nep-ban New Economics Papers
on Banking
Issue of 2022‒06‒20
33 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending By Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
  2. A baseline stock-flow model for the analysis of macroprudential regulation for Latin America and the Caribbean By Esteban Ramon Perez Caldentey; Lorenzo Nalin; Leonardo Rojas
  3. Capital requirements, market structure, and heterogeneous banks By Müller, Carola
  4. Is the Bank of Canada concerned about inflation or the state of the economy? By Ke Pang, Christos Shiamptanis
  5. Managing Monetary Policy Normalization By Gianluca Benigno; Pierpaolo Benigno
  6. The Adverse Effect of “Mandatory” Flood Insurance on Access to Credit By Kristian S. Blickle; Katherine Engelman; Theo Linnemann; João A. C. Santos
  7. Climate Stress Test: bad (or good) news for the market? An Event Study Analysis on Euro Zone Banks By Costanza Torricelli; Fabio Ferrari
  8. The Great Recalibration of U.S. Monetary Policy By Loretta J. Mester
  9. The sustainable practices of multinational banks as drivers of financial inclusion in developing countries By Úbeda, Fernando; Mendez, Alvaro; Forcadell, Francisco Javier
  10. Market Operations under the Three-Tier System- Explanation Using the Reserve Demand Curve Model - By Takuto Arao
  11. The Yield and Market Function Effects of the Reserve Bank of Australia's Bond Purchases By Richard Finlay; Dmitry Titkov; Michelle Xiang
  12. Zombie-Lending in the United States: Prevalence versus Relevance By Maximilian Göbel; Nuno Tavares
  13. The U.S. rise in inflation levels and the loss of purchasing powers. By De Koning, Kees
  14. Finance-Growth Nexus: Evidence from Angola By Manuel Ennes Ferreira; Jelson Serafim; João Dias
  15. A basic macroeconomic agent-based model for analyzing monetary regime shifts By Florian Peters; Doris Neuberger; Oliver Reinhardt; Adelinde Uhrmacher
  16. State-Contingent Forward Guidance By Julien Albertini; Valentin Jouvanceau; Stéphane Moyen
  17. Development bank financing in the context of the COVID-19 crisis in Latin America and the Caribbean By Cipoletta Tomassian, Georgina; Abdo, Tarek
  18. Financial Repercussions of SNAP Work Requirements By Samuel Dodini; Jeff Larrimore; Anna Tranfaglia
  19. Effects of inflation (consumer price index) and other macroeconomic variables on bank deposits: Evidence from Pakistan By Mushtaq, Saba; Mushtaq, Faiza
  20. Lost in Negative Territory? Search for Yield! By Mattia Girotti; Guillaume Horny; Jean-Guillaume Sahuc
  21. Credit Availability for Minority Business Owners in an Evolving Credit Environment: Before and During the COVID-19 Pandemic By Brett Barkley; Mark E. Schweitzer
  22. Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification By Pablo Ottonello; Wenting Song
  23. Supply Chain Network and Credit Supply By Kensuke Fukunaga; Daisuke Miyakawa
  24. Finance needs of the agricultural midstream and the prospects for digital financial services By Ambler, Kate; de Brauw, Alan; Herskowitz, Sylvan; Pulido, Cristhian
  25. How well can large banks in Canada withstand a severe economic downturn? By Andisheh (Andy) Danaee; Harsimran Grewal; Brad Howell; Guillaume Ouellet Leblanc; Xuezhi Liu; Xiangjin Shen; Mayur Patel
  26. The Relevance of Banks to the European Stock Market By Andreas Kick; Horst Rottmann
  27. A Model of Financial Market Control By Yoshihiro Ohashi
  28. A Model of the Relationship between the Interest Rate and the Profit Rate By Zolea, Riccardo
  29. Global Stagflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  30. Remittances and Income Inequality in Africa: Financial Development Thresholds for Economic Policy By Ofori, Isaac K.; Gbolonyo, Emmanuel; Dossou, Marcel A. T.; Nkrumah, Richard K.
  31. Expanding access to finance to boost growth and reduce inequalities in Mexico By Alessandro Maravalle; Alberto González Pandiella
  32. Modelling CDS Volatility at Different Tenures: An Application for Latin-American Countries By Fredy Gamboa-Estrada; José Vicente Romero
  33. A Functional Analysis of the Banking Industry By Riccardo Zolea

  1. By: Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
    Abstract: In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.
