nep-ban New Economics Papers
on Banking
Issue of 2022‒06‒13
34 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Optimal bank capital requirements: What do the macroeconomic models say? By Gulan, Adam; Jokivuolle, Esa; Verona, Fabio
  2. State-owned banks and international shock transmission By Borsuk, Marcin; Kowalewski, Oskar; Pisany, Pawel
  3. The digital economy, privacy, and CBDC By Ahnert, Toni; Hoffmann, Peter; Monnet, Cyril
  4. The Collateral Channel and Bank Credit By Arun Gupta; Horacio Sapriza; Vladimir Yankov
  5. Enhancing Stress Tests by Adding Macroprudential Elements By William F. Bassett; David E. Rappoport
  6. The Chronology of Brexit and UK Monetary Policy By Martin Geiger; Jochen Güntner
  7. Sovereign Cocos By Juan Carlos Hatchondo; Leonardo Martinez; Yasin Kürsat Önder; Francisco Roch
  8. The Fed's International Dollar Liquidity Facilities: New Evidence on Effects By Linda S. Goldberg; Fabiola Ravazzolo
  9. Financial Development and Income Inequality: Evidence from Advanced, Emerging and Developing Economies By Carolyn Chisadza; Mduduzi Biyase
  10. Implications for Determinacy with Average Inflation Targeting By Ahmad, Yamin; Murray, James
  11. Effectiveness and conduct of macroprudential policy in Indonesia in 2003-2020: Evidence from the structural VAR models By Dąbrowski, Marek A.; Widiantoro, Dimas Mukhlas
  12. Government Spending between Active and Passive Monetary Policy By Collin Philipps; Sebastian Laumer
  13. A Stochastic Climate Model -- An approach to calibrate the Climate-Extended Risk Model (CERM) By Jean-Baptiste Gaudemet; Jules Deschamps; Olivier Vinciguerra
  14. Normalizing the central bank’s balance sheet: Implications for inflation and debt dynamics By Begoña Domínguez; Pedro Gomis-Porqueras
  15. What drove the rise in bank lending rates in Lithuania during the low-rate era? By Jaunius Karmelavičius; Ieva Mikaliūnaitė-Jouvanceau; Andrius Buteikis
  16. Cryptocurrencies and Decentralized Finance (DeFi) By Igor Makarov; Antoinette Schoar
  17. Central Bank Digital Currency: Stability and Information By Todd Keister; Cyril Monnet
  18. A Wake-Up Call Theory of Contagion By Ahnert, Toni; Bertsch, Christoph
  19. What Drives Credit Risk? Empirical Evidence from Southeast Europe By Nikola Fabris; Nina Vujanović
  20. Implications of Cyber Risk for Financial Stability By Danny Brando; Antonis Kotidis; Anna Kovner; Michael Junho Lee; Stacey L. Schreft
  21. An application: Pension systems and transitions By Vîntu, Denis
  22. Costs of retail payments – an overview of recent national studies in Europe By Junius, Kerstin; Honkkila, Juha; Jonker, Nicole; Rusu, Codruta; Devigne, Lucas; Kajdi, László
  23. An empirical study of securitisations of non-performing loans By Boudiaf, Ismael Alexander; Miranda, Fernando Gonzalez
  24. Taxes, Risk Taking, and Financial Stability By Kogler, Michael
  25. Exercise Based Pedagogy to transition to Today's Implementation of Monetary Policy in Macroeconomics Principles By James K. Self; Kim P. Kuynh
  26. Why bank money creation? By Gersbach, Hans; Zelzner, Sebastian
  27. Exploring the Trade-Off Between Leaning Against Credit and Stabilizing Real Activity By Luca Benati
  28. Financial Innovations in a World with Limited Commitment: Implications for Inequality and Welfare By Saroj Dhital; Pedro Gomis-Porqueras; Joseph H. Haslag
  29. Central bank digital currency and bank intermediation By Adalid, Ramón; Álvarez-Blázquez, Álvaro; Assenmacher, Katrin; Burlon, Lorenzo; Dimou, Maria; López-Quiles, Carolina; Martín Fuentes, Natalia; Meller, Barbara; Muñoz, Manuel A.; Radulova, Petya; Rodriguez d’Acri, Costanza; Shakir, Tamarah; Šílová, Gabriela; Soons, Oscar; Veghazy, Alexia Ventula
  30. The return of inflation: a bankerâs perspective By Robert Amzallag
  31. Technological progress and institutional adaptations: the case of the Central Bank Digital Currency (CBDC) By Riccardo De Bonis; Giuseppe Ferrero
  32. Managing Monetary Policy Normalization By Gianluca Benigno; Pierpaolo Benigno
  33. Monetary and macroprudential policy interactions in a model of the European Union By Richard Dennis; Pelin Ilbas
  34. Traditional versus Behavioral Finance Theory By Assia Kamoune; Nafii Ibenrissoul

  1. By: Gulan, Adam; Jokivuolle, Esa; Verona, Fabio
    Abstract: The optimal level of banks' capital requirements has been a key research topic since at least the introduction of the Basel rules in the late 1980s. In this paper, we review the literature, focusing on recent findings from quantitative structural macroeconomic models. While dynamic stochastic general equilibrium models capture second-round (general equilibrium) effects such as the feedback effects from macroeconomic outcomes back to financial intermediation and the dynamic evolution of the economy following regulatory changes, they suffer from tractability issues, including treatment of nonlinear effects, that typically force modeling simplifications. Additionally, studies tend to be concerned with determining the optimal level of fixed capital requirements. Only a handful offer estimates of the optimal size of the dynamic buffers. Since optimal dynamic macroprudential policies depend heavily on the nature of the underlying shocks, questions arise regarding the robustness and potential side effects of such plicies. Despite progress, the optimal level of bank capital requirements - in either fixed or dynamic form - remains largely an open research question.
