nep-ban New Economics Papers
on Banking
Issue of 2022‒04‒11
thirty-two papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Hidden defaults By Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
  2. Federal Reserve Structure and Economic Ideas By Michael D. Bordo; Edward Simpson Prescott
  3. Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability? By David Newton; Steven Ongena; Ru Xie; Binru Zhao
  4. Stablecoins and Central Bank Digital Currencies: Policy and Regulatory Challenges By Barry Eichengreen; Ganesh Viswanath-Natraj
  5. Updated Primer on the Forward-Looking Analysis of Risk Events (FLARE) Model: A Top-Down Stress Test Model By Sergio A. Correia; Matthew P. Seay; Cindy M. Vojtech
  6. Capital Flows and the Eurozone's North-South Divide By Karsten Kohler
  7. Monetary policy in South Africa, 2007-21 By Patrick Honohan; Athanasios Orphanides
  8. Central bank digital currency with heterogeneous bank deposits By Remo Nyffenegger
  9. National Public Development Banks (PDBs): Key Actors Financing Water and Sanitation By Olivier Crespi Reghizzi (AFD),; Catarina Fonseca (IRC),; Goufrane Mansour (Aguaconsult),; Stef Smits (IRC).
  10. Asia Digital Common Currency as a Global (International) Currency By Wataru Takahashi; Taiji Inui
  11. “There is No Planet B", but for Banks “There are Countries B to Z": Domestic Climate Policy and Cross-Border Bank Lending By Emanuela Benincasa; Gazi Kabas; Steven Ongena
  12. Household Heterogeneity and the Performance of Monetary Policy Frameworks By Edouard Djeutem; Mario He; Abeer Reza; Yang Zhang
  13. Calibrating the countercyclical capital buffer for Italy By Pierluigi Bologna; Maddalena Galardo
  14. Disinflation Policies with a Flat Phillips Curve By Marco Del Negro; Aidan Gleich; Shlok Goyal; Alissa Johnson; Andrea Tambalotti
  15. Central Bank Liquidity Facilities and Market Making By David Cimon; Adrian Walton
  16. Optimal Liquidity Control and Systemic Risk in an Interbank Network with Liquidity Shocks and Regime-dependent Interconnectedness By Chotipong Charoensom; Thaisiri Watewai
  17. Who Can Tell Which Banks Will Fail? By Kristian S. Blickle; Markus K. Brunnermeier; Stephan Luck
  18. Fertility and Savings: The Effect of China’s Two-Child Policy on Household Savings By Scott R. Baker; Efraim Benmelech; Zhishu Yang; Qi Zhang
  19. It is not la vie en rose. New insights from Graziani’s theory of monetary circuit By Marco Veronese Passarella
  20. Optimal Monetary Policy with r* By Roberto M. Billi; Jordi Galí; Anton Nakov
  21. Monetary Policy and the Run Risk of Loan Funds By Nicola Cetorelli; Gabriele La Spada; João A. C. Santos
  22. On the optimal design of a financial stability fund By Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
  23. Econometric Analysis of the Determinants of Bank Profitability in Three Major African Counties: Kenya, Nigeria and South Africa By Davis, E Philip; Ali Abdilahi, Ridwa
  24. Determinants of non-performing loans: a panel data approach By Cândida Ferreira
  25. Unconventional Monetary Policy in the Euro Area. Impacts on Loans, Employment, and Investment By António Afonso; Francisco Gomes Pereira
  26. From low to high inflation: Implications for emerging market and developing economies By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  27. Quantitative forward guidance through interest rate projections By Boris Hofmann; Dora Xia
  28. Open Banking: Credit Market Competition When Borrowers Own the Data By Zhiguo He; Jing Huang; Jidong Zhou
  29. Central Bank Digital Currency in a Developing Economy: A Dynamic Stochastic General Equilibrium Analysis By Rivera Moreno, Pablo Nebbi; Triana Montaño, Karol Lorena
  30. Equilibrium in Two-Sided Markets for Payments: Consumer Awareness and the Welfare Cost of the Interchange Fee By Kim Huynh; Gradon Nicholls; Oleksandr Shcherbakov
  31. The economics of debt relief during a pandemic: lessons from the experience in Ireland By Gaffney, Edward; McCann, Fergal
  32. The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence By Antoine Camous; Dmitry Matveev

  1. By: Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: China's lending boom to developing countries is morphing into defaults and debt distress. Given the secrecy surrounding China's loans, also the associated defaults remain 'hidden', as missed payments and restructuring details are not disclosed. We construct an encompassing dataset of sovereign debt restructurings with Chinese lenders and find that these credit events are surprisingly frequent, exceeding the number of sovereign bond or Paris Club restructurings. Chinese lenders follow a resolution approach reminiscent of 1980s Western lenders; they seldom provide deep debt relief with face value reduction. If history is any guide, multi-year debt workouts with serial restructurings lie in store.
