nep-ban New Economics Papers
on Banking
Issue of 2022‒07‒11
eighteen papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Unconventional credit policy in an economy under zero lower bound By Jorge Pozo; Youel Rojas
  2. Banking in the shadow of Bitcoin? The institutional adoption of cryptocurrencies By Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss
  3. Graduating from Group to Individual Loans, with the Help of Personal Guarantees By Vasso Ioannidou; Sheng Li; Mrinal Mishra; Steven Ongena
  4. Covid-19 and market power in local credit markets: the role of digitalization By Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra
  5. The Demand for Money, Near-Money, and Treasury Bonds By Arvind Krishnamurthy; Wenhao Li
  6. Time inconsistency and overdraft use: Evidence from transaction data and behavioral measurement experiments By Gill, Andrej; Hett, Florian; Tischer, Johannes
  7. Central Banks and Climate Policy: Unpleasant Trade–Offs? A Principal–Agent Approach By Donato Masciandaro; Riccardo Russo
  8. Building regional payment areas: the Single Rule Book approach By Douglas Arner; Ross Buckley; Thomas Lammer; Dirk Zetzsche; Sangita Gazi
  9. The Endowment Effect and Collateralized Loans By Kevin Carney; Michael Kremer; Xinyue Lin; Gautam Rao
  10. DLT-based enhancement of cross-border payment efficiency - a legal and regulatory perspective By Dirk Zetzsche; Linn Anker-Sørensen; Maria Lucia Passador; Andreas Wehrli
  11. Bullard Discusses Inflation and His Views on the Policy Rate with Yahoo Finance By James B. Bullard
  12. Misfortunes Never Come Alone: From the Financial Crisis to the COVID-19 Pandemic By Antonio Moreno; Steven Ongena; Alexia Ventula Veghazy; Alexander F. Wagner
  13. Fifty years since Altman (1968): Performance of financial distress prediction models By Surbhi Bhatia; Manish K. Singh
  14. Would households understand average inflation targeting? By Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido
  15. The Lightning Network: Turning Bitcoin into Money By Anantha Divakaruni; Peter Zimmerman
  16. Novi indikatori kreditnog jaza u Hrvatskoj: unapređenje kalibracije protucikličkog zaštitnog sloja kapitala By Tihana Škrinjarić; Maja Bukovšak
  17. Bitcoin Price Factors: Natural Language Processing Approach By Oksana Bashchenko
  18. Will the U.S. Dollar Continue to Dominate World Trade? By Mary Amiti; Oleg Itskhoki; Jozef Konings

  1. By: Jorge Pozo; Youel Rojas
    Abstract: In this paper we develop a simple two-period model that reconciles credit demand and supply frictions. In this stylized but realistic model credit and deposit markets are interlinked and credit demand and credit supply frictions amplify each other in such a way that produces in equilibrium inefficiently low levels of credit and stronger reductions of the real and nominal interest rates, so an economy is much closer to the ZLB. However, an unconventional credit policy, that consists on central bank liquidity injection to banks provided they commit to issue loans (indirect central bank loans) that are guaranteed by the government, can undo partially the effects of the credit frictions and prevents the economy from reaching the ZLB. Since indirect central bank (CB) loans cannot be diverted by banks and are governmentguaranteed, credit market interventions rise aggregate credit supply and positively affect the aggregate credit demand, respectively. However, once the economy is at the ZLB the effect of a credit policy is reduced due to a relatively stronger inflation reduction, which in turn reduces entrepreneurs' incentives to demand bank loans, and due to that the relative cost reduction from having access to cheaper indirect CB loans is smaller.
    Keywords: unconventional credit policy, asymmetric information, moral hazard, zero lower bound
    JEL: E44 E5 G21 G28
    Date: 2022–05
  2. By: Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss
    Abstract: The phenomenal growth of cryptocurrencies raises important questions about their footprint on the financial system. What role are traditional financial intermediaries playing in cryptocurrency markets and what drives their engagement? Are new nodes emerging? We help answer these questions by leveraging a novel global supervisory database of banks' cryptocurrency exposures and by synthesising a range of complementary data sources for other types of institutions. We find that major banks' exposures currently remain at very modest levels. Across countries, higher innovation capacity, more advanced economic development, and greater financial inclusion are associated with a higher likelihood of banks taking on cryptocurrency exposures. We show that substantial activity is concentrated in lightly regulated crypto exchanges. This "shadow crypto financial system" serves both retail and institutional clients, such as dedicated investment funds. An uneven regulatory treatment across banks and crypto exchanges and significant data gaps suggest that a proactive, holistic and forward-looking approach to regulating and overseeing cryptocurrency markets is needed. It should focus on ensuring a more level playing field with regard to financial services provided by established financial institutions and intermediaries in the emerging crypto shadow financial system by introducing more stringent regulatory and supervisory oversight for the latter.
