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on Banking |
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Issue of 2022‒05‒23
twenty papers chosen by Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana |
| By: | Ronicle, David (Bank of England and International Monetary Fund) |
| Abstract: | This paper brings together modern empirical techniques, a sign-restricted structural vector autoregression, with contemporary high frequency data to answer an old question – what role did macroeconomic policy play in Britain’s high unemployment and deflation in the years 1919 to 1938. Its specific innovation is to draw on a previously little-used weekly publication of public finance statistics, allowing the roles of taxation, public spending and monetary policy to be assessed side-by-side in a coherent framework. In a period of particularly unsettled policy the paper finds that policy shocks, both monetary and fiscal, made a material contribution to variation in prices and unemployment – and these played a central role in the two great recessions of the period, modern Britain’s most severe. Other policy choices could have delivered better outcomes for prices and unemployment – but these would have required making different choices in the face of conflicting objectives and some sharp trade-offs. |
| Keywords: | Monetary policy; fiscal Policy; economic history; Great Depression |
| JEL: | E52 E62 N14 |
| Date: | 2022–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0968&r= |
| By: | Giorgio Albareto (Bank of Italy); Michele Cascarano (Bank of Italy); Stefania De Mitri (Bank of Italy); Cristina Demma (Bank of Italy); Roberto Felici (Bank of Italy); Carlotta Rossi (Bank of Italy) |
| Abstract: | This paper investigates the territorial gap in firms’ access to credit between 2008 and 2019 and describes the functioning of the credit market in the southern regions of Italy. The southern firms are characterized by a higher level of credit risk; all other things being equal, these firms face less favourable credit conditions than others, paying higher interest rates and providing more collateral on loans. Despite this, the dynamics of loans to firms was more marked in the south with respect to the rest of the country, given the support of the southern banks, which increased lending to firms in these regions, especially to small businesses, more than other banks. During the period 2008-2019, the proportion of riskier loans of banks headquartered in the south increased; these banks are characterized by lower quality credit portfolios and lower profitability. |
| Keywords: | firm credit, banking system, credit conditions territorial gaps, Italy’s southern regions |
| JEL: | G10 G21 G3 L10 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_684_22&r= |
| By: | Davide Arnaudo (Bank of Italy); Silvia Del Prete (Bank of Italy); Cristina Demma (Bank of Italy); Marco Manile (Bank of Italy); Andrea Orame (Bank of Italy); Marcello Pagnini (Bank of Italy); Carlotta Rossi (Bank of Italy); Paola Rossi (Bank of Italy); Giovanni Soggia (Bank of Italy) |
| Abstract: | Using a unique dataset based on the results of a survey of almost 280 Italian banks (Regional Bank Lending Survey), this paper presents early evidence on the digital transformation of the Italian banking sector over the period 2007-2018. By building a composite indicator that measures the digital supply of financial services, we show a growth in digitalization over the entire period, with a clear acceleration since 2013. The adoption of digital technologies is not homogeneous across banks and, to an even greater extent, business areas: digitalization started in payment services at the end of the 1990s and then spread to asset management, whereas the use of digital channels in lending is still less frequent. More recently, banks have also implemented new FinTech projects, mainly for digital payments and asset management activities. Lastly, we find a positive correlation between the intensity of technological innovation and bank profitability, and a negative correlation with the number of branches, signalling a potential substitution effect between physical and digital channels. |
| Keywords: | banking system, Big Data, financial services, FinTech, technological innovation |
| JEL: | G10 G21 G23 L86 O33 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_682_22&r= |
| By: | Pavon-Prado, David |
| Abstract: | This paper proposes another factor explaining why the American banking sector accumulates reserves (the reserves-cost mechanism) and its consequences mainly on inflation (reserves-cost channel). The mechanism claims that when banks are holding reserves more expensive than those available in the market, they obtain new reserves and accumulate those unused. In addition, the cost of the sources from where banks obtain their reserves determines banks’ decisions about the loans rate. This originates the reserves-cost channel, whereby banks’ decisions about the loans rate modify the impact of Fed’s policies on final targets such as inflation. I test the validity of the mechanism and channel estimating an SVAR for the period 1922-2020. The results confirm both hypothesis and show that when banks set a loans rate lower in relation to the short-term rate of reference, there is higher demand for credit, output and inflation levels. |