    Keywords: reserve requirements; reserve demand; excess reserves; money multiplier
    JEL: E51 E58 G21 G28 N12 N22
    Date: 2022–05–04
  2. By: Esteban Ramon Perez Caldentey; Lorenzo Nalin; Leonardo Rojas
    Abstract: This paper provides a critical view of macroprudential regulation/policies found in mainstream and post-Keynesian economics. The paper provides a macroeconomic framework that can be used as a basis for the analysis of macroprudential guidelines and policies. It is based on on five main principles/guidelines: (i) financial fragility is endogenous and results from the normal functioning of market based economies driven by the profit motive; (ii) financial fragility can originate in the financial and real sectors of an economy; (iii) financial cycles are not necessarily driven by boom and busts and financial fragility need not originate in an economic boom; (iv) macroprudential policies should be viewed from a dynamic perspective, that is they must take into account the changes in the international financial architecture/structure and be region/country specific; and (v) macroprudential regulation/guidelines requires a truly macroeconomic framework. These principles are captured in the specification of a baseline stock-flow model for Latin America and the Caribbean with five sectors (government, central bank, financial sector, private sector, and external sector). The model is a tool that can be used for evaluating other macroprudential policies.
    Keywords: Debt, external constraint, external financial cycle, financial flows, Latin America and the Caribbean, microprudential and macroprudential regulation, stock-flow
    JEL: B59 E32 E52 F21 F41 G15
    Date: 2022–05
  3. By: Müller, Carola
    Abstract: Bank regulators interfere with the efficient allocation of resources for the sake of financial stability. Based on this trade-off, I compare how different capital requirements affect default probabilities and the allocation of market shares across heterogeneous banks. In the model, banks' productivity determines their optimal strategy in oligopolistic markets. Higher productivity gives banks higher profit margins that lower their default risk. Hence, capital requirements indirectly aiming at highproductivity banks are less effective. They also bear a distortionary cost: Because incumbents increase interest rates, new entrants with low productivity are attracted and thus average productivity in the banking market decreases.
    Keywords: bank competition,bank regulation,Basel III,capital requirements,heterogeneous banks,leverage ratio
    JEL: G11 G21 G28
    Date: 2022
  4. By: Ke Pang, Christos Shiamptanis (Wilfrid Laurier University)
    Abstract: This paper examines the historical behaviour of the Bank of Canada (BoC) from 1991, when the BoC adopted inflation targeting, until 2015. We use a newly released dataset that contains quarterly vintages of real-time historical data and BoC staff forecasts, and we present three novel empirical findings. First, over the full sample period we find that the BoC responds both to inflation and the real economy. The long-run coefficient on inflation exceeds unity, satisfying the Taylor principle. Second, we fi nd that there is considerable variation in the monetary policy coefficients. During the early period of our sample, we fi nd a strong response to inflation and no response to the real economy. But over time we fi nd that the response to inflation weakens, the Taylor principle disappears, and the response to the real economy rises substantially. At the later part of our sample, the BoC appears to respond to the real economy, but not to inflation. Third, we investigate if the BoC is responding to an alternative inflation measure that captures persistent inflation deviations, that is inflation that remains away from its target for an extended period. We augment our monetary policy rule with this new inflation measure and find that the BoC responds asymmetrically to positive and negative persistent inflation deviations, suggesting that persistent inflation overshooting and undershooting elicit different responses.
    Keywords: monetary policy, forward looking Taylor rule, real-time data and forecasts, inflation deviations
    JEL: E42 E43 E52 E58
    Date: 2022–05
  5. 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
  6. By: Kristian S. Blickle; Katherine Engelman; Theo Linnemann; João A. C. Santos
    Abstract: The National Flood Insurance Program (NFIP) was designed to reduce household and lender flood-risk exposure and encourage lending. In this post, which is based on our related study, we show that in certain situations the program actually limits access to credit, particularly for low-income borrowers—an unintended consequence of this well-intentioned program.