    Keywords: China,external debt,default,crisis resolution,official lending,hidden debts,sovereign risk,Belt and Road initiative
    JEL: F21 F34 F42 F6 G15 H63 N25
    Date: 2022
  2. By: Michael D. Bordo; Edward Simpson Prescott
    Abstract: This essay was written in memory of Marvin Goodfriend for a Federal Reserve Bank of Richmond book called Essays in Honor of Marvin Goodfriend: Economist and Central Banker. We discuss his Carnegie-Rochester conference paper titled "The Role of a Regional Bank in a System of Central Banks." In that paper, Marvin argued that the Federal Reserve's decentralized structure allowed for competing ideas about monetary and banking policy to develop with the central bank. In our essay, we describe how Marvin demonstrated this argument during his long career at the Federal Reserve Bank of Richmond. We also describe the institutional developments that led to this competition, including reforms that Chairman William McChesney Martin made to the operation of the Federal Open Market Committee in the 1950s and the introduction of monetary policy ideas such as monetarism and rational expectations by the Reserve Banks.
    Keywords: Federal Reserve structure; monetary policy; governance; Marvin Goodfriend
    JEL: B0 E58 G28 H1
    Date: 2022–01–21
  3. By: David Newton (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Ru Xie (University of Bath, School of management); Binru Zhao (University of Bath - School of Management)
    Abstract: Is bank- versus market-based financing different in its attitudes towards Environmental, Social, and Governance (ESG) risk? Using a novel sample covering 3,783 U.S. public firms from 2007 to 2020, we study how firm-level ESG risk affects its financing outcomes. We find that companies with higher ESG risk borrow less from banks than from markets, potentially to avoid bank monitoring and scrutiny. The Social and Governance components, in particular, matter. Furthermore, firms suffering higher numbers of negative ESG reputation shocks are less likely to continue to rely on bank credit in response to lenders' threats to end the lending arrangements. Finally, our results indicate that firms' ESG risk reduces after borrowing from banks but increases after bond issuance, suggesting that banks are more effective than public bond markets in shaping borrowers' ESG performance.
    Keywords: ESG Risk, Debt Structure, Capital Structure; Debt Choices, Bank Monitoring
    JEL: G20 G21 G30 G32
    Date: 2022–03
  4. By: Barry Eichengreen; Ganesh Viswanath-Natraj
    Abstract: Stablecoins and central bank digital currencies are on the horizon in Asia, and in some cases have already arrived. This paper provides new analysis and a critique of the use case for both forms of digital currency. It provides time-varying estimates of devaluation risk for the leading stablecoin, Tether, using data from the futures market. It describes the formidable obstacles to widespread use of central bank digital currencies in cross-border transactions, the context in which their utility is arguably greatest. The bottom line is that significant uncertainties continue to dog the region's digital currency initiatives.
    Date: 2022–02
  5. By: Sergio A. Correia; Matthew P. Seay; Cindy M. Vojtech
    Abstract: This is an updated technical note describes the Forward-Looking Analysis of Risk Events (FLARE) model, which is a top-down model that helps assess how well the banking system is positioned to weather exogenous macroeconomic shocks. FLARE estimates banking system capital under varying macroeconomic scenarios, time horizons, and other systemic shocks.
