nep-ban New Economics Papers
on Banking
Issue of 2022‒08‒15
28 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Stress tests and capital requirement disclosures: do they impact banks’ lending and risk-taking decisions? By Konietschke, Paul; Ongena, Steven; Ponte Marques, Aurea
  2. Restoring confidence in troubled financial institutions after a financial crisis By Charles W. Calomiris; Mark A. Carlson
  3. Does Giving CRA Credit for Loan Purchases Increase Mortgage Credit in Low-to-Moderate Income Communities? By Kenneth P. Brevoort
  4. Data and Welfare in Credit Markets By Mark Jansen; Fabian Nagel; Constantine Yannelis; Anthony Lee Zhang
  5. Stepping Stone: The Logic of Financial Inclusion through Microcredit in Rural China By Nan Zhou; Wenli Cheng; Longyao Zhang
  6. Restoring Confidence in Troubled Financial Institutions After a Financial Crisis By Charles W. Calomiris; Mark Carlson
  7. The Collateral Premium and Levered Safe-Asset Production By Chase P. Ross
  8. Introductory Brief (Part II): Opportunities for Deposit Insurers (DepTech) By Edward Garnett; Rachel Youssef; Daniel Hoople
  9. The Effects of Audit Partners on Financial Reporting: Evidence from U.S. Bank Holding Companies By Gauri Bhat; Hemang Desai; W. Scott Frame; Christoffer Koch; Erik J. Mayer
  10. Behavioral Messages and Debt Repayment By Giorgia Barboni; Juan Camilo Cárdenas; Nicolás de Roux
  11. Using household-level data to guide borrower-based macro-prudential policy By Gaston Giordana; Michael H. Ziegelmeyer
  12. Are fund managers rewarded for taking cyclical risks? By Ryan, Ellen
  13. Fragility of Safe Asset Markets By Thomas M. Eisenbach; Gregory Phelan
  14. The Role of Marital Status for the Evaluation of Bankruptcy Regimes By Jan Sun
  15. An Approach to Quantifying Operational Resilience Concepts By Chase Englund
  16. Cyber Security and Ransomware in Financial Markets By Toni Ahnert; Michael Brolley; David Cimon; Ryan Riordan
  17. Canadians’ Access to Cash Before and During the COVID-19 Pandemic By Heng Chen; Marie-Hélène Felt
  18. Does a CBDC Reinforce Inefficiencies? By Max Fuchs
  19. Income Inequality in Canada By Sarah Burkinshaw; Yaz Terajima; Carolyn A. Wilkins
  20. Climate-related Financial Stability Risks for the United States: Methods and Applications By Celso Brunetti; John Caramichael; Matteo Crosignani; Benjamin Dennis; Gurubala Kotta; Donald P. Morgan; Chaehee Shin; Ilknur Zer
  21. Capital Control and Heterogeneous Impact on Capital Flows By Sanyal, Anirban
  22. Household credit-financed consumption and the debt service ratio: tackling endogenous autonomous demand in the Supermultiplier model By Joana David Avritzer; Lídia Brochier
  23. Climate-Contingent Finance By John Nay
  24. BigTech cryptocurrencies - European regulatory solutions in sight By Kotovskaia, Anastasia; Meier, Nicola
  25. Macroeconomic effects of the Covid-19 Pandemic in Germany and the European Monetary Union and economic policy reactions By Herr, Hansjörg; Nettekoven, Zeynep Mualla
  26. DSGE Nash: solving Nash games in macro models By Minesso, Massimo Ferrari; Pagliari, Maria Sole
  27. Sustainable management of central banks’ foreign exchange (FX) reserves By Fender, Ingo; McMorrow, Mike; Zulaica, Omar
  28. Environmental-Social-Governance Preferences and Investments in Crypto-Assets By Pavel Ciaian; Andrej Cupak; Pirmin Fessler; d'Artis Kancs

  1. By: Konietschke, Paul; Ongena, Steven; Ponte Marques, Aurea
    Abstract: How do banks respond to changes in capital requirements as a result of the stress tests? Does the disclosure of stress test results matter? To answer these questions, we study the impact of European stress tests on banks’ lending, their corresponding risk-taking, the ensuing effect on their profitability and the respective publication effect. Exploiting the centralised European stress tests in conjunction with two unique confidential databases containing (i) stress test information for the 2016 and 2018 exercises covering a total of 93 and 87 banks, respectively; and (ii) quarterly supervisory information on approximately 1000 banks (stress-tested and non-tested), allow us to implement a dynamic differencein-differences strategy for a comparable sample of banks. We find that banks participating in the stress tests reallocate credit away from riskier borrowers and towards safer ones in the household sector, making them in general safer but also less profitable. This is especially the case for the set of banks part of the Supervisory Review and Evaluation Process with undisclosed stress tests, which were also not disclosing their Pillar 2 Requirements voluntarily. Our results confirm that the publication of capital requirements can have a disciplinary effect since banks publishing their requirements tend to have more robust capital ratios, which improves market discipline and financial stability. JEL Classification: E51, E58, G21, G28
    Keywords: Credit supply, Financial stability, Market discipline, Profitability, Stress-testing
    Date: 2022–07
  2. By: Charles W. Calomiris; Mark A. Carlson
    Abstract: After an unprecedented number of banks suspended operations in the during Panic of 1893, the head regulator of banks chartered by the United States government allowed about 100 banks to reopen after certifying their solvency. We evaluate whether actions by bank owners to change management, contract with depositors to extend liability maturity structure, write off bad assets, and/or inject capital affected bank survival and deposit retention. This historical episode is particularly informative because there was no expectation of government intervention. We find that contracting with depositors provided short-term benefits while dealing with bad assets was key for long-run viability.