    Date: 2022
  2. By: Borsuk, Marcin; Kowalewski, Oskar; Pisany, Pawel
    Abstract: In this study, we reassess the links between commercial bank ownership and lending growth during the 1996–2019 period. We find evidence that the lending activities of foreign state-controlled and foreign privately owned banks differ, particularly during different crisis type periods and origins. Foreign state-controlled banks’ loan growth rates are higher than those of foreign private-owned banks during host banking crises. By contrast, foreign state-controlled banks reduce their credit growth during a home banking crisis, while foreign private-owned banks increase lending in the host countries. Moreover, we find evidence that bank-specific characteristics were more important determinants of credit growth than ownership structure during the global financial crisis of 2008 and gain in importance in the post-crisis period. JEL Classification: G01, G21, G28
    Keywords: credit growth, crisis, foreign banks, internal capital market, state-controlled banks
    Date: 2022–05
  3. By: Ahnert, Toni; Hoffmann, Peter; Monnet, Cyril
    Abstract: We study a model of financial intermediation, payment choice, and privacy in the digital economy. Cash preserves anonymity but cannot be used for more efficient online transactions. By contrast, bank deposits can be used online but do not preserve anonymity. Banks use the information contained in deposit flows to extract rents from merchants in need of financing. Payment tokens issued by digital platforms allow merchants to hide from banks but enable platforms to stifle competition. An independent digital payment instrument (a CBDC) that allows agents to share their payment data with selected parties can overcome all frictions and achieves the efficient allocation. JEL Classification: D82, E42, E58, G21
    Keywords: central bank digital currency, digital platforms, financial intermediation, payments, privacy
    Date: 2022–05
  4. By: Arun Gupta; Horacio Sapriza; Vladimir Yankov
    Abstract: Our paper studies the role of the collateral channel for bank credit using confidential bank-firm-loan data. We estimate that for a 1 percent increase in collateral values, firms pledging real estate collateral experience a 12 basis point higher growth in bank lending with higher sensitivities for more credit constrained firms. Higher real estate values boost firm capital expenditures and lead to lower unemployment and higher employment growth and business creation. Our estimates imply that as much as 37 percent of employment growth over the period from 2013 to 2019 can be attributed to the relaxation of borrowing constraints.
    Keywords: Collateral channel; Firm borrowing constraints; Bank credit allocation; Corporate investment; Macro-finance; Transmission mechanism
    JEL: E44 G21
    Date: 2022–05–10
  5. By: William F. Bassett; David E. Rappoport
    Abstract: The use of stress testing for macroprudential objectives is advanced by modeling spillovers within the financial sector or between the real and financial sectors. In this chapter, we discuss several macroprudential elements that capture these spillovers and how they might be added to stress test frameworks. We show how funding spillovers can be modeled as an add-on, using a reduced-form relation between banks' funding cost, bank capital and economic activity. Using a calibration to US data, we project very modest funding spillovers conditional on the DFAST 2018 severely adverse scenario. We describe the pros and cons of modeling different types of spillovers using this approach.
    Keywords: Bank capital; Funding shocks; Macroprudential policy; Stress testing
    JEL: E58 G28
    Date: 2022–05–06
  6. By: Martin Geiger (Liechtenstein Institute); Jochen Güntner
    Abstract: The outcome of the referendum on the UK’s membership of the European Union in June 2016 was largely unanticipated by politicians and pundits alike. Even after the “Leave†vote, the uncertainty surrounding the withdrawal process might have affected the UK economy. We draw on an official list of political events published by the House of Commons Library and daily data on UK stock prices, exchange rates, and economic policy uncertainty to construct a novel instrument for Brexit shocks. Including a monthly aggregate of this time series into a vector-autoregressive model of the UK economy, we find that Brexit shocks were quantitatively important drivers of the business cycle in the aftermath of the referendum that lowered gross domestic product, consumer confidence, and monetary policy rates while raising CPI inflation. A counterfactual experiment, in which we shut down the endogenous response of UK monetary policy to Brexit shocks, reveals that the Bank of England fended off a stronger contraction of output in 2016 and 2018.