    Keywords: cryptocurrencies, decentralised finance, digital currencies, financial regulation, financial supervision, exchange, stablecoin, Bitcoin, Ethereum
    JEL: E42 G12 G21 G23 G28 O33
    Date: 2022–05
  3. By: Vasso Ioannidou (Centre for Economic Policy Research (CEPR)); Sheng Li (University of Zurich); Mrinal Mishra (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: Loans granted by banks to several entrepreneurs jointly, but for their own individual business and/or projects, are rarely studied. Analyzing 32 million month-loan observations from the Bolivian credit register, we establish that group loans comprise a sizeable part of the formal credit market, and that the most common group size equals two. Larger than individual loans, per borrower the group loans are smaller, with a longer duration and lower loan rates than individual loans. When borrowers are immature, they obtain credit through group loans. Later, involving personal guarantees, they are more likely to graduate to obtain credit through individual loans.
    Keywords: group loan, individual loan, micro credit
    JEL: G20 O16
    Date: 2022–06
  4. By: Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra
    Abstract: This paper investigates how COVID-19 and digitalization affected the market power in local Brazilian credit markets. We first propose a novel methodology to estimate bank market power at the local level. We design a data-intensive local version of the Lerner index by developing heuristics to allocate national-level banks' inputs, products, and costs across their branches using large-scale datasets from many sources. We then exploit the exogenous variation in COVID-19 intensity across Brazilian localities to analyze how the pandemic influenced local market power through the effective price and marginal cost channels. Despite reducing the economic activity, COVID-19 did not impact the effective price channel: bank branches offset the decrease in credit income by reducing credit concessions. However, bank branches more affected by COVID-19 experienced increased marginal costs as they could not rapidly adjust their cost factors in response to the decrease in credit concessions. Consequently, COVID-19 reduced banks' local market power via the marginal cost channel. More digitalized bank branches enjoy cost and lending flexibility: they experience less stickiness in their cost structure and complement the reduced credit concessions in localities more affected by COVID-19 by extending credit to borrowers in remote localities less affected. Consequently, more digitalized banks improve their market power compared to traditional banks. This paper provides new insights into how crises can affect local market power in non-trivial ways.
    Keywords: COVID-19, market power, digitalization, information technology, Lerner index
    JEL: C58 D22 D40 G21 I19 O31
    Date: 2022–05
  5. By: Arvind Krishnamurthy; Wenhao Li
    Abstract: Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors' demand for a liquid transaction medium and safe store of value. We measure the quantity of these three forms of liquidity and their corresponding liquidity premium over a sample from 1934 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per unit delivered by each asset. Treasury bonds and bank deposits are imperfect substitutes, in contrast to the findings of perfect substitutes of Nagel (2016). This result is directly relevant to the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the imperfect substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system. We construct a new broad monetary aggregate based on our estimates and show that it helps resolve the money-demand instability and missing-money puzzles of the monetary economics literature.
    JEL: E41 E43 G21 G23
    Date: 2022–05
  6. By: Gill, Andrej; Hett, Florian; Tischer, Johannes
    Abstract: Households regularly fail to make optimal financial decisions. But what are the underlying reasons for this? Using two conceptually distinct measures of time inconsistency based on bank account transaction data and behavioral measurement experiments, we show that the excessive use of bank account overdrafts is linked to time inconsistency. By contrast, there is no correlation between a survey-based measure of financial literacy and overdraft usage. Our results indicate that consumer education and information may not suffice to overcome mistakes in households' financial decision-making. Rather, behaviorally motivated interventions targeting specific biases in decision-making should also be considered as effective policy tools.
    Keywords: Household Finance,Paycheck Sensitivity,Fintech,Time Inconsistency,Time Preferences,Experiment,Behavioral Measurement
    JEL: D14 D90 G51 G53
    Date: 2022
  7. By: Donato Masciandaro; Riccardo Russo
    Abstract: This paper focuses on the trade–offs that central banks would face if they were to start tackling climate change. Disruptive natural events can hamper growth and capital accumulation, thereby affecting price and financial stability – elements for which central banks are responsible. Yet, the array of instruments they could use to mitigate climate–related risks overlap with those already used in relation to their monetary and macroprudential mandates. By leveraging a principal–agent setting, we consider the conditions under which the central bank architecture would be fit to take on this objective without jeopardising the attainment of central banks’ core mandates. We also examine the corresponding effects in terms of climate risks. Our results show that central banks’ effectiveness in this regard depends on the degree of their independence from governments’ climate preferences and on their ability to calibrate their “green” easing, either monetary and/or regulatory, on the realised level of abatement and emissions.