    Keywords: Banking panics; Bank resolution; Market discipline; National Banking Era
    JEL: G21 G28 N21 N41
    Date: 2022–07–07
  3. By: Kenneth P. Brevoort
    Abstract: Under the Community Reinvestment Act (CRA) banks can fulfill their affirmative obligation to meet local credit needs by lending in low-to-moderate-income (LMI) communities or by purchasing loans made by others. This paper evaluates whether giving CRA credit for purchases has had its intended effect of increasing LMI credit availability by making LMI loans more liquid. Analyses using a regression discontinuity design show that CRA increases loan purchases without affecting LMI originations. Instead, banks purchase loans that are temporarily diverted from the Government Sponsored Enterprises, which provides little benefit to the communities the CRA is meant to help.
    Keywords: Community Reinvestment Act (CRA); Mortgage lending; Redlining; Low- and moderate income (LMI)
    JEL: G21 G28 R38
    Date: 2022–07–19
  4. By: Mark Jansen; Fabian Nagel; Constantine Yannelis; Anthony Lee Zhang
    Abstract: We show how to measure the welfare effects arising from increased data availability. When lenders have more data on prospective borrower costs, they can charge prices that are more aligned with these costs. This increases total social welfare, and transfers surplus from borrowers to lenders. We show that the magnitudes of the welfare changes can be estimated using only quantity data and variation in prices. We apply the methodology on bankruptcy flag removals, and find that removing prior bankruptcy information increases the surplus of previously bankrupt consumers substantially, at the cost of decreasing total social welfare modestly, suggesting that flag removals have low efficiency costs for redistributing surplus to previously bankrupt borrowers.
    JEL: D6 G20 G21 G28 G5 H81
    Date: 2022–07
  5. By: Nan Zhou (College of Finance, Nanjing Agricultural University); Wenli Cheng (Department of Economics, Monash University); Longyao Zhang (College of Finance, Nanjing Agricultural University)
    Abstract: This paper studies the effect of microcredit on a rural household’s subsequent access to bank loans. Based on a 2018 survey of rural households in 6 Chinese provinces, we find that microcredit served as a stepping stone to bank credit: participation in microcredit improved a household’ probability of obtaining bank loans in the following year by 4.9 percentage points. Notably, the stepping effect was present for both the relatively wealthy households and poor households, if we measure wealth by households’ social capital and assets. We identify two mechanisms behind the stepping stone effect. First, the experience of microcredit instilled confidence in households, which helped to turn their hidden demand for bank credit into effective demand. Second, since microcredit records were included in the National Credit Information System, participation in microcredit in effect enabled households to provide banks with creditable and easily discoverable information about their creditworthiness, which greatly improved their chances of obtaining bank loans.
    Keywords: Microcredit, stepping stone effect, credit graduation, financial inclusion
    JEL: G21 O16
    Date: 2022–07
  6. By: Charles W. Calomiris; Mark Carlson
    Abstract: After an unprecedented number of banks suspended operations in the during Panic of 1893, the head regulator of banks chartered by the United States government allowed about 100 banks to reopen after certifying their solvency. We evaluate whether actions by bank owners to change management, contract with depositors to extend liability maturity structure, write off bad assets, and/or inject capital affected bank survival and deposit retention. This historical episode is particularly informative because there was no expectation of government intervention. We find that contracting with depositors provided short-term benefits while dealing with bad assets was key for long-run viability.