| Keywords: | monetary policy, Federal Reserve, SVARs, excess reserves, reserves cost |
| JEL: | E4 E5 |
| Date: | 2022–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:112797&r= |
| By: | Billio, Monica; Costola, Michele; Hristova, Iva; Latino, Carmelo; Pelizzon, Loriana |
| Abstract: | The present paper proposes an overview of the existing literature covering several aspects related to environmental, social, and governance (ESG) factors. Specifically, we consider studies describing and evaluating ESG methodologies and those studying the impact of ESG on credit risk, debt and equity costs, or sovereign bonds. We further expand the topic of ESG research by including the strand of the literature focusing on the impact of climate change on financial stability, thus allowing us to also consider the most recent research on the impact of climate change on portfolio management. |
| Keywords: | environmental,social,and governance factors (ESG),credit risk,debt cost,equity cost,sovereign bonds,portfolio management |
| JEL: | M14 G24 G11 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:349&r= |
| By: | Jihane Aayale (ISCAE - Institut Supérieur de Commerce et d'Administration des Entreprises); Meriem Seffar (GRM - Groupe de Recherche en Management - EA 4711 - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - UCA - Université Côte d'Azur); James Koutene (ISCAE - Institut Supérieur de Commerce et d'Administration des Entreprises) |
| Abstract: | The Moroccan banking sector has undergone major developments following the structural reforms undertaken and which have enabled it to comply with international standards. The implementation of internal control, compliance and risk management systems has significantly improved its profitability. Indeed, Moroccan banks are subject to restrictive regulations and close supervision by the Moroccan Central Bank, Bank Al-Maghrib, to monitor and regulate their growth and exposure to the various risks inherent to their activities, including credit, liquidity, market and operational risks. Among the banks in the sector, six are listed on the Casablanca Stock Exchange, including market-leading banks such as Attijari Wafa bank, Bank of Africa and Banque Centrale Populaire. On the other hand, the Moroccan stock market attracts several local and foreign investors who would be interested in whether the price of shares and their evolution can be predicted by banking and financial ratios. The main objective of this study is to analyze the relationship between share prices and returns of listed banks and indicators of solvency, liquidity, asset quality and profitability. This article runs a multiple linear regression in a panel data analysis using the financial data of commercial banks listed on the Casablanca Stock Exchange from 2011 to 2020. In an efficient financial market, stock prices and their fluctuations should reflect the profitability of banks, alongside with their liquidity, and their solvency, which is a guarantee of the resilience of the banking during financial and economic crises. The results show that stock prices are not impacted by the level of liquidity, asset quality and profitability indicators, raising a much-debated question about the efficiency of the Moroccan stock market. On the other hand, other tests show that the level of profitability of banks, measured by ROA, is linked to the above-mentioned indicators. |
| Keywords: | Emerging Market,Asset quality,Profitability,Liquidity,Solvency,Stock Market Efficiency,Banks,Share Prices,Stock Returns |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03633358&r= |
| By: | Úbeda, Fernando; Forcadell, Francisco Javier; Aracil, Elisa; Mendez, Alvaro |
| Abstract: | The role of the financial sector is central in reducing income inequality – the goal of SDG 10 – by facilitating economic opportunities. However, institutional weaknesses may also undermine this effect. We argue that sustainable banking generates bidirectional trust to overcome institutional weaknesses, particularly the weak rule of law. Empirical evidence from 46 countries aggregating data of 1060 banks over 2010–2017 shows that sustainable banking lessens income inequality in weak rule of law settings. The results are robust after including the effects of bank digitalisation. This study has important implications for sustainable banking expansion into weak institutional environments and demonstrates banks’ efforts in their commitment to reducing inequality. |
| Keywords: | banks; ESG; inequality; institutions; rule of law; sustainable Development Goals |
| JEL: | F3 G3 |
| Date: | 2022–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:114881&r= |