    Keywords: monetary policy, macroprudential policy, fiscal policy, climate change, delegation, independence
    JEL: D02 E52 E58 E61 E63
    Date: 2022
  8. By: Douglas Arner; Ross Buckley; Thomas Lammer; Dirk Zetzsche; Sangita Gazi
    Abstract: In October 2020, the G20 endorsed a significant initiative to enhance cross-border payments. Faster, cheaper, more transparent, and more inclusive cross-border payment services will deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development, and financial inclusion. Enhancing cross-border payments requires more than mere adoption of technical standards. The best outcome involves aligned technological, regulatory, and legal frameworks. This paper analyzes such payment integration projects. Each border adds to the costs of a cross-border payment if crossing the border means entering into a different technological, regulatory and legal environment, with different systems, regulators, and courts. Under ideal circumstances, cross-border payments will be processed as seamlessly as comparable domestic payments, even where various currencies are processed. While this highly ambitious target is unlikely to be achieved globally in the short to medium term, regionally, the gap between cross-border and domestic payments has already been narrowed. At the global level, mismatches between the inter-institutional framework on the back-end and the contractual relationship with clients on the front-end represent potential costs for the payment services provider and increase legal risk, prompting costly legal, due diligence manual adjustments in payments processes. A high degree of cross-border harmonization via rulebooks along the technological, regulatory, and legal dimensions has been instrumental for successful regional integration projects and has promoted straight-through-processing. Potentially costly events such as rejects, returns, and revocations of payment orders have been reduced, sanction screening and financial crime compliance processes agreed. Drawing on this insight, this paper suggests globally coordinated action to develop a comprehensive framework to guide and support regional payment integration. This we call a "Single Rule Book." Such a Single Rule Book could be instrumental in enhancing safety, efficiency, and integrity in cross-border payments. We explore its potential contents, and importantly, the minimum standards it would impose.
    Keywords: payments, cross-border payments, central banks, harmonization of law
    JEL: G20 G21 G28 E42 E58 K23 K24 O16
    Date: 2022–05
  9. By: Kevin Carney; Michael Kremer; Xinyue Lin; Gautam Rao
    Abstract: Collateral requirements play an important role in credit markets. This paper shows that the endowment effect—the phenomenon where owing a good increases one's valuation of it—inhibits demand for loans which use a borrower's existing assets as collateral. Using a field experiment in Kenya, we show that borrowers instead strongly prefer loans collateralized using the new durable assets being financed by the loans themselves. They are willing to pay 9% per month higher interest for such Same-Asset Collateralized Loans (SACLs) despite the endowed and new assets being randomized, and thus similarly valued before ownership. Our findings imply that assets which are difficult to use as collateral—which cannot be financed by SACLs—will be invested in less, even if the borrower has other collateral. We argue that borrowers' preference for SACLs is driven by naivete: they initially perceive that they have little to lose when offered a SACL, but subsequently come to develop an attachment to the new asset, resulting in high repayment effort. Consistent with this, borrowers underestimate their future attachment to an asset before owning it, and SACLs do not have higher default rates despite having higher demand. We derive the conditions under which offering consumers SACLs increases or conversely decreases borrower welfare.
    JEL: D14 D25 D9 D91 D92 O1 O16
    Date: 2022–05
  10. By: Dirk Zetzsche; Linn Anker-Sørensen; Maria Lucia Passador; Andreas Wehrli
    Abstract: Financial law and regulation have, to date, assumed that regulated activities and functions are concentrated in a single legal entity responsible and accountable for operations and compliance. Even with regard to financial market infrastructure where the regulatory perspective acknowledges the need for interoperability of many entities as a system, each entity is subject to its own rules and regulations, and can thus meet its own compliance requirements independent of other system participants. The entity-focused regulatory paradigm is under pressure in the world of DLT-based payment arrangements where some ledgers, and thus the performance of the services as such, are distributed. DLT arrangements could provide an alternative to the traditional reliance on a mutually trusted central entity to transfer funds and enable the creation of new foundational infrastructures by distributing technical functions or linking existing systems. As such, we identify and outline concepts for use cases where DLT is potentially improving the efficiency of cross-border payments, namely a Best Execution DLT, a DLT application for a Network of Central Banks, a DLT as an AML/KYC utility, as well as DLT arrangements for an Identity Platform, a Small Payments Platform and, finally, an Interoperability Platform connecting multiple closed-loop and proprietary banking systems.