    JEL: G21 G28 N21 N41
    Date: 2022–07
  7. By: Chase P. Ross
    Abstract: Banks are vital suppliers of money-like safe assets, which they produce by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I present a model to describe private safe-asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades. The collateral premium — a strategy long Treasuries used more often as repo collateral and short Treasuries used less often — has a positive expected return of 22 basis points per year because the collateral premium compensates for bank leverage risk.
    Keywords: Collateral; Bank leverage constraints; Repurchase agreement; Safe asset; Money
    JEL: E40 E51 G12 G20
    Date: 2022–07–12
  8. By: Edward Garnett (Federal Deposit Insurance Corporation); Rachel Youssef (Federal Deposit Insurance Corporation); Daniel Hoople (Federal Deposit Insurance Corporation)
    Abstract: The International Association of Deposit Insurers (IADI) recently launched a research series that explores innovations in financial technology (fintech) and how these innovations affect deposit insurance systems. The Financial Stability Board has defined fintech as 'technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services.' (Financial Stability Board, 2019b). While the growth in consumer use of fintech presents challenges to deposit insurers by blurring the lines between financial products and services offered within and outside the traditional financial system, fintech also provides many opportunities for deposit insurers by creating business efficiencies, quality products, and new frameworks for solving problems, among other improvements. This brief introduces the term 'DepTech', or Deposit Insurer Technology, and defines it as the adoption of new technologies to improve deposit insurer operations. This can include enhanced reporting procedures, improvements to the reimbursement process, and faster depositor access to funds when a bank fails. This brief investigates the opportunities fintech presents to deposit insurers and in doing so, focusses on data standardisation, digital payments, artificial intelligence and machine learning, cloud computing and new media.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–07
  9. By: Gauri Bhat; Hemang Desai; W. Scott Frame; Christoffer Koch; Erik J. Mayer
    Abstract: This paper uses confidential data on audit engagement partner names from regulatory filings of bank holding companies (BHC) to investigate whether partners display individual style that affects the financial reporting of the BHCs. We focus on loan loss provisioning. We construct an audit partner-BHC matched panel data set that enables us to track different partners across different BHCs over time. We employ two empirical approaches to investigate partner style. The first approach tests whether partner fixed effects are statistically significant in loan loss provisioning models. The second approach tests whether a partner’s history of loan loss provisioning predicts future practices for the same partner. Our empirical evidence does not support systematic differences in loan loss provisioning across audit engagement partners, suggesting that the audit firm’s standards and quality control constrain personal partner style.
    Keywords: Accounting; Banking; Audit Partner Names; Audit Engagement; PCAOB
    JEL: G21 M42
    Date: 2022–07–08
  10. By: Giorgia Barboni; Juan Camilo Cárdenas; Nicolás de Roux
    Abstract: We use a randomized experiment involving 7,029 late-paying clients of a large Colombian bank to compare the effects on loan delinquency of text messages that encourage repayment through different behavioral angles { increased attention, reciprocity, social norms, moral norms, and environmental and sustainability concerns. We find that receiving a behavioral message decreases borrowers' average likelihood to be late by 4%. The effects are more pronounced when messages leverage social norms. Heterogeneity analysis shows that our results are concentrated among late- paying borrowers with a good credit history. We also find evidence that customers who are late on unsecured loan products respond more to the messages. Our intervention provides novel evidence that behavioral messages are most effective when borrowers are marginally struggling to repay and have preferences to be on a good repayment track. In a second experiment pushing the same messages to 8,019 on-time borrowers, we find precisely estimated zero effects, suggesting that these types of messages may not be the right tool to prevent on-time borrowers from falling into loan delinquency.