    Keywords: Bank capital; Financial insitutions; Stress test
    JEL: G21
    Date: 2022–03–04
  6. By: Karsten Kohler
    Abstract: The paper offers a monetary perspective on the role of capital flows in the Eurozone's north-south divide. It argues that finance-centric narratives in Comparative Political Economy rightly emphasise financial instability in the periphery, but that the role of capital flows therein requires clarification. The paper draws on post-Keynesian monetary theory, coherent accounting, and balance-of-payments data to make three main points. First, the focus on the financial account as a driver of current accounts should be abandoned in favour of an analysis of gross capital flows. Gross flows need not stem from excess savings in core countries and can be independent from trade flows. Second, speculative portfolio flows into bond markets and foreign direct investment into real estate are causally more important than interbank flows in driving financial instability. Third, rising spreads in the periphery during the Eurozone crisis and the outbreak of the pandemic were not triggered by balance-of-payments problems but by a reversal of speculative flows in government bond markets. The argument suggests that Comparative Political Economy should dedicate more attention to institutions that render peripheral countries particularly susceptible to speculative capital flows into asset markets.
    Keywords: Gross capital flows, balance-of-payments, current account imbalances, Eurozone crisis, sudden stop, comparative political economy, post-Keynesian macroeconomics
    JEL: E12 F32 F36 F41 O57
    Date: 2022–03
  7. By: Patrick Honohan; Athanasios Orphanides
    Abstract: This paper reviews South Africa's monetary policy since 2007 and makes recommendations towards improving the inflation-targeting framework currently in place. Following a surge in inflation into double digits in 2007/08, the South African Reserve Bank managed to guide inflation in line with the 3-6 per cent target band. Estimates of South Africa's potential output underwent successive downward revisions. The resulting output gap misperceptions contributed to the tendency of inflation to be closer to the upper edge of the band in the 2010s.
    Keywords: Monetary policy, Inflation targeting, Output gap, South Africa
    Date: 2022
  8. By: Remo Nyffenegger
    Abstract: This paper analyses the effects of an introduction of a retail central bank digital currency (CBDC) on bank intermediation in a general equilibrium model with heterogeneous bank deposits and an imperfectly competitive loan market. I find that the impacts of a CBDC strongly differ depending on whether it is used as a medium of exchange or as a saving vehicle. A calibration of the model to the US economy from 1987-2006 shows that if a CBDC is only used as a medium of exchange, a 10% increase in the fraction of people who hold central bank money as a medium of exchange decreases bank lending only by 0.2%. The effect is four times stronger if CBDC is only used as a saving vehicle.
    Keywords: Central bank digital currency, bank lending, new monetarism, overlapping generations
    JEL: E42 E50 E58
    Date: 2022–03
  9. By: Olivier Crespi Reghizzi (AFD),; Catarina Fonseca (IRC),; Goufrane Mansour (Aguaconsult),; Stef Smits (IRC).
    Abstract: Today, more than 2 billion people still do not have access to safe drinking water, and more than 3.6 billion people do not have access to sanitation. In many countries, climate change is increasing the risks related to the water cycle; at the same time, the quantitative and qualitative pressure on water resources threatens people and ecosystems. Lack of access to water and sanitation and failure to sustainably manage water resources have dramatic consequences in terms of health, gender equity, the economy, and the en- vironment.
    JEL: Q
    Date: 2022–04–04
  10. By: Wataru Takahashi (Faculty of Economics, Osaka University of Economics and Research Fellow, Research Institute for Economics and Business Administration, Kobe University, JAPAN); Taiji Inui (Japan International Cooperation Agency and Asia Development Bank (ADB), JAPAN)
    Abstract: This paper proposes “Asia Digital Common Currency (ADCC)” aiming at fostering Asian financial markets. We are proposing to issue a digital common currency controlled and managed under multilateral governance framework. As a result, the international currency, which should be an international public good, will be governed by a multilateral system. Under our proposed ADCC, each member country can carry out monetary policy independently. It also has a mechanism to maintain currency sovereignty in digital era. In addition, ADCC will contribute to the development of financial market infrastructures in Asia. It will foster the bond markets and standardize the Asian financial system. Asia lags behind Europe in monetary integration, but historically had experiences in common currency circulation. ADCC is an idea that should be thoroughly considered in order to develop the Asian and Japanese economies in the digital age.