    Keywords: flood maps; climate change; bank lending; regulation; unintended consequences
    JEL: D14 G52
    Date: 2022–05–23
  7. By: Costanza Torricelli; Fabio Ferrari
    Abstract: The scope of this paper is to assess the effect 2021 ECB Climate stress test on the stock prices of the banks included in the exercise. To this end, we set up an event study analysis, whereby at the relevant dates we use market data in order to test for the existence of abnormal returns. Three main results emerge from our research. First, on 18.03.2021 investors’ fear arising from the details published about the methodology of the ECB climate stress test and some preliminary evidence had a negative impact on banks stock prices. Second, on the date of publication of the final results on 22.09.21, we find a positive reaction from market participants, since the market possibly expected the banks’ exposure to climate risks to be greater than the one emerging from final results. Third, on the starting date of COP26, an event related to the worldwide consensus on the need to manage climate change, we find a negative effects on banks’ quote that can be explained by the too tiny progresses reached by the summit, which are considered too mild and not adequate to reach the Paris Agreement goals. Finally, robustness tests including small banks not directly supervised by the ECB and banks with a business model not focused on credit intermediation, indicate that the market consider them less exposed to climate risks than larger banks. Our results may have implications in view of future climate stress tests.
    Keywords: banks climate stress test; physical risk; transition risk; abnormal returns; event study.
    JEL: G14 G28 F55
    Date: 2022–05
  8. By: Loretta J. Mester
    Abstract: It is a pleasure to participate in this policy panel at the International Research Forum on Monetary Policy sponsored by the Euro Area Business Cycle Network, the European Central Bank, and the Federal Reserve Board. The Federal Open Market Committee (FOMC) met last week; so in my brief prepared remarks, I will review the FOMC’s recent decisions and put them into context. As a reminder, the views I present today will be my own and not necessarily those of the Federal Reserve System or of my colleagues on the Federal Open Market Committee.
    Keywords: Monetary Policy; Pandemic
    Date: 2022–05–13
  9. By: Úbeda, Fernando; Mendez, Alvaro; Forcadell, Francisco Javier
    Abstract: Lack of access to banking is a major problem that contributes to inequality in the developing world. For this reason, financial inclusion is a crucial objective of the Sustainable Development Goals (SDGs). In this study, we investigate the impact of the sustainable practices of multinational banks (MNBs) on financial inclusion. Drawing from a sample of 24 developing countries and 28,089 individuals, we obtain robust evidence about the positive effect of sustainable practices on financial inclusion. We find that MNBs increase the use of mobile bank accounts in the developing world. We also find that when these MNBs follow sustainable practices, the use of mobile bank accounts positively intensifies. These findings are consequential because mobile banking is one of the most powerful means to achieve financial inclusion in the developing world.
    Keywords: sustainable banking; finance inclusion; mobile banking accounts; sustainable development goals
    JEL: G00 G20 G21 Q01 Q56 D63
    Date: 2022
  10. By: Takuto Arao (Bank of Japan)
    Abstract: In Japan's money markets, negative interest rate transactions prevail under the three-tier system applied to the financial institutions' current accounts held at the Bank of Japan. This paper explains the mechanism of short-term interest rate formation under the three-tier system and the concept of market operations using a simple reserve demand curve model. Under the three-tier system, in which current deposits are divided into three tiers and different interest rates are applied to each tier, financial institutions have an incentive to conduct money market transactions for arbitrage purposes depending on to which tier their outstanding current account balances fill up prior to money market transactions. The Bank realizes negative interest rates consistent with yield curve control by taking steps so that the "hypothetical policy-rate balance (the policy-rate balance that remains assuming that arbitrage transactions have taken place in full), " is maintained at a certain level. The shape of the reserve demand curve is considered to be downward sloping around the boundaries of each tier due to the uncertainties over future course of current account balances. The shape and position of the reserve demand curve will change depending on the degree of the uncertainties and other factors such as the use of Special Operations in Response to COVID-19 and various loan support programs. Short-term interest rates also change when arbitrage transactions are not conducted in full due to market friction. It can be interpreted that the Bank influences on short-term interest rates by changing the reserve demand curve and the reserve supply curve through setting the Benchmark Ratio and carrying out market operations based on the information about these factors.
