households’ insurance possibilities, like those signaling the presence of various forms of liquidity and credit constraints. |
| Keywords: | Precautionary saving; wealth accumulation; preferences; liquidity constraints; credit constraints |
| JEL: | C21 D12 D91 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0267&r= |
| By: | Honda, Tomohito |
| Abstract: | This study examines how credit lines affect corporate cash holdings and capital investment, using hand-collected data on credit lines for publicly traded Japanese firms for 2006–2017. Although theoretical research has explained the effects of credit lines in terms of the extensive margin, previous empirical studies have investigated the impacts of credit lines focusing on the intensive margin. Against this background, the present study concentrates on the extensive margin of the effects of credit lines and compares firms that have access to credit lines with those that do not. The empirical results are as follows: (1) firms with credit lines hold lower cash reserves than those without; (2) firms with credit lines undertake more capital investment than firms without; and (3) once firms gain access to credit lines, their cash holdings decrease and their capital investment increases. These empirical findings are consistent with the predictions of the theoretical literature and suggest that credit lines improve firms’ financial flexibility and enable firms to use cash holdings held for precautionary reasons for investment instead. |
| Keywords: | Credit lines, Cash holdings, Corporate investment, Financial constraints |
| JEL: | G31 G32 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rcesrs:dp22-2&r= |
| By: | Giuseppe Cascarino (Bank of Italy); Mirko Moscatelli (Bank of Italy); Fabio Parlapiano (Bank of Italy) |
| Abstract: | Forecasting models based on machine learning (ML) algorithms have been shown to outperform traditional models in several applications. The lack of an easily interpretable functional form, however, is a major challenge for their adoption, especially when a knowledge of the estimated relationships and an explanation of individual forecasts are needed, for instance due to regulatory requirements or when forecasts are used in policy making. We apply some of the most established methods from the eXplainable Artificial Intelligence (XAI) literature to shed light on the random forest corporate default forecasting model in Moscatelli et al. (2019) applied to Italian non-financial firms. The methods provide insight into the relative importance of financial and credit variables to predict firms’ financial distress. We complement the analysis by showing how the importance of these variables in explaining default risk changes over time in the period 2009-19. When financial conditions deteriorate, the variables characterized by a more complex relationship with financial distress, such as firms’ liquidity and indebtedness indicators, become more important in predicting borrowers’ defaults. We also discuss how ML models could enhance the accuracy of credit assessment for those borrowers with less developed credit relationships such as smaller firms |
| Keywords: | explainable artificial intelligence, model-agnostic explainability, artificial intelligence, machine learning, credit scoring, fintech |
| JEL: | G2 C52 C55 D83 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_674_22&r= |
| By: | Thanh, Nguyen Duc; Quyen, Luu Thi Truc; Tâm, Ngô Mỹ; Thao, Nguyen Thu; Thao, Nguyen Thi Phuong |
| Abstract: | Monetary policy is a very important macroeconomic regulatory policy of the state in a market. Economic researchers have shown that: To have a wise monetary policy suitable for each period is always a difficult "problem" economy, contributing to the success or failure of economic development. With the characteristics of Vietnam's economy, the choice of which tools and how to use them at specific stages of the economy is always a problem that must regularly be monitored and resolved. Especially in the context of a prolonged and increasingly complicated Covid-19 epidemic, the prospect of economic recovery remains uncertain. Therefore, operating monetary policy of the State Bank of Vietnam is an urgent issue. This paper gives an overall and comprehensive view of the impact of COVID-19 on inflation, banking, and production, and at the same time gives an overview and overview of our country's monetary policy so far, then proposes solutions for monetary policy in Vietnam. |
| Date: | 2022–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:2efd9&r= |
| By: | Wenli Li (Federal Reserve Bank of Philadelphia); Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR and IFS); Florian Oswald (SciencesPo, Paris) |
| Abstract: | We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the US as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 and 13) for each of our two education groups that differ in both preferences and wage profiles. We also provide an evaluation of the BAPCPA reform. Our paper demonstrates importance of distributional effects of Bankruptcy policy. |