| By: | Pongsak Luangaram; Nipit Wongpunya |
| Abstract: | This paper develops a small-scale, structural general equilibrium model for the Thai economy. Using Bayesian estimation, we evaluate the conduct of monetary policy under inflation targeting regime. Specifically, we focus on three main issues. First, we investigate whether exchange rate movements are incorporated in the monetary policy formulation. Second, we conduct welfare evaluation under alternative monetary policy settings. Third, we explore how the varying degree of openness could affect the transmission mechanism. Using data over the past 20 years, we find that the Bank of Thailand adjusted policy interest rate in response to exchange rate movements and this helped to reduce both output and inflation fluctuations from global shocks and improves welfare. While higher degree of openness is found to flatten the slope of the Phillips curve, it does not necessarily reduce monetary policy effectiveness. This is because openness also affects the policy coefficients in the central bank’s endogenous reaction function. |
| Keywords: | Small open economy models; Monetary policy rules; Exchange rates; Bayesian analysis; Thai economy |
| JEL: | C32 E52 F41 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:pui:dpaper:179&r= |
| By: | Durante, Ruben (Universitat Pompeu Fabra); Fabiani, Andrea (Bank of Italy); Laeven, Luc (CEPR); Peydró, José-Luis (CEPR) |
| Abstract: | Do media slant news in favor of the banks they borrow from? We study how lending connections affect news coverage of banks earnings reports and of the Eurozone sovereign debt crisis on major newspapers from several European countries. We find that newspapers cover announcements by their lenders - relative to those of other banks - significantly more when they report profits than when they report losses. Such pro-lender bias is stronger for more leveraged outlets and banks, and operates on the extensive margin for general-interest newspapers and on the intensive margin for financial newspapers. Regarding the Eurozone crisis we find that newspapers connected to banks more exposed to stressed sovereign bonds are more likely to promote a narrative of the crisis favorable to banks and to oppose debt-restructuring measures detrimental to creditors. Our findings support the concern that financial distress and increased dependence on creditors may undermine media companies' editorial independence. |
| Keywords: | media bias, banks, newspapers, earnings reports, Eurozone crisis |
| JEL: | G21 L82 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp15214&r= |
| By: | Jaromir Baxa; Jan Zacek |
| Abstract: | We evaluate to what extent inflation-targeting central banks appear to have used their interest rate policies to respond to financial imbalances beyond the reaction via the conventional Taylor-rule variables. First, we use the multivariate structural time series model to extract financial cycles for Australia, Canada, Japan, New Zealand, Sweden, the United Kingdom, and the United States. We then estimate time-varying monetary policy reaction functions extended for the financial cycle. We interpret the responses to the financial cycle as attempts to lean against the wind of financial imbalances. The historical decompositions of interest rates reveal that most central banks raised interest rates in response to asset prices and credit booms in the past, including in the years preceding the global financial crisis. The interest rate response to financial cycles is more pronounced with ex-post than with pseudo real-time data. Finally, we document that the financial crisis of 2008 had less of an impact on credit and real housing prices in countries where the interest rate responses to financial cycles were accompanied by macroprudential measures. |
| Keywords: | Financial cycle, model-based filters, monetary policy, reaction functions |
| JEL: | C32 E32 E40 E44 E52 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2022/4&r= |
| By: | Zheng Zhang; Yingsheng Ji; Jiachen Shen; Xi Zhang; Guangwen Yang |
| Abstract: | Risk assessment is a substantial problem for financial institutions that has been extensively studied both for its methodological richness and its various practical applications. With the expansion of inclusive finance, recent attentions are paid to micro and small-sized enterprises (MSEs). Compared with large companies, MSEs present a higher exposure rate to default owing to their insecure financial stability. Conventional efforts learn classifiers from historical data with elaborate feature engineering. However, the main obstacle for MSEs involves severe deficiency in credit-related information, which may degrade the performance of prediction. Besides, financial activities have diverse explicit and implicit relations, which have not been fully exploited for risk judgement in commercial banks. In particular, the observations on real data show that various relationships