    Keywords: Negative interest rate; Tiered remuneration; Interbank market; Monetary policy implementation
    Date: 2022–05–27
  11. By: Richard Finlay (Reserve Bank of Australia); Dmitry Titkov (Reserve Bank of Australia); Michelle Xiang (Reserve Bank of Australia)
    Abstract: We examine the effect on government bond yields of three Reserve Bank of Australia policy measures implemented following the onset of the COVID-19 pandemic. We also assess the impact of the three measures on government bond market functioning. The three measures were: purchases to support government bond market function over early 2020; the yield target on 3-year Australian government bonds; and the bond purchase program to lower longer-term yields from late 2020 until early 2022. For purchases to support market function, we find that the announcement lowered short-dated Australian Government Securities (AGS) yields, but did not lower longer-dated AGS yields. We also find that such purchases led to lower yields as and when they were implemented, and that they supported market function by lowering bid-offer spreads. For the yield target, we find a substantial announcement effect and moderate implementation effects on yields. Conversely, the yield target appears to have detrimentally affected some aspects of government bond market function. For the bond purchase program, we find an announcement effect of around 30 basis points for longer-term AGS yields, while any implementation effects were small and temporary.
    Keywords: market function; yield target; quantitative easing; event study
    JEL: E52 E58 G12
    Date: 2202–05
  12. By: Maximilian Göbel; Nuno Tavares
    Abstract: Extraordinary fiscal and monetary interventions in response to the COVID-19 pandemic have revived concerns about zombie prevalence in advanced economies. The literature has al- ready linked this phenomenon - observed over the course of the last two decades - to impeding the performance of healthy firms in Japan and Europe. To make the case for the United States, we analyze banks' and capital markets' zombie-lending practices on the basis of a sample of publicly listed U.S. companies. Our results suggest that zombie prevalence and zombie-lending per se are not a defining characteristic of the U.S. economy. Nevertheless, we find evidence for negative spillovers of zombie-lending on productivity, capital-growth, and employment-growth of non-zombies as well as on overall business dynamism. It is predominantly the class of healthy small- and medium-sized companies that is sensitive to zombie-lending activities, with financial constraints further amplifying these effects.
    Keywords: zombie lending; business dynamism; bank credit; non-viable firms; productivity
    JEL: D24 E24 G21 L25 O40
    Date: 2022–05
  13. By: De Koning, Kees
    Abstract: Who, in the U.S., is ultimately responsible for servicing government debt levels? They are the individual households, directly and indirectly through the ownership of companies. The number of households increased from 116.01 million as per the end of 2007 to 129.93 million per the end of 2021. The U.S. government debt per household increased from $53,617 per household as at the end of 2007 to $94,444 as per the end of 2021. With a 2021 median household income of $67.463, the U.S. government debt per household is now 1.4 times the median annual household income level over 2021. All central banks aim to stabilise prices when price levels go up. The usual response is to increase interest base rates. It is likely that the Fed will further increase its interest rate levels this year. The option of even more Quantitative Easing is not a very attractive one as the source of repayment of government debts will ultimately have to come from higher taxes on households. U.S. households will bear the brunt of such upward interest rate changes as and when the Fed adjusts its interest rates due to the expected further rise in consumer goods prices. Increases in interest rates are aimed to slow down demand levels to lower inflation pressures. U.S. households are and will be confronted with rising prices, higher taxes and consequently a reduced level of purchasing powers. There are four variables that play a major role in the economic adjustment processes: two are related to current disposable income and tax levels while the other two are linked to savings for pensions and savings in home equity. Conversion of wealth into income levels is rarely a straightforward process. A new approach might need to be considered: “Using existing home equity levels as a generator for economic growth.” Such approach would be an asset-based approach. This approach can be called the bottom-up approach: Quantitative Easing Home Equity (QEHE). It starts with each household individually and the level of purchasing powers they require. To allow households to use some of their home equity at 0% interest rate could provide the U.S. economy with just the boost it needs. It could be a freedom of choice method for households within a macro economic program.