| Keywords: | Lifecycle, Bankruptcy, Housing, Mortgage Default, Labor Supply, Consumption, Education, Insurance, Moral hazard |
| JEL: | G33 K35 J22 J31 D14 D18 D52 D53 E21 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2327&r= |
| By: | Quyen, Luu Thi Truc; Thanh, Nguyen Duc; Tâm, Ngô Mỹ; Thao, Nguyen Thu; Thao, Nguyen Thi Phuong |
| Abstract: | Monetary policy is a very important macroeconomic regulatory policy of the state in a market. Economic researchers have shown that: To have a wise monetary policy suitable for each period is always a difficult "problem" economy, contributing to the success or failure of economic development. With the characteristics of Vietnam's economy, the choice of which tools and how to use them at specific stages of the economy is always a problem that must regularly be monitored and resolved. Especially in the context of a prolonged and increasingly complicated Covid-19 epidemic, the prospect of economic recovery remains uncertain. Therefore, operating monetary policy of the State Bank of Vietnam is an urgent issue. This paper gives an overall and comprehensive view of the impact of COVID-19 on inflation, banking, and production, and at the same time gives an overview and overview of our country's monetary policy so far, then proposes solutions for monetary policy in Vietnam. |
| Date: | 2022–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:7gcxt&r= |
| By: | Jordan Barone; Alain P. Chaboud; Adam Copeland; Cullen Kavoussi; Frank M. Keane; Seth Searls |
| Abstract: | As the economic disruptions associated with the COVID-19 pandemic increased in March 2020, there was a global dash-for-cash by investors. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to central bank interventions. We show that these market disruptions occurred disproportionately in the U.S. Treasury market and were due to investors’ selling pressures being far more pronounced and broad-based. Furthermore, we assess differences in key drivers of the market disruptions across sovereign bond markets, based on an analysis of the data as well as structured outreach to a range of market participants. |
| Keywords: | sovereign bond markets; financial crisis; COVID-19 |
| JEL: | G01 G12 E44 H63 |
| Date: | 2022–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:93852&r= |
| By: | Schelkle, Waltraud |
| Abstract: | How does the inherent norm of integration, notably to share risks among its members in good faith, become a self-sustaining practice? I address this question generally and for a critical case of a divisive institution, i.e. the evolution of sovereign bailout funding in the Euro Area since 2010. Community building between states is a potential outcome of solidaristic practices, reinforced by positive feedback processes. Inspired by Deborah Stone’s [Stone, D. A. (1999). Beyond moral hazard: Insurance as moral opportunity. Connecticut Insurance Law Journal, 6(1), 12–46] work on insurance, I demonstrate that there are social mechanisms at play that favour the secular expansion of risk sharing between states. |
| Keywords: | crisis; Euro area; insurance; moral hazard; risk-sharing; solidarity; European Research Council under the Synergy Grant number ERC_SYG_2018 Grant no. 810356; as part of the project SOLID – Policy Crisis and Crisis Politics. Sovereignty; Solidarity and Identity in the EU post 2008. |
| JEL: | E6 |
| Date: | 2022–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:113746&r= |
| By: | Aitor Erce (Navarra Public University); Enrico Mallucci (Board of Governors of the Federal Reserve System); Mattia Picarelli (ESM) |
| Abstract: | We introduce a novel database on sovereign defaults that involve public debt instruments governed by domestic law. By systematically reviewing a large number of sources, we identify 134 default and restructuring events of domestic debt instruments, in 52 countries from 1980 to 2018. Domestic-law defaults are a global phenomenon. Over time, they have become larger and more frequent than foreign-law defaults. Domestic-law debt restructurings proceed faster than foreign ones, often through extensions of maturities and amendments to the coupon structure. While face value reductions are rare, net-present-value losses for creditors are still large. Unilateral amendments and post-default restructuring are the norm but negotiated pre-default restructurings are becoming increasingly frequent. We also document that domestic-law defaults typically involve debt denominated in local currency and held by resident investors. We complement our analysis with a collection “sovereign histories", which provide the fine details about each episode. |
| Keywords: | Public debt, sovereign default, domestic law, database |
| JEL: | E62 E65 F34 G01 H12 H63 K00 K41 |
| Date: | 2022–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:51&r= |
| By: | Cong, Lin William; Mayer, Simon |