between company users have additional power in financial risk analysis. In this paper, we consider a graph of banking data, and propose a novel HIDAM model for the purpose. Specifically, we attempt to incorporate heterogeneous information network with rich attributes on multi-typed nodes and links for modeling the scenario of business banking service. To enhance feature representation of MSEs, we extract interactive information through meta-paths and fully exploit path information. Furthermore, we devise a hierarchical attention mechanism respectively to learn the importance of contents inside each meta-path and the importance of different metapahs. Experimental results verify that HIDAM outperforms state-of-the-art competitors on real-world banking data. |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2204.11849&r= |
| By: | Hirbod Assa; Liyuan Lin; Ruodu Wang |
| Abstract: | The Value-at-Risk (VaR) and the Expected Shortfall (ES) are the two most popular risk measures in banking and insurance regulation. To bridge between the two regulatory risk measures, the Probability Equivalent Level of VaR-ES (PELVE) was recently proposed to convert a level of VaR to that of ES. It is straightforward to compute the value of PELVE for a given distribution model. In this paper, we study the converse problem of PELVE calibration, that is, to find a distribution model that yields a given PELVE, which may either be obtained from data or from expert opinion. We discuss separately the cases when one-point, two-point and curve constraints are given. In the most complicated case of a curve constraint, we convert the calibration problem to that of an advanced differential equation. We further study some technical properties of PELVE by offering a few new results on monotonicity and convergence. |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2204.08882&r= |
| By: | Fernando E. Alvarez; David Argente; Diana Van Patten |
| Abstract: | This paper studies the potential of a cryptocurrency to become a medium of exchange. We use evidence from a natural experiment: In September 2021, El Salvador became the first country in the world to make bitcoin legal tender, and all economic agents were required to accept bitcoin for all payments. The Salvadorean government also launched an app, “Chivo Wallet,” which allowed users to digitally trade both bitcoin and dollars, and gave major incentives to download it. We conduct a representative national face-to-face survey to obtain information on bitcoin’s usage and effects. Leveraging this data, we document how, despite the government’s “big push” and a large fraction of people downloading Chivo Wallet, usage of bitcoin for everyday transactions is low and is concentrated among the banked, educated, young, and male population. We also estimate the fixed cost of adopting the new payment technology, the importance of strategic complementarities for users, and the elasticity of substitution between mobile payments and other payment methods. |
| JEL: | E4 E41 E42 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29968&r= |
| By: | Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang |
| Abstract: | We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the financial payoff and raise the cost of capital. |
| JEL: | G14 G32 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29839&r= |
| By: | Sangyup Choi (Yonsei Univ); Gabriele Ciminelli (OECD); Davide Furceri (IMF) |
| Abstract: | Theory and conventional wisdom suggest that an increase in uncertainty in one country scares away foreign investment. But, due to the limited availability of cross-country uncertainty data, empirical evidence remains scarce. This paper provides a systematic analysis of how foreign capital inflows react to an increase in political and economic uncertainty, proxied using the World Uncertainty Index. We focus on bank credit, portfolio debt, and portfolio equity capital inflows into 143 countries from 51 source countries. We find that an increase in domestic uncertainty induces a substantial and persistent decrease in bank credit and portfolio debt inflows, and (to a lesser extent) in equity inflows. The effects on portfolio flows are larger for countries with more open capital markets. We also uncover important differences in the response of portfolio flows through actively-managed and passive funds. The former are similarly sensitive to changes in uncertainty that are country-specific (purely local uncertainty) and common across countries (global uncertainty), while the latter are only sensitive to global uncertainty. |
| Keywords: | Uncertainty; Capital flows; World Uncertainty Index; Mutual funds; ETFs; COVID-19 |
| JEL: | F21 F32 F42 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2022rwp-195&r= |
| By: | Andrea Barbon (University of St. Gallen); Angelo Ranaldo (University of St. Gallen) |