    Keywords: Inflation and Recession; Federal Reserve options; Cash from Home Equity;
    JEL: E21 E24 E3 E31 E4 E42 E44 E6 E61
    Date: 2022–05–07
  14. By: Manuel Ennes Ferreira; Jelson Serafim; João Dias
    Abstract: This study examines the relationship between financial development and economic growth in Angola for the period of Q12002 to Q42018. The results show that there is evidence of a long-run relationship between financial development and real GDP per capita, when using the Bound test approach for cointegration. Furthermore, the results of the Error Correction Model (ECM) indicate that financial development has a negative impact on GDP growth when considering credit to private and broad money as proxies for financial development. On the other hand, the degree of intermediation has a positive impact on GDP growth. The Toda–Yamamoto causality test was carried out, which indicates a unidirectional causality relationship, running from real GDP per capita to a purely financial development proxy, which shows demand-following responses. Consequently, policymakers should adopt policies that sustain the benefits of financial developments for economic growth.
    Keywords: Autoregressive-distributed Lag, Economic growth, financial development, Angola
    JEL: C32 E44 O55
    Date: 2022–05
  15. By: Florian Peters; Doris Neuberger; Oliver Reinhardt; Adelinde Uhrmacher
    Abstract: In macroeconomics, an emerging discussion of alternative monetary systems addresses the dimensions of systemic risk in advanced financial systems. Monetary regime changes with the aim of achieving a more sustainable financial system have already been discussed in several European parliaments and were the subject of a referendum in Switzerland. However, their effectiveness and efficacy concerning macro-financial stability are not well-known. This paper introduces a macroeconomic agent-based model (MABM) in a novel simulation environment to simulate the current monetary system, which may serve as a basis to implement and analyze monetary regime shifts. In this context, the monetary system affects the lending potential of banks and might impact the dynamics of financial crises. MABMs are predestined to replicate emergent financial crisis dynamics, analyze institutional changes within a financial system, and thus measure macro-financial stability. The used simulation environment makes the model more accessible and facilitates exploring the impact of different hypotheses and mechanisms in a less complex way. The model replicates a wide range of stylized economic facts, including simplifying assumptions to reduce model complexity.
    Date: 2022–05
  16. By: Julien Albertini (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France, France); Valentin Jouvanceau (Lietuvos Bankas); Stéphane Moyen (Bundesbank)
    Abstract: This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.
    Keywords: New Keynesian model, Search and matching, ZLB, Forward guidance
    JEL: E30 J60
    Date: 2022
  17. By: Cipoletta Tomassian, Georgina; Abdo, Tarek
    Abstract: The world’s financing needs multiplied rapidly from 2020 onward owing to the effects of a systemic crisis considered to have been the worst global crisis since the Second World War: that unleashed by the COVID-19 pandemic. Furthermore, flows from China, FDI and other inflows of international cooperation and multilateral resources which had been the largest in the region for some years fell back from their pre-pandemic levels. In this context, the debate about the fundamental role of development banks in alleviating market constraints in a crisis has come to the fore. The present study seeks to contribute to that debate by analysing information compiled in a database of multilateral, regional, subregional and national development bank financing measures, priorities and amounts in Latin America and the Caribbean for the specific purpose of addressing the needs of the countries given the effects of the COVID-19 pandemic between 2020 and 2021.
    Date: 2022–05–18
  18. By: Samuel Dodini; Jeff Larrimore; Anna Tranfaglia
    Abstract: This paper considers the credit response of individuals after the implementation of new work requirements for Supplemental Nutrition Assistance (SNAP) benefits using a large nationally representative sample of credit records. It does so by exploiting county-level variation in the implementation of work requirements after the Great Recession in a difference-in-differences design. We find that the implementation of new SNAP work requirements leads more people to seek out new credit and leads to an increase in credit account openings. New work requirements also result in an increase in total outstanding balances on bank and retail card accounts and increase the number of borrowers that are past due on these accounts. These findings suggest that some individuals are turning to credit and debt products to cover expenses after losing eligibility for SNAP benefits.
    Keywords: Credit cards; SNAP Benefits; Work Requirements
    JEL: G51 H31 I38 H53
    Date: 2022–05–24
  19. By: Mushtaq, Saba; Mushtaq, Faiza
    Abstract: Effect of inflation (CPI) and other macroeconomic variable on bank deposits is the empirical issue in many countries but in Pakistan there is no significant work have been done about this relationship. This paper investigates the effect of different macroeconomic variables on bank deposits in Pakistan by using time series data from 1960 to 2010.Least square method and multiple regression model was used to analyze the data. The results clearly indicate that there is a negative relationship between inflation and bank deposits. Other macroeconomic variable which includes broad money, deposit rates, GDP and per capita income have positive impact on bank deposits. It is concluded that by efficient fiscal and monetary policy we can manage this macroeconomic variable in order to increase bank deposits. Per capita income can be increase by different policies and by reducing unemployment. Banks can play a vital role with the help of Government in order to manage these macroeconomic variables by using different policies and step to minimize the effects of these variables.