    Keywords: Brexit, business cycle, economic policy uncertainty, high-frequency identification, monetary policy
    JEL: E02 E31 E32 E44 E58 F15
    Date: 2022–05
  7. By: Juan Carlos Hatchondo (Western University); Leonardo Martinez (IMF); Yasin Kürsat Önder (Ghent University); Francisco Roch (IMF)
    Abstract: We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government faces liquidity shocks in the form of an increase of the bondholders’ risk aversion. We find that in spite of reducing the frequency of defaults triggered by liquidity shocks, introducing cocos increases the overall default frequency. By mitigating concerns about liquidity, cocos make indebtedness and default risk more attractive for the government. In contrast, cocos that stipulate debt forgiveness when the government faces the shock, achieve larger welfare gains by reducing default risk.
    Date: 2022–05
  8. By: Linda S. Goldberg; Fabiola Ravazzolo
    Abstract: In March 2020, the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) repo facility. We provide new evidence on how the central bank swap lines and FIMA repo facility reduce strains in global dollar funding markets and US Treasury markets during extreme stress events. These facilities are found to contribute to the narrowing of foreign exchange swap basis spreads and to reduce the sensitivity of global funding strain metrics to risk sentiment deterioration. Cross border flows through banks for excess liquidity support purposes are reduced in the near term, and the risk sensitivity of equity and bond fund flows declines. However, access to these facilities leave longer-term patterns of liquidity and capital flows across borders broadly unchanged. While official sector liquidity hoarding and “dash for cash” type of activity is expected to be lower with access to these facilities, initial evidence does not show general differential changes in foreign exchange reserve holdings by foreign central banks in line with the type of liquidity access.
    JEL: F31 F33 F42 G01 G15
    Date: 2022–04
  9. By: Carolyn Chisadza (Department of Economics, University of Pretoria, Pretoria, South Africa); Mduduzi Biyase (Director of the Economic Development and Well-being Research Group (EDWRG); Senior lecturer at the School of Economics, University of Johannesburg)
    Abstract: Using a broad-based index of financial development, this paper investigates the effects of financial development on income inequality for 148 countries between 1980 and 2019. The findings indicate that in general, financial development reduces inequality across emerging and least developed countries, but is not statistically significant for advanced countries. However, when we disaggregate the financial development index into its sub-components (financial institutions and financial markets), we find different effects on inequality, based on the levels of development. Further investigation on the dimensions under financial institutions and financial markets (depth, access and efficiency) reveals that banking sector development under financial institutions has income inequality-reducing effects in emerging and least developed countries, while stock market development under financial markets widens inequality in least developed countries. The findings in our paper firstly highlight the nuances in financial development depending on the level of development in countries, and secondly that policies focussed on financial inclusion of the poor can mitigate inequality.
    Keywords: financial development, financial markets, inequality, financial institutions
    JEL: C22 D63 G20 O55
    Date: 2022–04
  10. By: Ahmad, Yamin; Murray, James
    Abstract: We use a standard New Keynesian model to explore implications of backward- and forward-looking windows for monetary policy with average inflation targeting and investigate the conditions for determinacy. A unique equilibrium rules out sunspot shocks that can lead to self-fulfilling shocks for inflation expectations. We find limitations for the length of the forward window and demonstrate how this depends on other parameters in the model, including parameters governing monetary policy and expectations formation.
    Keywords: Average Inflation Targeting, Determinacy, Monetary Policy
    JEL: E50 E52 E58
    Date: 2022–05–13
  11. By: Dąbrowski, Marek A.; Widiantoro, Dimas Mukhlas
    Abstract: The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-Covid-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-Covid-19 period.
    Keywords: macroprudential policy; loan-to-value policy; structural vector autoregressive models; financial stability
    JEL: E44 E58 F41 G10
    Date: 2022–05–05
  12. By: Collin Philipps (Department of Economics and Geosciences, US Air Force Academy); Sebastian Laumer (Department of Economics, University of North Carolina Greensboro)
    Abstract: Theory suggests that the government spending multiplier is larger when monetary policy is passive. We find instead that, regardless of the monetary policy regime at the time of a spending shock, the central bank responds actively towards inflation quickly after the shock. This rapid monetary policy response leaves multipliers ultimately unaffected by whether the initial regime was active or passive. Our analysis highlights the necessity of accounting for the monetary policy reaction to spending shocks. Failure to do so ignores the central bank’s ability to respond to shocks, potentially leading to a misrepresentation of how multipliers depend on monetary policy.
    Keywords: Fiscal Multiplier, Monetary Policy, Nonlinear SVARs
    JEL: C32 E32 E62
    Date: 2022–05
  13. By: Jean-Baptiste Gaudemet; Jules Deschamps; Olivier Vinciguerra
    Abstract: The initial Climate-Extended Risk Model (CERM) addresses the estimate of climate-related financial risk embedded within a bank loan portfolio, through a climatic extension of the Basel II IRB model. It uses a Gaussian copula model calibrated with non stationary macro-correlations in order to reflect the future evolution of climate-related financial risks. In this complementary article, we propose a stochastic forward-looking methodology to calibrate climate macro-correlation evolution from scientific climate data, for physical and transition efforts specifically. We assume a global physical and transition risk, likened to persistent greenhouse gas (GHG) concentration in the atmosphere. The economic risk is considered stationary and can therefore be calibrated with a backward-looking methodology. We present 4 key principles to model the GDP and we propose to model the economic, physical and transition effort factors with three interdependent stochastic processes allowing for a calibration with seven well defined parameters. These parameters can be calibrated using public data. This new approach means not only to evaluate climate risks without picking any specific scenario but also allows to fill the gap between current one year approach of regulatory and economic capital models and the necessarily long-term view of climate risks by designing a framework to evaluate the resulting credit loss on each step (typically yearly) of the transition path. This new approach could prove instrumental in the 2022 context of central banks weighing the pros and cons of a climate capital charge.