    Keywords: Digital currency; Common currency; International currency as an international public good; Currency sovereignty (Münzhoheit); Anonymity; Independence of monetary policy
    JEL: E42 F33 F36
    Date: 2022–03
  11. By: Emanuela Benincasa (Swiss Finance Institute; University of Zurich - Department of Banking and Finance); Gazi Kabas (University of Zurich); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: We document that lenders react to domestic climate policy stringency by increasing cross-border lending. We use granular fixed effects to control for loan demand and an instrumental variable strategy to establish causality. Consistent with regulatory arbitrage, the positive effect decreases in borrowers’ climate policy stringency and is absent if the borrower country has a higher stringency. Furthermore, climate policy stringency decreases loan supply to domestic borrowers with high carbon risk while increasing loan supply if such borrowers are abroad. Our results suggest that crossborder lending can enable lenders to exploit the lack of global coordination in climate policies.
    Keywords: Cross-Border Lending, Climate Policy, Regulatory Arbitrage, Syndicated Loans
    JEL: G21 H73 Q58
    Date: 2022–04
  12. By: Edouard Djeutem; Mario He; Abeer Reza; Yang Zhang
    Abstract: We compare the performance of alternative monetary policy frameworks (inflation targeting, average inflation targeting, price level targeting and nominal GDP level targeting) in a tractable HANK model where incomplete financial markets and idiosyncratic earnings risk introduce precautionary savings and consumption inequality. Financial market incompleteness generates an additional source of societal welfare loss due to cyclical fluctuations in inequality on top of those from inflation and output volatility. We find that history-dependent policies are preferred in this framework. However, if central banks put a high weight on curbing inequality, AIT and IT can be preferred over PLT.
    Keywords: Monetary policy framework; Monetary policy transmission; Monetary policy and uncertainty; Economic models
    JEL: D31 D52 E21 E31 E58
    Date: 2022–03
  13. By: Pierluigi Bologna (Bank of Italy); Maddalena Galardo (Bank of Italy)
    Abstract: While the setting of the countercyclical capital buffer (CCyB) is not an automatic decision, insights from indicators, such as the credit-to-GDP gap, are a starting point to inform the policy decision. This paper identifies an optimal rule to map the credit-to-GDP gap adjusted to the guide to set the CCyB. We follow two alternative procedures. First, we apply the criteria suggested by the Basel Committee on Banking Supervision, (BCBS), obtaining 3 percentage points of the adjusted gap as the activation threshold and 8 percentage points as the maximum. Then we depart from the BCBS approach by proposing a procedure based on the maximization of the area under the receiver operating characteristic curve (AUROC), which suggests 1 and 9 percentage points as the minimum and maximum thresholds, respectively. We also explore whether the CCyB, had it been in place, would have mitigated the repercussions of the Great Financial Crisis for the Italian banking system. Based on a stylized exercise, the full release of the CCyB at the outbreak of the crisis would have freed around 40 billion of capital, a value close to the total amount of banks' credit provisions during the three following years.
    Keywords: macroprudential policy, CCyB, buffer calibration, credit cycle
    JEL: E32 G21 G28
    Date: 2022–03
  14. By: Marco Del Negro; Aidan Gleich; Shlok Goyal; Alissa Johnson; Andrea Tambalotti
    Abstract: Yesterday’s post analyzed the drivers of the surge in inflation over the course of 2021 through the lens of the New York Fed DSGE model. In today’s post, we use the model to study how alternative monetary policy strategies might contribute to bringing inflation back down to 2 percent. Our main finding is that there is no monetary silver bullet. Due to a flat Phillips curve—a well–documented feature of the economic environment of the last three decades—monetary policy can only achieve faster disinflation at a considerable cost in terms of forgone economic activity. This is true regardless of the systematic approach followed by the central bank in the model to pursue its objective.
    Keywords: DSGE; inflation; macroeconomics; monetary policy
    JEL: E2 E52
    Date: 2022–03–02
  15. By: David Cimon; Adrian Walton
    Abstract: In the onset of the COVID-19 crisis, central banks purchased large volumes of assets in an effort to keep markets operational. We model one such central bank, which purchases assets from dealers to alleviate balance sheet constraints. Asset purchases can prevent market breakdown, improve price efficiency and reduce dealer risk positions. A central bank that purchases assets at their expected value is able to achieve market outcomes as if dealers were unconstrained. Absent other concerns, central banks can maximize welfare by purchasing assets at a premium, though they may create market distortions. Alternatively, central banks who bear costs associated with large interventions may only be willing to purchase assets at a discount. In the absence of leverage constraints, lending programs are as effective as asset purchases; when leverage constraints are present, lending programs lose effectiveness.