    Keywords: Bank deposits, Inflation (Consumer Price Index), Per Capita Income, Broad Money, GDP, Deposit rate
    JEL: E6 G21
    Date: 2022–05–16
  20. By: Mattia Girotti; Guillaume Horny; Jean-Guillaume Sahuc
    Abstract: We study how negative interest rate policy (NIRP) affects banks’ loan pricing. Using contract-level data from France, we show that NIRP affects bank lending rates to firms through a portfolio rebalancing channel: banks holding a one standard deviation more of cash and central bank reserves offer a 8.6 basis points lower loan rate after NIRP is introduced. The impact concentrates on medium-term loans (with maturity comprised between three and six years) but not on loans to risky firms, indicating that banks conduct a search for yield focused on term spreads. These findings suggest that NIRP complements quantitative easing policies.
    Keywords: Negative interest rates, portfolio rebalancing, search for yield, term spreads, banks
    JEL: E43 E58 G21
    Date: 2022
  21. By: Brett Barkley; Mark E. Schweitzer
    Abstract: We apply data from the Federal Reserve’s Small Business Credit Survey from 2016 to 2020 to estimate disparities in access to small business financing through loan denials and discouragement. We find that substantial credit disparities continue to exist despite the growth of fintech lenders, which prior research shows have expanded the set of small businesses receiving credit. Because the pandemic period brought many direct changes to the business and lending environment, we separately analyze the change to lending in 2020. PPP loans represented an unprecedented support for small businesses, support that was not dependent on the creditworthiness of businesses, but minority-owned businesses are estimated to have received a smaller fraction of the funds they applied for from the program.
    Keywords: small business lending; minority credit access; fintech; COVID-19
    JEL: G21 L5 R3
    Date: 2022–06–02
  22. By: Pablo Ottonello; Wenting Song
    Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries’ net worth on the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries’ net worth in a narrow window around their earnings announcements, based on US tick-by-tick data. Using these shocks, we estimate that news of a 1% decline in intermediaries’ net worth leads to a 0.2% to 0.4% decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
    Keywords: Asset pricing; Business fluctuations and cycles; Credit and credit aggregates; Financial institutions; Financial markets; Financial system regulation and policies; Monetary and financial indicators
    Date: 2022–05
  23. By: Kensuke Fukunaga (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Senior Analyst, UTokyo Economic Consulting Inc., E-mail:; Daisuke Miyakawa (Associate Professor, Hitotsubashi University Business School (E-mail:
    Abstract: How do supply chain networks affect credit supply? To answer this question, we empirically detect clusters of firms by using firm-to- firm transaction data, then measure banks' exposures to those clusters and borrowing firms by using bank-to-firm lending data. Through the panel estimations controlling for unobservable factors potentially affecting credit demand and supply, first, we find that the higher portfolio concentration of banks on the clusters of firms lowers credit supply to less creditworthy firms. Second, we also find that such a pattern is more apparent for banks lending to creditworthy firms. These results suggest that the change in real network propagates to credit supply through banks' risk management.
    Keywords: Credit supply, supply chain network, cluster detection
    JEL: D22 E44 G11 G21
    Date: 2022–05
  24. By: Ambler, Kate; de Brauw, Alan; Herskowitz, Sylvan; Pulido, Cristhian
    Abstract: Recent literature suggests that agricultural value chains are changing rapidly and places an increasing focus on the importance of actors and activities taking place in the “midstream†of these value chains, after production and prior to final sale. This article discusses the financial needs of midstream actors in agricultural value chains, emphasizing differences across midstream activities and highlighting how value chain characteristics can influence both financial needs and potential remedies. The paper concludes with a discussion of the prospects of digital financial services to alleviate financial needs of midstream actors.