    Date: 2022–05
  14. By: Begoña Domínguez; Pedro Gomis-Porqueras
    Abstract: We explore the effects of reducing the overall size of the central bank’s balance sheet and lowering its maturity structure. To do so, we consider an environment where fiscal policy is traditionally passive and the central bank follows the Taylor principle. In addition, the monetary authority has also explicit size and compositional rules regarding its balance sheet. Agents in this economy face limited commitment in some markets and government bonds can be used as collateral. When short and long-term public debt exhibit premia, changes in the central bank’s balance sheet have implications for long-run inflation and real allocations. To ensure a unique locally stable steady state, the central bank should target a low enough maturity composition of its balance sheet. In our numerical exercise, calibrated to the United States, we find that long-term debt holdings by the central bank should be less than 0.5 times of their short-term positions. Moreover, the process of balance sheet normalization should aggressively respond to the total debt issued in the economy relative to its target. These findings depend on the degree of liquidity of long-term bonds. The more liquid long-term bonds are, the lower is the value of the composition threshold and the parameter space consistent with unique and stable equilibria is smaller. In addition, we consider a modified Taylor rule that takes into account the premium. Such rule increases the prevalence of multiplicity of steady states and delivers lower welfare. Thus, we argue that the traditional Taylor rule is appropriate for managing interest rates in the presence of premia.
    Keywords: Inflation, Government Bonds, Liquidity, Spreads, Maturity, Balance Sheet.
    JEL: E40 E61 E62 H21
    Date: 2022–05
  15. By: Jaunius Karmelavičius (Bank of Lithuania); Ieva Mikaliūnaitė-Jouvanceau (Bank of Lithuania); Andrius Buteikis (Bank of Lithuania)
    Abstract: While Euro area interest rates were responding to accommodative monetary policy and 201519, in stark contrast, Lithuania’s bank lending rates increased. decreasing throughout Although the rates have slightly dropped around t he onset of the pandemic, they are still question, what were the elevated and well above the EA figures. This paper calls into drivers of such interest rate dynamics in Lithuania? By analysing the historical events and practical aspects of loan pricing in Lithuania’s banking industry, we build an empirical lending rate variation across banks, time and lending segments, and model that exploits maps it to different drivers of pricing. We find that the recent changes in lending rates in response to changes can be attributed to avera ge bank margins, which moved largely in market concentration.
    Keywords: interest rates, loan pricing, banking, concentration, capital requirements
    JEL: D22 D40 E43 G21 L11
    Date: 2022–05–20
  16. By: Igor Makarov; Antoinette Schoar
    Abstract: The paper provides an overview of cryptocurrencies and decentralized finance. The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance, anti-money laundering laws, and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.
    JEL: G1 G2 G20 G21 G23 G3
    Date: 2022–04
  17. By: Todd Keister (Rutgers University); Cyril Monnet (University of Bern, Study Center Gerzensee, Swiss National Bank)
    Abstract: We study how the introduction of a central bank digital currency (CBDC) would affect the stability of the banking system. We present a model that captures a concern commonly raised in policy discussions: the option to hold CBDC can increase the in- centive for depositors to run on weak banks. Our model highlights two countervailing effects. First, banks do less maturity transformation when depositors have access to CBDC, which leaves them less exposed to depositor runs. Second, monitoring the flow of funds into CBDC allows policymakers to more quickly identify weak banks and take appropriate action, which also decreases the incentive for depositors to run. Our results suggest that a well-designed CBDC may decrease rather than increase financial fragility.
    Date: 2022–05
  18. By: Ahnert, Toni; Bertsch, Christoph
    Abstract: We offer a theory of financial contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex-post exposure to region 1. We explore normative and testable implications of the model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work. JEL Classification: D83, F3, G01, G21
    Keywords: bank run, contagion, financial crises, fundamental re-assessment., global games, information choice, wake-up call
    Date: 2022–05
  19. By: Nikola Fabris; Nina Vujanović (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Bank stability is an important aspect of financial stability, especially in bank-centric systems such as those in Southeast Europe. The financial crisis has shown that there is a particular need to monitor credit and other similar risks. Hence, it is important to analyse risks affecting the stability of both the banking sector and the financial system as a whole. To that end, central banks have developed macroprudential policies aiming to safeguard financial stability. However, little is known about the drivers of some financial risks. In that context, this study analyses the determinants of credit risk, which is the most prominent risk in the banking sectors of three selected Southeast European economies – Montenegro, Kosovo* and Bosnia and Herzegovina. Dynamic panel data techniques were applied to 48 banks, which represent almost the entire banking sectors in the respective countries. The empirical evidence has shown that both macroeconomic and bank-specific determinants represent influential factors driving credit risk in Southeast Europe. Particularly important macroeconomic factors affecting credit risk are business cycle and sovereign debt. On the other hand, bank size, capital levels, credit activity and profitability are the most prominent factors influencing credit risk in the region.