    Keywords: Coronavirus disease (COVID-19); Economic models; Financial institutions; Financial markets; Market structure and pricing
    JEL: G10 G20 L10
    Date: 2022–03
  16. By: Chotipong Charoensom; Thaisiri Watewai
    Abstract: We propose a novel interbank network model in which banks face systemic liquidity shocks, fight-to-quality liquidity flows, and collapses of the interbank network during crises, and study their impacts on the optimal liquidity control and the systemic risk of the interbank network. We find that banks respond to negative shocks by holding positive precautionary liquidity, but once the shock size is sufficiently large, the benefit of precautionary liquidity reduces, and banks lower their precautionary liquidity. Lending (borrowing) banks also hold positive (negative) interbank liquidity provision. Banks hold more provision for more interconnected networks, but when the network is too interconnected, it is too costly to hold large provision, causing banks to lower the provision. On the contrary, a higher degree of the fight-to-quality effect tends to make banks act more aggressively on both precautionary liquidity and interbank provision. As a result, the systemic risk tends to increase in the size of the negative shock, but is quite insensitive to the degree of the fight-to-quality effect. Our analysis shows that the systemic risk increases if the interbank market collapses or becomes too interconnected during crises. Rewards and penalties from regulators can help reduce the systemic risk, but they come with a cost and have different implications on the banks' optimal policies.
    Keywords: Liquidity shock; Interbank Interconnectedness; Fight-to-quality; Systemic risk; Precautionary liquidity; Interbank liquidity provision; Regime switching; Stochastic control
    Date: 2022–03
  17. By: Kristian S. 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 percent during the run and that there is an equal outflow of retail and nonfinancial 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, it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.
    Keywords: bank run; deposit insurance; financial crises
    JEL: G01 G21 N20 N24
    Date: 2022–02–01
  18. By: Scott R. Baker; Efraim Benmelech; Zhishu Yang; Qi Zhang
    Abstract: China’s high household savings rate has attracted great academic interest but remains a puzzle. Potential explanations include demographic, policy, and financial causes. Yet a lack of reliable microlevel data on household finances makes it difficult to assess the relative importance of each factor. This paper uses individual income and spending transactions linked to demographic characteristics and financial information on loan applications and credit availability from a large Chinese bank in Inner Mongolia. We match a large subset of bank customers to administrative records covering marriage and births and obtain a unique view into consumption and saving patterns around important life events. Our results point toward identifying income growth, financial instability, and credit access, rather than such directives as the one-child policy, as the primary causes of high levels of savings among Chinese households.
    JEL: D14 D31 E21 G51
    Date: 2022–03
  19. By: Marco Veronese Passarella (University of Leeds)
    Abstract: The aim of this paper is twofold. First, it shows how a standard stock-flow consistent model (SFCM) can be modified to embed some fundamental insights from Graziani’s theory of monetary circuit (TMC). Second, it aims at addressing some common mis- conceptions about the TMC. More precisely, it is argued that: a) a market-clearing price mechanism does not necessarily imply a neoclassical-like closure of the model; b) the ways in which SFCMs and the TMC define bank loans are mutually consistent, although they are based on different accounting periods; c) consumer credit is final finance, not initial finance; d) the paradox of profit is not a logical conundrum, but an abstract counterfactual that allows shedding light on a neglected role of government spending; e) overall, the TMC can be regarded as a “Marxian” rendition of Keynes’s method of aggregates.
    Keywords: Theory of Monetary Circuit, Stock-Flow Consistent Models, Macroeconomics, Monetary Economics
    JEL: E11 E12 E16 E17
    Date: 2022–03
  20. By: Roberto M. Billi; Jordi Galí; Anton Nakov
    Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, and in which the steady state natural rate (r*) is negative. We show that the optimal policy aims to approach gradually a steady state with positive average inflation. Around that steady state, inflation and output fluctuate optimally in response to shocks to the natural rate. The central bank can implement that optimal outcome by means of an appropriate state-contingent rule, even though in equilibrium the nominal rate remains at zero most (or all) of the time. In order to establish that result, we derive sufficient conditions for local determinacy in a more general model with endogenous regime switches.