    Keywords: WORLD; agricultural value chains; agriculture; value chains; trade; finance; digital finance services; midstream
    Date: 2022
  25. By: Andisheh (Andy) Danaee; Harsimran Grewal; Brad Howell; Guillaume Ouellet Leblanc; Xuezhi Liu; Xiangjin Shen; Mayur Patel
    Abstract: We examine the potential impacts of a severe economic shock on the resilience of major banks in Canada. We find these banks would suffer significant financial losses but nevertheless remain resilient. This underscores the role well-capitalized banks and sound underwriting practices play in supporting economic activity in a downturn.
    Keywords: Financial institutions; Financial stability
    JEL: E E27 E37 E44 G1 G23
    Date: 2022–05
  26. By: Andreas Kick; Horst Rottmann
    Abstract: Banks have always played an ambivalent role in financial markets. On the one hand, they provide essential services for the market; on the other hand, problems in the banking sector can send shock waves through the entire economy. Given this prominent role, it is not surprising that Pereira and Rua (2018) found that the health of the banking sector exerts an influence on stock returns in the US. Understanding the relationship between banks and their impact on the asset prices of non-financials is essential to evaluate the risk emanating from an unhealthy banking sector and should be considered in new regulatory requirements. The aim of this study is to determine if the health of European banks is of such importance for the European stock market so that spillover effects are visible. Our results show that none of our banking-health variables have explanatory power on the cross-section of European stock returns. These findings contrast those for the US. The reasons may be manifold, from an unimportant liquidity provisioning channel over reduced room for actions due to regulatory requirements up to a moral hazard situation in Europe, where investors strongly rely on the governmental bailouts of distressed banks.
    Keywords: asset pricing, banking, spillover, errors-in-variables, individual stocks, distance-to-default
    JEL: G12 G21
    Date: 2022
  27. By: Yoshihiro Ohashi
    Abstract: This study investigates the prevention of market manipulation using a price-impact model of financial market trading as a linear system. First, I define a trading game between speculators such that they implement a manipulation trading strategy that exploits momentum traders. Second, I identify market intervention by a controller (e.g., a central bank) with a control of the system. The main result shows that there is a control strategy that prevents market manipulation as a subgame perfect equilibrium outcome of the trading game. On the equilibrium path, no intervention is realized. This study also characterizes the set of manipulation-proof linear pricing rules of the system. The set is very restrictive if there is no control, while the presence of control drastically expands the set.
    Date: 2022–05
  28. By: Zolea, Riccardo (Roma Tre University)
    Abstract: In this paper we investigate the relationship between interest rate and profit rate. Considering that the bank must obtain on the invested capital a profit rate at least equal to the normal one, the bank interest rate can be calculated as the price of the bank output, i.e. the loan. The profit rate thus determines the interest rate, through the instrument of the price equation. Central to this study is the analysis of the best way to imagine such a price equation, considering the role of the central bank. We then move on to study the structure of interest rates and their relationship to the profit rate. Finally, by introducing the hypothesis of a bank profit rate permanently higher than the normal one, we confirm and better explain from an analytical point of view some insights expressed by Marx in Book III of Capital.
    Keywords: bank profitability; interest rate; price equation; Marx; finance
    JEL: E11 E43 G21
    Date: 2022–06–13
  29. By: Jongrim Ha (World Bank); M. Ayhan Kose (World Bank; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (World Bank; CEPR; CAMA)
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    Keywords: Inflation; growth; COVID-19; global recession; monetary policy; fiscal policy; disinflation.
    JEL: E31 E32 E52 Q43
    Date: 2022–06
  30. By: Ofori, Isaac K.; Gbolonyo, Emmanuel; Dossou, Marcel A. T.; Nkrumah, Richard K.
    Abstract: The study employs macrodata on 42 African countries to examine whether remittances and financial development (including the sub-components of access, depth and efficiency) contribute to the equalisation of incomes across the continent. Robust evidence from the dynamic GMM estimator shows that: (i) remittances heighten income inequality in Africa, (ii) Africa’s financial system is not potent enough for repacking remittances towards the equalisation of incomes, and (iii) vis-à-vis financial access and depth, inefficiencies characterising Africa’s financial institution is the main reason remittances contribute to the widening of the income disparity gap. Nonetheless, the optimism which we provide by way of threshold analysis shows that channelling efforts into the development of Africa’s financial sector could yield shared income distribution dividends. In particular, efforts should be made to achieve a minimum of 23.05 per cent of financial access, and 3.02 per cent for that of efficiency of financial institutions if Africa’s financial sector is to repackage external finance towards the equalisation of incomes. A few policy recommendations are provided in the end.