    Keywords: Credit Risk, Financial Stability, Southeast Europe, Banking
    JEL: G21 E37
    Date: 2022–05
  20. By: Danny Brando; Antonis Kotidis; Anna Kovner; Michael Junho Lee; Stacey L. Schreft
    Abstract: Cyber risk, defined as the risk of loss from dependence on computer systems and digital technologies, has grown in the financial system. Cyber events, especially cyberattacks, are among the top risks cited in financial stability surveys in the United States and globally.
    Date: 2022–05–12
  21. By: Vîntu, Denis
    Abstract: The classical IS-LM model does not have inflation and inflation expectation in it; it is exogenous. The LM curve shifts as the price level changes and subsequently the real money supply changes assuming the money stock stays the same. The decreasing interest rate pressure on the private sector translates into an accelerating rise in investments. Suppose an economy is at unemployment equilibrium. Inflation is stable so the central bank has no price-caused reason to intervene. To stimulate the economy, the central bank cuts (nominal) interest rate horizon. One type frequently discussed is when expansionary fiscal policy reduces investment spending by the private sector. The government spending is "crowding out" investment because it is demanding more loanable funds and thus causing increased interest rates and therefore reducing investment spending. This basic analysis has been broadened to multiple channels that might leave total output little changed or even smaller. As Keynesian economics, the Phillips curve provided a menu of tradeoffs for policy-makers: They could use demand management policies to increase output and decrease unemployment, but this could only be done at the expense of higher inflation.
    Keywords: IS-LM model; dynamic general equilibrium (DGE); Monetary Policy, Policy Design and Consistency; discrete regression; prices; econometric methods; IS-LM model; dynamic general equilibrium (DGE); Monetary Policy, Policy Design and Consistency; discrete regression; prices; econometric methods
    JEL: C13 E21 E41 E44
    Date: 2022–05
  22. By: Junius, Kerstin; Honkkila, Juha; Jonker, Nicole; Rusu, Codruta; Devigne, Lucas; Kajdi, László
    Abstract: The paper provides an overview of studies on the social and private costs of retail payments conducted since 2013 in nine EU countries and collates the results obtained. Social costs of retail payments are the overall costs resulting from providing payment services to society and deriving from the resource costs incurred by all parties along the payment chain. Private costs, in contrast, are the costs incurred by the individual stakeholder only, such as banks and other payment intermediaries. Understanding the social and private costs of retail payments is crucial for assessing the impact of the rapidly changing retail payment landscape, such as the shift to electronic payments, and for designing strategies for moving towards cost efficient retail payments. JEL Classification: D23, D24, O52, E42
    Keywords: payment instruments, private costs, retail payments, social costs
    Date: 2022–05
  23. By: Boudiaf, Ismael Alexander; Miranda, Fernando Gonzalez
    Abstract: After addressing the securitisation of non-performing loans (NPLs) within the broader context of the ECB’s efforts to reduce NPL stocks and inflows, we investigate the structural and pricing features of NPL securitisations, issued by large banks in the euro area, by drawing on a unique and comprehensive dataset. In doing so, we provide an overview and typology of NPL securitisations issued in the past five years by large banks in the euro area and propose a concrete framework to compare and assess NPL securitisations across multiple dimensions. Despite methodological constraints resulting from the inherently bespoke nature of securitisations, we are able to identify structural differences between transactions that rely solely on private market participants and transactions that benefit from government guarantee schemes. Indeed, the existing data indicates that transactions involving government guarantee schemes display distinct structural features and higher costs for originating banks when compared with purely private market transactions in our dataset. Our analysis indicates that government guarantee schemes might not solely act as an incentive to new investors who would otherwise not invest in NPLs, but possibly also create conditions, for a new market, distinct in particular from the private NPL securitisations market (in terms of asset quality, capital efficiency, etc.). We believe that further research on the impact of government guarantee schemes on market participants’ behaviour and on the pricing and structuring of NPL transactions, as well as their impact over time would greatly help policymakers and supervisors to strengthen the design of future policy options for dealing with NPL stocks. JEL Classification: G21, G28, G29
    Keywords: asset quality, government policy and regulation., lending conditions, non-performing loans, Securitisations, state guarantees
    Date: 2022–05
  24. By: Kogler, Michael
    Abstract: After the global financial crisis, the use of taxes to enhance financial stability received new attention. This paper compares two ways of taxing bank leverage, namely, an allowance for corporate equity (ACE), which addresses the debt bias in corporate taxation, and a Pigovian tax on bank debt (bank levy). We emphasize financial stability gains driven by lower bank asset risk and develop a principal-agent model, in which risk taking depends on the bank's capital structure and, by extension, on the tax treatment of debt and equity because of moral hazard. We find that (i) the ACE unambiguously reduces risk taking, (ii) bank levies reduce risk taking if they are independent of bank performance but may be counterproductive otherwise, (iii) high corporate tax rates render the bank levies less effective, and (iv) taxes are especially effective if capital requirements are low.