| Abstract: | We model the dynamic global competition among national fat currencies, cryptocurrencies, and Central Bank Digital Currencies (CBDCs) in which the strength of a country and of its currency are mutually reinforcing. The rise of cryptocurrencies hurts stronger fat currencies, but can beneft weaker fat currencies by reducing competition from stronger ones. Countries strategically implement CBDCs in response to competition from emerging cryptocurrencies and other currencies. Our model suggests the following pecking order: Countries with strong but non-dominant currencies (e.g., China) are most incentivized to launch CBDC due to both technological frst-mover advantage and potential reduction in dollarization; the strongest currencies (e.g., USD) beneft from developing CBDC early on to nip cryptocurrency growth in the bud and to counteract competitors’ CBDCs; nations with the weakest currencies forgo implementing CBDCs and adopt cryptocurrencies instead. Strong fat competition and the emergence of cryptocurrencies spur fnancial innovation and digital currency development. Our fndings help rationalize recent developments in currency and payment digitization, while providing insights into the global battle of currencies and the future of money. |
| Keywords: | Financial Economics |
| Date: | 2022–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:ags:cuaepw:320020&r= |
| By: | Robert S. Chirinko (Professor, Department of Finance, University of Illinois at Chicago (E-mail: chirinko@uic.edu)); Debdulal Mallick (Associate Professor, Department of Economics, Deakin University (E-mail: dmallic@deakin.edu.au)) |
| Abstract: | We study the return on private capital across 88 countries for 1970-2014. The return on private capital has exhibited two phases, approximately constant from 1970-1990, but then rising dramatically from 1991-2014. This latter increase occurs for both Rich/Developed and Poor/ Developing countries, though at an uneven pace; the Lucas Paradox seems to have become more pronounced in recent years. Despite falling real interest rates lowering the returns on private capital, 60% of the secular rise in the returns in poor countries is explained by rising equity risk, depreciation, and markups and by the capital loss from expected decreases in the relative price of new capital. These same factors explain 163% of the secular rise in the returns of private capital in rich countries (i.e., the factors rise more than the returns). Policy implications are discussed. |
| Keywords: | Return on private capital, International capital allocations |
| JEL: | E22 F21 O10 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:22-e-02&r= |
| By: | Yusuke Takahashi (Bank of Japan); Yoichiro Tamanyu (Bank of Japan) |
| Abstract: | This study analyzes the mechanism of how households' inflation perceptions are formed in Japan and investigates the backdrop of why perceived inflation is higher than CPI inflation. Our cross-sectional analysis using micro-data shows that a variety of factors affect households' inflation perceptions, including their sociodemographic characteristics, which are likely to affect their consumption patterns, their sentiment, and their awareness of the Bank of Japan's "price stability target." We further show that such inflation perceptions, as well as sentiment and awareness of the "price stability target," influence households' tolerance towards price rises. We then analyze how changes in the price of individual goods and services influence perceived inflation using aggregate data and find that a large share of the fluctuations in perceived inflation can be explained by changes in food product and petroleum product prices. In addition, we show that house prices, which are not included in the CPI in Japan, also explain these fluctuations. These results imply that households have in mind a different basket of goods and services from the CPI when they form their inflation perceptions. |
| Keywords: | Inflation; Inflation perception; Consumer price index; Tolerance towards price rises |
| JEL: | D12 E31 E58 |
| Date: | 2022–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp22e01&r= |
| By: | Mary C. Daly |
| Abstract: | Presentation to the Los Angeles World Affairs Council & Town Hall, Los Angeles, CA, February 23, 2022, by Mary C. Daly, President and Chief Executive Officer, Federal Reserve Bank of San Francisco. |
| Keywords: | covid19; inflation; price stability; economic conditions; transparency; monetary policy |
| Date: | 2022–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfsp:93772&r= |
| By: | Bernhard K. Meister; Henry C. W. Price |