    Keywords: zero lower bound, New Keynesian model, decline in r*, equilibrium determinacy, regime switching models, secular stagnation
    JEL: E32 E52
    Date: 2022–03
  21. By: Nicola Cetorelli; Gabriele La Spada; João A. C. Santos
    Abstract: Loan funds are open-end mutual funds holding predominantly corporate leveraged loans. We document empirically that loan funds are significantly more susceptible to run risk than any other category of debt funds, including corporate bond funds. Most importantly, we establish a link between loan funds’ flows and monetary policy, based on the institutional characteristics of their portfolio holdings. We find robust evidence indicating a pro-cyclical relationship between monetary policy and loan-fund flows. This relationship, however, is asymmetric: weaker for policy-rate increases and stronger for policy-rate decreases. Finally, the effect of monetary policy shocks on loan-fund flows also depends on the level of market short-term rates, suggesting that it is not only the direction of the monetary policy change that matters, but also the level of the policy rate at the time of the change. Our results thus identify a novel channel of monetary policy transmission affecting a critical segment of the credit sector, represented by leveraged lending.
    Keywords: mutual funds; monetary policy; leverage lending
    JEL: G23 E52 G28
    Date: 2022–03–01
  22. By: Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
    Abstract: We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints as part of the contingencies. We develop the theory (welfare theorems, with a new price decentralization) and quantitatively compare the constrained-efficient Fund economy with an incomplete markets economy with default. In particular, we characterize how prices and allocations differ, when the two economies are subject to exogenous productivity and endogenous government expenditure shocks. In our economies, calibrated to the euro area 'stressed countries', substantial welfare gains are achieved, particularly in times of crisis. The Fund is, in fact, a risk-sharing, crisis prevention and resolution mechanism, which transforms participant countries’ defaultable sovereign debts into union’s safe assets. In sum, our theory can help to improve current official lending practices and, eventually, to design an European Fiscal Fund.
    Keywords: fiscal unions, recursive contracts, Debt Contracts, partnerships, limited enforcement, moral hazard, debt restructuring, Debt Overhang, sovereign fund
    JEL: E43 E44 E47 E63 F34 F36
    Date: 2022–03
  23. By: Davis, E Philip; Ali Abdilahi, Ridwa
    Abstract: Our panel econometric approach, using bank-level fixed effects, seeks to identify the bank-specific, banking-market and macroeconomic determinants of bank profitability in 240 banks across the three countries over 1990-2019. Across a range of estimates, we find that bank liquidity and the non-interest income to total income ratio had a significant positive effect on profitability while credit risk and the cost-to-income ratio had a significant negative effect. In most models, real GDP growth affected bank profitability positively. Small banks and large banks differ in terms of their determinants of profitability. There are important implications for both bank management and regulators, which in turn may affect both financial stability and scope for economic development.
    Keywords: Bank management, bank profitability, bank regulation, financial and economic development, financial stability, Sub-Saharan Africa, Sub-Saharan AfricanB Banks
    JEL: C01 C13 C23 C51
    Date: 2022–03
  24. By: Cândida Ferreira
    Abstract: This paper analyses the evolution of the bank non-performance loans to total loans ratio using three categories of explaining variables: bank performance indicators (bank credit to bank deposits ration, bank cost to income ratio, bank net interest margin, bank noninterest income to total income, and bank return on assets), market conditions and financial structure indicators (bank concentration, Lerner index, bank Z-score, bank regulatory to risk-weighted assets, and bank crisis dummy), and economic growth indicator (natural logarithm of real GDP per capita). The paper applies panel fixed effects and dynamic Generalised Method of Moments (GMM) estimates to a panel of 80 countries spread by all Continents, over the period 1999-2017. The results obtained clearly demonstrate that bank performance, bank market conditions, and bank capital regulation are relevant to explain the evolution of non-performance loans, but the promotion of economic growth is always much more important to assure the decrease the levels of non-performing loans, preventing the losses of the banking system as well as potential financial crisis.
    Keywords: Bank risk, non-performing loans, bank performance, bank market conditions, panel estimates.