    Keywords: Pigovian taxes, corporate tax reform, bank risk taking, financial stability
    JEL: G21 G28 H25
    Date: 2022–05
  25. By: James K. Self (Indiana University, Department of Economics); Kim P. Kuynh (Bank of Canada and Indiana University, Department of Economics)
    Abstract: The process by which most Central Banks target nominal interest rates and implement monetary policy has changed considerably in the last 20 years. Today, the use of interest payments on reserves and the decoupling of rate targets (e.g., the Fed Funds Rate) from reserve targets now play a crucial role in Central Banks policy decisions. However, in introductory macroeconomics textbooks, monetary policy implementation focuses on the relation of reserves in the system to the deposit multiplier and money stock, which leads to a discussion of interest rate targeting resulting from effective adjustments to the money supply. The main problem with that focus is that the target rate is not dependent on the money multiplier or strict control of the money stock. Instead, the current policy uses interest payments on reserves to create a floor that sets the target rate. This process leaves the system's reserves mostly independent of the targeting process. As a result, the current pedagogy leaves students unaware of the actual process used to target rates and an unrealistic interpretation of money multipliers' importance. We survey commonly used introductory macroeconomic books to highlight current pedagogy. Moreover, we show how it can be changed to reflect a Central Bank’s current practice to implement monetary policy. We also provide key learning objectives to transform outdated monetary policy implementation pedagogy consistent with existing Federal Reserve Bank practices.
    Keywords: monetary policy implementation, excess reserves, pedagogy
    Date: 2022–05
  26. By: Gersbach, Hans; Zelzner, Sebastian
    Abstract: We provide a rationale for bank money creation in our current monetary system by investigating its merits over a system with banks as intermediaries of loanable funds. The latter system could result when CBDCs are introduced. In the loanable funds system, households limit banks' leverage ratios when providing deposits to make sure they have enough "skin in the game" to opt for loan monitoring. When there is unobservable heterogeneity among banks with regard to their (opportunity) costs from monitoring, aggregate lending to bank-dependent firms is inefficiently low. A monetary system with bank money creation alleviates this problem, as banks can initiate lending by creating bank deposits without relying on household funding. With a suitable regulatory leverage constraint, the gains from higher lending by banks with a high repayment pledgeability outweigh losses from banks which are less diligent in monitoring. Bank-risk assessments, combined with appropriate risksensitive capital requirements, can reduce or even eliminate such losses.
    Keywords: monetary system,banking,money creation,loanable funds,capitalrequirements,leverage constraint,asymmetric information,moral hazard,CBDC
    JEL: E42 E44 E51 G21 G28
    Date: 2022
  27. By: Luca Benati
    Abstract: Evidence from monetary VARs for ten countries points towards an unfavorable trade-off between leaning against credit fluctuations and stabilizing real economic activity. Results are robust both across countries, and based on two alternative approaches, i.e. either (i) focusing on the impact of monetary policy shocks, which I identify based on a combination of zero and sign restrictions, or (ii) analyzing ‘modest’ policy interventions in which the central bank reacts weakly, but systematically, to credit fluctuations. In particular, a modest intervention suggests that in the U.S. during the years leading up to the financial crisis a 1% shortfall in real GDP would have been associated with a decrease in credit leverage by 2.5 percentage points.
    Keywords: Credit; structural VARs; sign restrictions; zero restrictions; Lucas critique
    Date: 2022–05
  28. By: Saroj Dhital (Economics and Business Department, Southwestern University); Pedro Gomis-Porqueras (School of Economics and Finance, Queensland University of Technology, Brisbane, Australia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: Do financial innovations benefit or harm expected welfare? For innovations that provide greater access to banks, researchers have argued that lower transaction costs and better project assessments result in expected welfare gains. Others, however, have shown that with incomplete markets, financial innovations result in expected welfare losses. In this paper, we examine the impacts of financial innovations in economies with incomplete markets and limited commitment. We show that the results critically depend on whether assets are priced fundamentally or not. When priced fundamentally, greater access does improve expected welfare, also resulting in greater consumption inequality. However, when assets carry a premium, there is an additional channel owing to limited commitment. Because of a more severe limited commitment problem, collateral is necessary. A fixed quantity of pledgeable assets are spread across a larger measure of depositors, resulting in less consumption for those with access to banks and consumption inequality decreases. Second, we consider a financial innovation that increases the pledegeability of one type of bank collateral. We also show that the results critically depend on whether assets are priced fundamentally or not. When assets are priced fundamentally, this type of financial innovation does not change welfare nor consumption inequality. In contrast, when assets carry a premium, better collateral results in more consumption for depositors with access to the more sophisticated payment option. We extend our model economy to consider an endogenous decision to access checkable deposits. This allows us to examine the effects of changes in the distribution of costs that are important to the choice of participating in observing buyers’ deposit or not. Third, our analysis demonstrates that collateral in a limited commitment framework provides a mechanism through which financial innovation can increase or decrease the impact that financial innovations have on welfare and inequality.