    Keywords: distributed ledgers, blockchain, payments, central banks, cross-border payments, law
    JEL: G20 G21 G28 E42 E58 K23 K24 O16
    Date: 2022–05
  11. By: James B. Bullard
    Abstract: St. Louis Fed President Jim Bullard shared his views on the latest inflation data and Fed action needed to put downward pressure on inflation. During an interview with Yahoo Finance, he also said that the probability of a U.S. recession is not particularly elevated at this time. Asked about the latest CPI report, Bullard said, “my takeaway is that inflation is broader and more persistent than many have thought and that the Fed will have to act in order to keep inflation under control.” He added that the Federal Open Market Committee (FOMC) has a plan in place—a 50-basis-point increase in the policy rate at the last meeting and also teeing that up for future meetings. Bullard noted that he has been advocating a policy rate of 3.5% by the end of the year. “I think we’re going to have to do more than just get to neutral. We’re going to have to go above neutral in order to put downward pressure on the persistent component of this inflation,” he said. Regarding the effect of the Fed’s forward guidance since late last year, Bullard noted that the two-year Treasury yield—which is indicative of where the market thinks policy will go—has moved up substantially over the last six to nine months. (For more details, see his May 6 remarks at Stanford University’s Hoover Institution, “Is the Fed ‘Behind the Curve’? Two Interpretations.”)
    Keywords: inflation; policy rate
    Date: 2022–05–11
  12. By: Antonio Moreno (School of Economics and Business, University of Navarra); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Alexia Ventula Veghazy (European Central Bank (ECB)); Alexander F. Wagner (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute)
    Abstract: Is there a connection between the 2007-2009 financial crisis and the COVID-19 pandemic? To answer this question, we examine the relation between both macroeconomic and financial losses derived from the financial crisis and the health outcomes associated with the first wave of the pandemic. At the European level, countries more affected by the financial crisis had more deaths relative to coronavirus cases. An analogous relation emerges across Spanish provinces and US states. Part of the transmission from finance to health outcomes appears to have occurred through cross-sectional differences in health facilities. Therefore, dampening financial-economic instability may yield long-term societal benefits.
    Keywords: Global Financial Crisis, COVID-19, local sovereign debt, death ratio, curative beds
    JEL: I10 G21 H1
    Date: 2022–05
  13. By: Surbhi Bhatia (Independent Researcher); Manish K. Singh (Department of Humanities and Social Sciences Indian Institute of Technology Roorkee and XKDR Forum)
    Abstract: Using bankruptcy filings under the new Insolvency and Bankruptcy Code (2016), we investigate the effect of firm characteristics and balance sheet variables on the forecast of one-year-ahead default for Indian manufacturing firms. We compare traditional discriminant analysis and logistic regression models with state-of-the-art variable selection technique-the least absolute shrinkage and selection operator, and the unsupervised techniques of variable selection-to identify key predictive variables. Our findings suggest that the ratios considered as important by Altman (1968) still hold relevance for the prediction of default, no matter the technique applied for variables selection. We find cash to current liability (a liquidity measure) as an additional robust and significant predictor of default. In terms of predictive accuracy, the reduced-form multivariate discriminant analysis model used in Altman (1968) performs at par with the more advanced econometric specification for both in-sample and full-sample default prediction.
    JEL: C53 G17 G32 G33
    Date: 2022–06
  14. By: Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido
    Abstract: Yes, they would. In a randomized control trial, we provide groups of respondents from the Bundesbank Online Panel Households with information about a hypothetical alternative ECB monetary policy regime akin to the Federal Reserve's flexible average inflation targeting (AIT). Inflation expectations significantly increase for the treated individuals. When provided with additional information about near-term inflation, individuals update their expected inflation path in line with the central banks' intentions. This is particularly true for individuals with high trust in the ECB. We assess the economic significance of our findings by comparing two model economies under different monetary policy strategies, calibrated to match the difference in medium-term inflation expectations from our survey results. Under AIT, inflation is substantially less volatile and the frequency of hitting the lower bound on interest rates is considerably reduced.
    Keywords: Monetary Policy Strategy,Household Inflation Expectations,Randomized Control Trial,Survey Data
    JEL: F33 E31 E32
    Date: 2022
  15. By: Anantha Divakaruni; Peter Zimmerman
    Abstract: The Lightning Network (LN) is a means of netting Bitcoin payments outside the blockchain. We find a significant association between LN adoption and reduced blockchain congestion, suggesting that the LN has helped improve the efficiency of Bitcoin as a means of payment. This improvement cannot be explained by other factors, such as changes in demand or the adoption of SegWit. We find mixed evidence on whether increased centralization in the Lightning Network has improved its efficiency. Our findings have implications for the future of cryptocurrencies as a means of payment and their environmental footprint.