| Abstract: | Despite the growing adoption of decentralized exchanges, little is known about their market quality. Using a comprehensive dataset, we compare decentralized blockchain-based venues (DEXs) to centralized crypto exchanges (CEXs) assessing two aspects of market quality: price efficiency and market liquidity. We find that CEXs provide better market quality and identify the main friction dampening DEX efficiency as the high gas price stemming from proof-of-work blockchains. We propose and empirically validate a stylized model of DEX liquidity provision, linking trading volume, protocol fees, and liquidity. We identify quantitative conditions needed for DEXs to overtake CEXs in the future. |
| Keywords: | Decentralized Exchanges, Automated Market Making, Blockchain, Decentralized Finance, Market Quality, Limit Order Book |
| JEL: | G14 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2238&r= |
| By: | Benos, Evangelos (University of Nottingham); Ferrara, Gerardo (Bank of England); Ranaldo, Angelo (University of St. Gallen) |
| Abstract: | Using supervisory data from UK central counterparties (CCPs), we study a collateral cycle in which market participants raise liquidity in the repo markets to meet CCPs margin calls, before CCPs reinvest the liquidity through reverse repos as well as bond purchases. In the first leg, we find that increases in the cost of repo funding precede increases in CCP cash margin as market participants anticipate increased margin requirements. However, this effect is moderated by the return leg, where cash margin received by CCPs is returned to market participants via the repo and bond markets. The additional cash being recycled by CCPs via the repo markets alongside the increased demand for safe bonds, create counter‑cyclical effects that lower repo rates, especially at times of stress. |
| Keywords: | Central clearing; margin procyclicality; repo rates |
| JEL: | G10 G12 G14 |
| Date: | 2022–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0966&r= |
| By: | Florian Misch (ESM); Martin Rey (ESM) |
| Abstract: | A greater likelihood of significant asymmetric shocks, the war in Ukraine, and stretched fiscal space all underscore the importance of establishing a euro area fiscal stabilisation capacity. This paper considers the merits of a fund that provides loans for fiscal stabilisation purposes, referred to as ‘stability fund’. First, we argue that this fund could better address moral hazard and be more easily set up than other proposed schemes. Second, using quarterly data from two decades, we model eligibility and the authorities’ decision to request loans to simulate the loan portfolio of this fund had it existed all along, with the loan parameters calibrated to match what the ESM could provide. The results suggest the ESM’s current lending capacity is sufficient to host this fund, and that the expansion of fiscal space can be macroeconomically significant and larger compared to other fiscal stabilisation capacity types. |
| Date: | 2022–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:stm:dpaper:20&r= |
| By: | Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang |
| Abstract: | We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Our measures of Fed Chairs’ emotions expressed in words, voice and facial expressions are created using machine learning. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise the SandP500 index and lower the VIX—indicating that these cues help shape market responses to Fed communications. These effects add up and propagate after the testimony, reaching magnitudes comparable to those after a policy rate cut. Markets respond most to the Chair’s emotions expressed about issues related to monetary policy. |
| Keywords: | Central bank research; Financial markets; Monetary policy communications |
| JEL: | E52 E58 E71 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-20&r= |
| By: | David Lucca; Jonathan H. Wright |
| Abstract: | We study the recent Australian experience with yield curve control (YCC) of government bonds as perhaps the best evidence of how this policy might work in other developed economies. We interpret the evidence with a simple model in which YCC affects prices of both government and other bonds via “broad” transmission channels, but only government bond prices through “narrow” liquidity channels. YCC seemingly worked well in 2020 while the market expected short rates to stay at zero for long. But as the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased most of the outstanding amount of the targeted government bond, and its yield dislocated from other financial market instruments. The model and empirical evidence point to narrow transmission channels playing more prominent roles than broad channels considered in prior studies of quantitative easing (QE), such as portfolio balance effects and signaling about short term rates. We argue that asset-specific narrow channels may be primary transmission mechanisms of quantity-based QE policies as well. |
| JEL: | C32 E43 E52 G12 G14 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29971&r= |