    JEL: G21 G15 G32 F39 C33
    Date: 2022–03
  25. By: António Afonso; Francisco Gomes Pereira
    Abstract: Using a difference-in-differences identification strategy on a micro panel at the bank and firm level, we study the transmission effectiveness of ECB’s large-scale asset purchasing programs programs (i.e. APP and PEPP) in the Euro area. Our findings show: first, balance sheet composition of banks is an important determinant of monetary policy transmission. We tested this hypothesis by showing that banks more exposed to government debt securities had higher loan growth than less exposed banks after the APP announcement. By extension, this could lead to heterogeneous economic impacts depending on the geographical location of exposed banks. For the PEPP, contrary to the APP, we did not find a portfolio-rebalancing channel for banks that were more exposed to government debt securities. Second, using balance sheet data on corporates, we verify that firms that borrowed more increased employment and fixed capital investment, albeit to a lesser degree than before the APP announcement. Furthermore, our sample shows that corporations in countries with banks more exposed to government debt securities had higher borrowing growth and fixed capital growth versus countries with less exposed banks.
    Keywords: unconventional monetary policy, difference-in-differences, euro area, employment, investment.
    JEL: C23 D22 E52 E58 G11 G20
    Date: 2022–03
  26. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    Abstract: Recent energy and food price surges, in the wake of Russia’s invasion of Ukraine, have exacerbated inflation pressures that are unusually high by the standards of the past two decades. High and rising inflation has prompted many emerging market and developing economy (EMDE) central banks and some advanced-economy central banks to increase interest rates. Inflation is expected to ease back towards targets over the medium-term as recent shocks unwind, but the 1970s experience is a reminder of the material risks to this outlook. As inflation remains elevated, the risk is growing that, to bring inflation back to target, advanced economies need to undertake a much more forceful monetary policy response than currently anticipated. If this risk materializes, it would imply additional increases in borrowing costs for EMDEs, which are already struggling to cope with elevated inflation at home before the recovery from the pandemic is complete. EMDEs need to focus on calibrating their policies with macroeconomic stability in mind, communicating their plans clearly, and preserving and building their credibility.
    Keywords: Global Inflation, Commodity Price, War in Ukraine, Global Recession, Great Inflation, Monetary Policy Tightening
    JEL: E31 E32 E37 Q43
    Date: 2022–04
  27. By: Boris Hofmann; Dora Xia
    Abstract: We assess quantitative forward guidance through interest rate projections along four key dimensions: (i) predictability, (ii) credibility, (iii) redundancy and (iv) consistency. Based on data for the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank and the Federal Reserve, we find that the interest rate projections released by these four central banks are predictable and credible, but in limited ways. Market expectations of the future path of interest rates predict changes in the central bank projection path, but far from fully. Central bank paths' credibility is limited as markets adjust to path surprises, but far from a one-to-one basis. Both predictability and credibility decrease with the projection horizon. We further find that central bank interest rate projections are not redundant as they impact market expectations also when controlling for the effects of central bank macro projections that are released in parallel. Finally, the interest rate projections are consistent with the macro projections as they are empirically linked by a stabilising Taylor rule.
    Keywords: forward guidance, interest rate projections, central bank communication.
    JEL: E52 E58
    Date: 2022–03
  28. By: Zhiguo He (University of Chicago, Booth School of Business); Jing Huang (University of Chicago, Booth School of Business); Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: Open banking facilitates data sharing consented to by customers who generate the data, with the regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks’ customer transaction data enables better borrower screening. Open banking can make the entire financial industry better off yet leave all borrowers worse off, even if borrowers have the control of whether to share their banking data. We highlight the importance of the equilibrium credit quality inference from borrowers’ endogenous sign-up decisions. We also study extensions with fintech affinities and data sharing on borrower preferences.
    Keywords: Open banking, Data sharing, Banking competition, Digital economy, Winner's curse, Privacy
    JEL: G21 L13 L52 O33 O36
  29. By: Rivera Moreno, Pablo Nebbi; Triana Montaño, Karol Lorena
    Abstract: Central Bank Digital Currency (CBDC) has been in the center of discussion of many monetary policy research agendas. We explore how the business cycle behavior of a developing economy is affected by the introduction of this type of money as a second monetary policy tool. We emphasize on the characteristic dual formal and informal labor markets that are present in most developing economies, given its relevance on explaining the business cycle dynamics. Our main contribution is the building of a model that encompasses such characteristics and features the relevance of monetary balances to macroeconomic fluctuations. We find that CBDC has the ability to improve the monetary policy effectiveness, and the response of relevant variables may be amplified or dampened, depending on the nature of the shock. Also the magnitude of the new dynamics introduced by CBDC are also profoundly dependant on its structural parameters. The main transmission mechanisms that are affected by CBDC are the dynamics of distortions generated by transaction costs.