    Keywords: welfare, financial innovation, financial access, inequality
    JEL: E40 E61 E62 H21
    Date: 2022–05
  29. By: Adalid, Ramón; Álvarez-Blázquez, Álvaro; Assenmacher, Katrin; Burlon, Lorenzo; Dimou, Maria; López-Quiles, Carolina; Martín Fuentes, Natalia; Meller, Barbara; Muñoz, Manuel A.; Radulova, Petya; Rodriguez d’Acri, Costanza; Shakir, Tamarah; Šílová, Gabriela; Soons, Oscar; Veghazy, Alexia Ventula
    Abstract: In July 2021 the Eurosystem decided to launch the investigation phase of the digital euro project, which aims to provide euro area citizens with access to central bank money in an increasingly digitalised world. While a digital euro could offer a wide range of benefits, it could prompt changes in the demand for bank deposits and services from private financial entities (ECB, 2020a), with knock-on consequences for bank lending and resilience. By inducing bank disintermediation, a central bank digital currency, or CBDC, could in principle alter the transmission of monetary policy and impact financial stability. To prevent this risk, options to moderate CBDC take-up are being discussed widely.In view of the significant degree of uncertainty surrounding the design of a potential digital euro, its demand and the prevailing environment in which it would be introduced, this paper explores a set of analytical exercises that can offer insights into the consequences it could have for bank intermediation in the euro area.Based on assumptions about the degree of substitution between different forms of money in normal times, several take-up scenarios are calculated to illustrate how the potential demand for a digital euro might shape up. The paper then analyses the mechanisms through which commercial banks and the central bank could react to the introduction of a digital euro. Overall, effects on bank intermediation are found to vary across credit institutions in normal times and to be potentially larger in stressed times. Further, a potential digital euro’s capacity to alter system-wide bank run dynamics appears to depend on a few crucial factors, such as CBDC remuneration and usage limits. JEL Classification: E42, E51, G21
    Keywords: bank intermediation, bank runs, CBDC, digital euro
    Date: 2022–05
  30. By: Robert Amzallag
    Abstract: The COVID 19 pandemic followed by the invasion of Ukraine is a two-punch economic strike never seen in recent history. The pandemic not only disrupted many aspects of a tightly knit integrated world but also exposed its fragility. The devastation of Ukraine and the sanctions quickly imposed by most major developed countries have accelerated the retreat of globalization. For many decades, Central Bankers and economists considered stable prices as an almost permanent feature. Today, the consumer price index in the US hit a 40-year high at more than 8 per cent and experts were unable to predict such course of inflation. In this paper, Robert Amzallag, CIRANO Invited Fellow, looks at these recent events in the light of the factors that have altered significantly and reliably inflation since World War II. Despite the dire economic challenges, the economy recovered quickly after the war. The financial imbalances rectified in only a few years and inflation was tamed. Can the same thing be achieved today? The author’s analysis suggests that this is highly improbable. Deep-rooted inflationary forces are at work because of the distortions that the economic order of the last 40 years has created. These distortions, exacerbated by the dual crisis of COVID 19 and the invasion of Ukraine, will take long to repair. La pandémie de COVID 19 et l'invasion de l'Ukraine ont créé un choc économique d’une ampleur jamais vue dans l'histoire récente. La pandémie a perturbé de nombreux aspects d'une économie mondiale tissée serrée. Elle a également mis en évidence sa fragilité. La dévastation de l'Ukraine et les sanctions rapidement imposées par la plupart des grands pays développés ont accéléré le processus de repli de la mondialisation. Pendant de nombreuses décennies, les gouverneurs des banques centrales et les économistes ont considéré la stabilité des prix comme quelque chose de permanent. Aujourd'hui, l'indice des prix à la consommation aux États-Unis a atteint son plus haut niveau depuis 40 ans, à plus de 8 pour cent, une évolution que les experts ont été incapables de prévoir. Dans cet article, Robert Amzallag, Fellow invité CIRANO, examine les événements récents à la lumière de ceux qui ont profondément marqué l’évolution de l'inflation depuis la Seconde Guerre mondiale. Malgré les graves difficultés économiques, l'économie s'est rapidement redressée au sortir de la guerre. En seulement quelques années, les déséquilibres financiers se sont corrigés et l'inflation a été maîtrisée. Est-ce qu’on aura un tel succès aujourd’hui ? Selon l’auteur c’est très improbable. Au cours des 40 dernières années, l’ordre économique a créé des distorsions telles que les forces inflationnistes sont maintenant profondément enracinées. Ces distorsions, exacerbées par le double choc de la COVID 19 et l’invasion de l’Ukraine, mettront du temps à se résorber.