    Keywords: bitcoin; blockchain; cryptocurrency; Lightning Network; payments
    JEL: E42 G10
    Date: 2022–06–21
  16. By: Tihana Škrinjarić (Hrvatska narodna banka, Hrvatska); Maja Bukovšak (Hrvatska narodna banka, Hrvatska)
    Abstract: Protuciklički zaštitni sloj kapitala je jedan od ključnih instrumenata makrobonitetne politike, čija je namjena stvaranje dodatnog kapitala u razdobljima porasta cikličkih rizika, kako bi se njegovim otpuštanjem u krizi bankama osigurao prostor za nastavak nesmetanog kreditiranja, a u razdobljima koje joj prethode i posredno ublažilo prekomjerno kreditiranje. Njegova kalibracija započinje ocjenom kreditnog jaza, na način da se primjenom statističkih filtera određuje dugoročna kreditna aktivnost u odnosu na ekonomsku, kako bi se ocijenilo koliko trenutna kretanja odstupaju od ravnotežnih. Budući da se u praksi pojavio niz problema u primjeni takvih indikatora, ovim istraživanjem se razmatraju mogućnosti unapređenja procjene kreditnog jaza, koje se ocjenjuju uz primjenu kriterija kvalitete signaliziranja krize u povijesnom uzorku i stručnu procjenu. Glavni rezultati istraživanja upućuju da je potrebno zasebno filtrirati serije kredita i BDP-a uz pretpostavku da kreditni ciklus traje dulje u odnosu na gospodarski, te da se nepoznavanje točne duljine trajanja kreditnog ciklusa može premostiti promatranjem raspona mogućih kreditnih jazeva. Novi indikatori koji se predlažu u istraživanju su ranije signalizirali prethodnu globalnu financijsku krizu, te su stabilniji od prethodno korištenih specifičnih indikatora, čime se u realnom vremenu omogućava ranija i postepenija izgradnja protucikličkog zaštitnog sloja kapitala, manje podložna promjenama.
    Keywords: kreditni jaz, statistički filtri, makrobonitetna politika, sistemski rizik, protuciklički zaštitni sloj kapitala.
    JEL: C18 E32 E58 G01 G2
    Date: 2022–06–14
  17. By: Oksana Bashchenko (Swiss Finance Institute - HEC Lausanne)
    Abstract: I propose a new methodology to construct interpretable, fundamental-based pricing factors from news to explain Bitcoin returns. Each news article from a specialized cryptocurrency website is classified in a semi-supervised manner into one of the few predefined topics. Topic sentiments become factors contributing to the price variation. I use a cutting-edge NLP algorithm (SBERT network) to embed linguistic data into a vector space, which allows the application of an intuitive classification rule. This approach permits the exclusion of news pieces that describe the price movements per se from the analysis, thus mitigating endogeneity concerns. I show that non-endogenous news contains fundamental information about Bitcoin. Thus I reject the concept of Bitcoin price being based on pure speculation and show that Bitcoin returns are partially explained by fundamental topics. Among those, the adoption of cryptocurrencies and blockchain technology is the most important aspect. On top of that, I study the media expressed attitude toward Bitcoin from the functions of money perspective. I show that investors consider Bitcoin as the store of value rather than the medium of exchange.
    Keywords: Bitcoin, Cryptocurrency, Natural Language Processing, BERT.
    JEL: C45 C55 C80 G12 G19
    Date: 2022–05
  18. By: Mary Amiti; Oleg Itskhoki; Jozef Konings
    Abstract: There are around 180 currencies in the world, but only a very small number of them play an outsized role in international trade, finance, and central bank foreign exchange reserves. In the modern era, the U.S. dollar has a dominant international presence, followed to a lesser extent by the euro and a handful of other currencies. Although the use of specific currencies is remarkably stable over time, with the status of dominant currencies remaining unchanged over decades, there have been decisive shifts in the international monetary system over long horizons. For example, the British pound only lost its dominant currency status in the 1930s, well after Britain stopped being the leading world economy. In a new study, we show that the currency that is used in international trade transactions is an active firm-level decision rather than something that is just fixed. This finding raises the question of what factors could augment or reduce the U.S. dollar’s dominance in world trade.
    Keywords: currency invoicing; exporters; trade; US dollar
    JEL: E2 F0
    Date: 2022–06–21

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