    Date: 2022–04
  30. By: Kim Huynh; Gradon Nicholls; Oleksandr Shcherbakov
    Abstract: The market for payments is an important two-sided one, where consumers benefit from increased merchant acceptance of payment cards and vice versa. The dependence between the decisions that are made on each side of the market results in various network externalities that are often discussed but rarely quantified. We construct and estimate a structural two-stage model of equilibrium in a market for payments in order to quantify the network externalities and identify the main determinants of consumer and merchant decisions. The estimation results suggest significant heterogeneity in consumer adoption costs and benefits. We discuss the critical characteristics that determine which payment instrument is used at the point of sale. Our counterfactual simulation measures the degree of excessive intermediation by credit card providers.
    Keywords: Bank notes; Digital currencies and fintech; Econometric and statistical methods; Financial services
    JEL: C51 D12 E42 L14
    Date: 2022–03
  31. By: Gaffney, Edward; McCann, Fergal
    Abstract: The coronavirus (COVID-19) macroeconomic shock was different from previous crises in terms of its speed, the severity of the resulting job losses, the fiscal support provided in response and the stability of house prices. In response to this sudden shock and in line with European Banking Authority guidance, lenders in Ireland offered temporary COVID-19 payment breaks, or moratoria, to homeowners with mortgages. COVID-19 payment breaks had minimal eligibility criteria, did not require a regulatory risk reclassification of loans and had no impact on borrower credit records. All of this enabled a rapid response that minimised costs to both borrowers and lenders. As the initial payment breaks have expired, lenders have typically responded to a relatively small number of requests for further arrears support or restructuring by extending moratoria or other temporary arrangements. Based on the lessons learned from research into the economics of debt relief since the global financial crisis, we view this initial response as appropriate for the specific, temporary economic shock that the Irish economy faced in March 2020. As the pandemic progresses, the optimal future response of policymakers will depend on how both the labour and housing markets evolve. In circumstances such as those that prevailed in early 2021, when uncertainty and additional temporary liquidity shocks affected some sectors, additional extensions of payment moratoria or other short-term arrangements may be appropriate for some borrowers. However, should it appear that income shocks were becoming more permanent, perhaps because of structural shifts in demand, or if house prices were to decline, longer-term solutions might be required, similar to those implemented after the global financial crisis. In light of the successful pandemic response, we also consider the benefits of mortgage contracts that allow households to opt into payment moratoria or reduced payment levels in certain situations. To avoid incentive problems, this optionality would ideally either (i) have to be triggered by the declaration of a national emergency or (ii) perhaps more simply be time-limited or tied to periodic amortisation requirements. In all cases, a major advantage of such optionality would be the automatic nature of the option. This would mean that there was no need for urgent coordination among policymakers or lenders to avoid issues such as credit records or risk classifications being altered as a result of the widespread requirement for payment relief.
    Date: 2022–04
  32. By: Antoine Camous; Dmitry Matveev
    Abstract: How should independent central banks react if pressured by fiscal policymakers? We study an environment with strategic monetary-fiscal interactions where the central bank has a limited degree of commitment to follow policies over time and the fiscal authority has none. We contrast the implications of two monetary frameworks: one where the central bank follows a standard rule aiming exclusively at price stability against the other, where monetary policy additionally leans against fiscal influence. The latter rule improves economic outcomes by providing appropriate incentives to the fiscal authority. More importantly, the additional fiscal conditionality can enhance the credibility of the central bank to achieve price stability. We emphasize how the level and structure of government debt emerge as key factors affecting the credibility of monetary policy with fiscal conditionality.
    Keywords: Credibility; Fiscal policy; Monetary policy
    JEL: E02 E52 E58 E61 E62
    Date: 2022–03

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