    Keywords: Loan Delinquency, Behavioral Messages, Personal loans, Field Experiments
    JEL: G51 D91
    Date: 2022–07–06
  11. By: Gaston Giordana; Michael H. Ziegelmeyer
    Abstract: In 2019, Luxembourg introduced borrower-based instruments in the macro-prudential toolkit to constrain credit to households who exceed a certain limit on their loan-to-value ratio, on their (mortgage) debt-to-income ratio or on their debt service-to-income ratio. This paper analyses the impact of setting these limits at different levels, using household-level data from Luxembourg. We calculate these debt burden ratios for individual households who recently purchased their main residence using data from the Household Finance and Consumption Survey conducted in 2010, 2014 and 2018. On January 1, 2021 authorities imposed a legally binding limit on the loan-to-value (LTV) ratio for new mortgages. This may be 80%, 90% or 100% depending on the category of borrower. Had the least restrictive LTV limit envisaged by the law (100%) been applied in 2018, credit would have been rationed to 24% of households with recent mortgages on their main residence. This limit would have required a 7% reduction in the overall debt of this group of households. Had the most restrictive LTV limit envisaged by the law (75%) been applied in 2018, credit would have been rationed to 64% of households with recent mortgages on their main residence, requiring an 18% reduction in overall debt in this group. More generally, we evaluate how well borrower-based instruments can target those households that are financially vulnerable (according to conventional measures from the literature). By simulating an adverse scenario, we find that combining several ratios one could better target households that were not financially vulnerable in the benign conditions of 2018 but would become vulnerable after a shock to income. However, any borrower-based instrument inevitably generates some classification errors (either granting credit to households that are financially vulnerable or constraining credit to households that are not financially vulnerable). Using different assumptions on policymaker preferences, we apply the signals approach to derive limits that are “optimal” in the sense of minimising classification errors.
    Keywords: Household debt, Financial vulnerability, Macro-prudential policy, Markets, Housing Wealth; Affordability
    JEL: D10 D14 G21 G28
    Date: 2022–07
  12. By: Ryan, Ellen
    Abstract: The investment fund sector has expanded dramatically since the crisis of 2008-2009. As the sector grows, so do the implications of its risk-taking for the wider financial system and real economy. This paper provides empirical evidence for the existence of wide- spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronised, cyclical risk-taking which could have systemic effects. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows, which may keep managers from fully internalising the effects of adverse outcomes on their portfolios. The fact that market discipline may not be sufficient to ensure prudential behaviour among managers, combined with the externalities of this risk-taking for the wider system, creates a clear case for macroprudential regulatory intervention. JEL Classification: G23, G11, G28
    Keywords: Financial stability, incentive, investment funds, risk-taking
    Date: 2022–07
  13. By: Thomas M. Eisenbach; Gregory Phelan
    Abstract: We model a safe asset market with investors valuing safety, investors valuing liquidity, and constrained dealers. While safety investors and liquidity investors can interact symbiotically with offsetting trades in times of stress, we show that liquidity investors’ strategic interaction harbors the potential for self-fulfilling fragility. Surprisingly, standard flight to safety in times of stress can have a destabilizing effect and trigger a dash for cash by liquidity investors. This explains how safe asset markets can experience price crashes, as in March 2020. The announcement and execution of policy interventions play important roles for the functioning of safe asset markets.
    Keywords: safe assets; liquidity shocks; global games; Treasury securities; COVID-19
    JEL: C7 G01 G1 E4 E5
    Date: 2022–07–01
  14. By: Jan Sun
    Abstract: The consumer finance literature has emphasized the importance of income and ex pense risk for the evaluation of bankruptcy regimes. Single and married households differ in the risks they face. In this paper, I build the first quantitative consumer default model that explicitly models singles and couples. I calibrate my model to the United States in 2019 and estimate (medical) expense shocks separately for single and married individuals. My calibrated model generates large differences in bankruptcy rates across marital status as in the data. I examine how the preferred degree of bankruptcy leniency differs between singles and couples. There are several channels at work: Differences on the income side between singles and couples cause couples to prefer a stricter bankruptcy regime due to the intra-household insurance channel. However, increased risk for couples due to divorce and on the expense side outweigh the first channel. The net effect is that couples prefer more lenient bankruptcy than singles. My findings suggest that marital status is important to take into account for the evaluation of bankruptcy regimes.
    Keywords: Consumer Credit, Bankruptcy, Default, Bankruptcy Regulation, Marital Status
    JEL: D13 D14 D15 E21 E49 G18 G51 J12 K35
    Date: 2022–07
  15. By: Chase Englund
    Abstract: This paper uses public data disclosed in eight bank holding companies' "living wills", or Resolution Plans, to examine and test how operational resilience can contribute to financial system stability. The banks, each subject to the Large Institution Supervision Coordinating Committee (LISCC) supervisory program, interact in a complex network of Financial Market Utilities (FMUs). By employing complementary public data on operational exposures and benchmarks for operational disruption developed in existing research, we construct plausible estimates of how various disruption events would impact the financial system. This paper provides a tangible, reproducible example of how concepts discussed in recent regulatory agency guidance on operational resilience can be employed for risk analysis and scenario testing. It also demonstrates how network mapping can aid in this type of analysis. The estimates generated here indicate that disruptions stemming from tail-end operational risk events extend beyond absolute financial losses, and are likely to be large enough to pose a systemic risk to the financial system.