| Abstract: | In this chapter structures that generate yield in cryptofinance will be analyzed and related to leverage. While the majority of crypto-assets do not have intrinsic yields in and of themselves, similar to cash holdings of fiat currency, revolutionary innovation based on smart contracts, which enable decentralised finance, does generate return. Examples include lending or providing liquidity to an automated market maker on a decentralised exchange, as well as performing block formation in a proof of stake blockchain. On centralised exchanges, perpetual and finite duration futures can trade at a premium or discount to the spot market for extended periods with one side of the transaction earning a yield. Disparities in yield exist between products and venues as a result of market segmentation and risk profile differences. Cryptofinance was initially shunned by legacy finance and developed independently. This led to curious and imaginative adaptions, reminiscent of Darwin's finches, including stable coins for dollar transfers, perpetuals for leverage, and a new class of exchanges for trading and investment. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.10265&r= |
| By: | Hagher Ben Rhomdhane (Central Bank of Tunisia); Brahim Mehdi Benlallouna (Central Bank of Tunisia) |
| Abstract: | This study aims to construct a new monthly leading indicator for Tunisian economic activity and to forecast Tunisian quarterly real GDP (RGDP) using several mixed-frequency models. These include a mixed dynamic factor model, unrestricted mixed-data sampling (UMIDAS), and a threepass regression filter (3PRF) developed at the Central Bank of Tunisia, based on a monthly/quarterly set of economic and financial indicators as predictors. Our methodology is based on direct and indirect approaches, and the direct approach nowcasts aggregate RGDPs. The indirect approach is a disaggregated approach based on the output side of GDP (manufacturing, non-manufacturing, and services) using a set of available monthly indicators by sector. Furthermore, mixed-frequency dynamic factor models and unrestricted MIDAS perform well in terms of root mean squared errors compared to the benchmark model VAR (2). The forecast errors derived from the disaggregated approach during the recent COVID period are smaller than those derived from classical models such as VAR (2). In our model, we used indicators such as electricity consumption by sector, stock market index detailed by sector, and international economic surveys to capture the pandemic effect. The financial variables improve forecasting for all horizons. Additionally, we find that it is better to employ several UMIDAS-ARs by each component of GDP at constant prices and to pool the results rather than relying on aggregated GDP, specifically in volatile times. |
| Keywords: | Mixed-Frequency Data Sampling; Nowcasting; short-term forecasting |
| JEL: | E37 C55 F17 O11 |
| Date: | 2022–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp02-2022&r= |
| By: | Robert S. Chirinko (Professor, Department of Economics, University of Illinois at Chicago, CESifo (E-mail: chirinko@uic.edu)) |
| Abstract: | What went wrong? Why did seemingly rational, forward-looking bond investors continue to purchase Puerto Rican debt with only a modest risk premium, even though the macroeconomic fundamentals were dismal? Why did financial markets fail to exercise market discipline and restrict capital flows to Puerto Rico? Given weak macroeconomic fundamentals and relatively low risk premia, investors were either stunningly myopic/ misinformed or Puerto Rican debt was implicitly insured by the U.S. government. This paper examines the latter hypothesis, which we label the "Treasury Put," by examining a rare situation where the put was extinguished. The expectation of a federal bailout was perfectly reasonable given past behavior by the federal government, starting with the prior bailout of the city of New York through the Global Financial Crisis. Evaluating the Treasury Put hypothesis with a minimal set of assumptions is possible given three unique features - the dire fiscal and economic conditions in Puerto Rico, a fortunate characteristic of Puerto Rican bond issuance, and an exogenous "seismic shock." The latter feature is the non-bailout of the city of Detroit in 2013 that effectively extinguished the Treasury Put. Puerto Rican risk premia were stable before the Detroit bankruptcy and bracketed by the risk premia on Corporate Aaa and Baa bonds. However, after the Detroit bankruptcy, risk premia rose dramatically, thus identifying a sizeable Treasury Put of at least 350 basis points and a significant misallocation of capital to Puerto Rico. In effect, the Treasury Put was a form of regulatory forbearance. Institutional reforms that would eliminate the Treasury Put are considered, but none are found satisfactory. |
| Keywords: | Puerto Rican debt crisis, Implicit government guarantees, Failure of market discipline |
| JEL: | H81 H74 G18 G01 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:22-e-03&r= |
| By: | Bernhard K. Meister; Henry C. W. Price |
| Abstract: | The paper highlights some commonalities between the development of cryptocurrencies and the evolution of ecosystems. Concepts from evolutionary finance embedded in toy models consistent with stylized facts are employed to understand what survival of the fittest means in cryptofinance. Stylized facts for ownership, trading volume and market capitalization of cryptocurrencies are selectively presented in terms of scaling laws. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2202.10340&r= |