    Keywords: Economic crisis,Inflation,Covid-19,War in Ukraine,Distortions, Crise économique,Inflation,Covid-19,Guerre en Ukraine,Distorsions
    Date: 2022–05–31
  31. By: Riccardo De Bonis (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: The paper summarizes the debate about the proposed introduction of a Central Bank Digital Currency (CBDC). We place the CBDC in the wider context of the different types of money used in market economies. We explore the most important ideas on why economic agents use money, on the history of money and on the distinction between public and private money. We then discuss the digitalization of the payment system and the main characteristics of cryptoassets. We conclude the paper by explaining the reasons for introducing a CBDC as well as the associated risks.
    Keywords: central bank digital currency, history of money, payment system, digitalization, digital euro
    JEL: E42 E58
    Date: 2022–04
  32. By: Gianluca Benigno; Pierpaolo Benigno
    Abstract: We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.
    Keywords: reserve management; central bank balance sheet; quantitative tightening; quantitative easing; interest on reserves
    JEL: E31 E43 E52 E58
    Date: 2022–05–01
  33. By: Richard Dennis; Pelin Ilbas
    Abstract: We use the two-country euro-area model developed by Quint and Rabanal (2014) to study policymaking in the European Monetary Union (EMU). We focus on strategic interactions: 1) between an EMU-level monetary authority and an EMU-level macro-prudential authority, and; 2) between an EMU-level monetary authority and regional macro-prudential authorities. In the former, price stability and financial stability are pursued at the EMU level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and non-cooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. Further, we assess the effects on policy performance of assigning shared objectives across policymakers and of altering the relative importance attached to different policy objectives. In the three-policymaker setting, we find that regional macro-prudential policymakers play an important role in achieving regional stability.
    Keywords: Monetary policy, macro-prudential policy, policy coordination
    JEL: E42 E44 E52 E58 E61
    Date: 2022–04
  34. By: Assia Kamoune (ENCG - Ecole Nationale de Commerce et de Gestion - UH2MC - Université Hassan II [Casablanca]); Nafii Ibenrissoul (ENCG - Ecole Nationale de Commerce et de Gestion - UH2MC - Université Hassan II [Casablanca])
    Abstract: According to traditional finance theorists, in an efficient market, investors think and behave "rationally" when trading, buying, and selling stocks, and each investor considers carefully all available information before making any trading or investment decisions. The theory of the financial market efficiency or efficient market hypothesis (EMH) corresponds to the theory of competitive equilibrium applied to the financial securities market. Indeed, efficiency assumes the atomicity of the market actors and that all the participants are in active competition with the aim of maximizing profits, so that none of them can alone influence the level of prices which will establish themselves in the market. However, behavioral finance, whose main purpose is to study the real behavior of investors in the financial markets, based on social and cognitive psychology, has come to demonstrate with convincing evidence that investors make major systematic errors and that psychological biases affect investors' investment decision-making. In other words, behavioral finance claims that investors tend to have psychological and emotional biases that lead to making irrational investment decisions. In this article, we will try in thefirst part to examine the nature and the extent of knowledge on the theory of the financial markets efficiency, one of the fundamental paradigms in traditional finance. Despite its considerable contribution to economic and financial theory, it has been hotly contested in recent years. In the second part,we will focus on the theory of behavioral finance, its main theory (prospect theory), its main biases and heuristics as well as its contribution and its limits.
    Abstract: Selon les théoriciens de la finance traditionnelle, dans un marché efficient, les investisseurs pensent et se comportent « rationnellement » lorsqu'ils négocient, achètent et vendent des actions, et chaque investisseur tient soigneusement compte de toutes les informations disponibles avant de prendre des décisions d'investissement. La théorie de l'efficience des marchés financiers correspond à la théorie de l'équilibre concurrentiel appliquée au marché des titres financiers. En effet, l'efficience suppose l'atomicité des agents et que les participants sont en concurrence active dans le but de réaliser des profits, de telle sorte qu'aucun d'entre eux ne puisse à lui seul influencer sur le niveau des prix qui s'établiront sur le marché.Cependant, la finance comportementale, ayant pour finalité l'étude des comportements réels des investisseurs au niveau des marchés financiers, en se basant sur la psychologie sociale etcognitive, est venue démontrer avec des preuves convaincantes que les investisseurs commettent des erreurs systématiques majeures et que les biais psychologiques affectent la prise de décision d'investissement des investisseurs. En d'autres termes, la finance comportementale prétend que les investisseurs ont tendance à avoir des préjugés psychologiques et émotionnels qui conduisent à l'irrationalité. Dans cet article, nous allons essayer dans une première partie d'examiner la nature et l'étendue des connaissances sur la théorie de l'efficience des marchés financiers l'un des paradigmes fondamentaux en finance traditionnelle. En dépit de son apport considérable à la théorie économique et financière, elle se trouve vivement contestée depuis ces dernières années. En deuxième partie, nous allons nous focaliser sur la théorie de la finance comportementale, sa principale théorie (théorie des perspectives), ses principaux biais et heuristiques ainsi que son apport et ses limites.
    Keywords: Standard finance,Behavioral finance,Efficient market theory,Prospect theory,behavioral biases.
    Date: 2022

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