    Keywords: Africa; Financial Development; Financial Sector Efficiency; Income Inequality; Remittances.
    JEL: F4 F6 G2 O15 O55
    Date: 2022
  31. By: Alessandro Maravalle; Alberto González Pandiella
    Abstract: The access to formal financial services in Mexico is particularly low. Access is also significantly unequal across income levels, gender, between rural and urban areas and across regions. SMEs access to bank credit is low, hampering firms’ ability to grow and innovate. The use of cash and informal credit is still widespread, especially in rural areas, where financial infrastructure is underdeveloped. The diffusion of digital financial services is slowly advancing but remains low, hindered by a relatively low level of financial literacy and a digital divide. Expanding access to finance would enable Mexican households to invest in education and health, and better manage income shocks and smooth consumption. It would also enable Mexican firms to invest more, increase productivity and create formal jobs. Low-income households, small firms and more disadvantaged regions would particularly benefit, as it would unlock new economic opportunities for them. Boosting competition in the banking sector would facilitate SMEs access to credit by lowering interest rate margins. Upgrading the regulatory framework of the financial system would help increase competition and quality of financial services. The potential of the fintech sector is yet to be materialised, which would further increase competition and bring financial services to wider segments of the population. Strengthening financial education and digital literacy would facilitate a larger and better use of traditional and digital financial services.
    Keywords: competition, credit, digital, financial education, financial inclusion, FinTech, SMEs
    JEL: D18 G2 G41 G51 G52 G53 O32
    Date: 2022–06–03
  32. By: Fredy Gamboa-Estrada; José Vicente Romero
    Abstract: Assessing the dynamics of risk premium measures and its relationship with macroeconomic fundamentals is important for both macroeconomic policymakers and market practitioners. This paper analyzes the main determinants of CDS in Latin-America at different tenures, focusing on their volatility. Using a component GARCH model, we decompose volatility between permanent and transitory components. We find that the permanent component of CDS volatility in all tenors was higher and more persistent in the global financial crisis than during the recent COVID-19 shock. **** RESUMEN: Evaluar la dinámica de las medidas de prima de riesgo y su relación con los fundamentales macroeconómicos es importante tanto para quienes implementan las políticas macroeconómicas como para los participantes del mercado. En este documento se analizan los principales determinantes de los CDS para economías de Latinoamérica a diferentes plazos, enfocándose en su volatilidad. Empleando un modelo GARCH por componentes, se realiza una descomposición de la volatilidad de los CDS a diferentes plazos entre un componente permanente y transitorio. En los resultados se encuentra que el componente permanente de la volatilidad de los CDS en todos los plazos fue mayor y más persistente durante la crisis financiera global que durante el episodio más reciente relacionado con el choque del COVID-19.
    Keywords: Credit default swaps (CDS), CDS in Latin-American countries, sovereign risk, volatility, crisis, component GARCH models, Credit default swaps (CDS), CDS de países en Latinoamérica, riesgo soberano, volatilidad, crisis, modelos GARCH por componentes
    JEL: C22 C58 G01 G15
    Date: 2022–05
  33. By: Riccardo Zolea
    Abstract: This paper proposes a functional analysis of input, output and capital of the banking sector in an endogenous money framework with the aim of determining the aggregates on which to calculate the bank profit rate. Although banks create bank money, State money is not producible by banks, which need it as an input. Deposits are the cheapest source of central bank money already in the system, so it can be argued that deposits are inputs to the banking industry. Assuming that loans are the banking output, we investigate what role regulation plays in defining a banking production technique. The framework developed from Basel Accords imposes a level of equity proportional to the level of risk-weighted bank assets. Thus, a bank capital-to-output ratio defined by these rules is conceivable.
    Keywords: Bank; deposit; capital; input-output analysis; post-Keynesian approach; MMT.
    JEL: E51 E12 G21
    Date: 2022–06

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