    Date: 2022–07–01
  16. By: Toni Ahnert; Michael Brolley; David Cimon; Ryan Riordan
    Abstract: Financial markets face the constant threat of cyber attacks. We develop a principal-agent model of cyber-attacking with fee-paying clients who delegate security decisions to financial platforms. We derive testable implications about clients’ vulnerability to cyber attacks and about the fees charged. We characterize which cyber attacks actors choose. We find that ransomware attacks are more successful than traditional attacks and that platforms underinvest in security when security is unobservable. Regulating security investment (e.g., minimum security standards) or improving transparency (e.g., security ratings) can improve welfare. Our results support regulatory efforts to increase transparency around cyber security and cyber attacks.
    Keywords: Economic models; Financial services; Financial stability; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: D78 D81 G18 G21 G23
    Date: 2022–07
  17. By: Heng Chen; Marie-Hélène Felt
    Abstract: This paper studies Canadians’ access to cash using the geographical distribution of automated banking machines (ABMs). We find that over 97% of urban Canadians have access to ABMs in their communities, while 92% of rural people have access to at least one ABM. During the pandemic, there have been no sustained adverse effects on cash accessibility through ABMs.
    Keywords: Financial services; Regional economic developments
    JEL: J15 O1 R51
    Date: 2022–07
  18. By: Max Fuchs (University of Kassel)
    Abstract: This paper examines whether a central bank digital currency (CBDC) reinforces inefficiencies in transactions with cash. In this case, the gap between the traded quantity and the welfare-maximizing one, which arises due to discounting or a suboptimal amount of money, increases further. To get some answers, the monetary search model of Trejos and Wright (1995) is extended by a CBDC. We show that an interest-bearing CBDC reinforces inefficiencies in transactions with cash since opportunity costs for cash holders and money supply increase. Nevertheless, a CBDC is able to increase welfare as long as the share of CBDC holders is limited.
    Keywords: CBDC, inefficiencies, welfare analysis
    JEL: E31 E41 E51
    Date: 2022
  19. By: Sarah Burkinshaw; Yaz Terajima; Carolyn A. Wilkins
    Abstract: Concerns over rising inequality have heightened in the years following the 2007–09 global financial crisis and, more recently, with the COVID-19 pandemic. This staff discussion paper reviews the historical facts regarding income inequality in Canada, comparing Canada with the United States and reviewing briefly what the literature says about the most likely drivers of the rise in inequality. Data show that income inequality in Canada increased substantially during the 1980s and first half of the 1990s but has been relatively stable over the past 25 years. This increase was felt mainly by low-income earners and younger people, while older people benefited from higher retirement income. Income inequality in the United States has been higher than in Canada for the last four decades, with the main differences observed at the high end of the income distribution. These facts give rise to a number of important questions for future research, including the role (if any) of monetary policy in driving changes in income inequality and that of the monetary policy framework and decisions in reflecting the observed inequality.
    Keywords: Central bank research; Labour markets; Monetary and financial indicators
    JEL: D31 D63 J31 J32 I24 I32 N32
    Date: 2022–07
  20. By: Celso Brunetti; John Caramichael; Matteo Crosignani; Benjamin Dennis; Gurubala Kotta; Donald P. Morgan; Chaehee Shin; Ilknur Zer
    Abstract: This report has two objectives: 1. Review the available literature on Climate-Related Financial Stability Risks (CRFSRs) as it pertains to the United States. Specifically, the literature review considers several modeling approaches and aims to 1.1 Identify financial market vulnerabilities (e.g., bank leverage), 1.2 Provide an assessment of those vulnerabilities (high/medium/low) as identified by the current literature, and 1.3 Evaluate the uncertainty surrounding these assessments based on interpretation of the findings and coverage of existing literature (high/low). 2. Identify methodologies to link climate risks to financial stability and possible research paths to assess U.S. CRFSRs. The report is structured in three parts. First, it characterizes the potential financial system vulnerabilities of climate change. Second, it describes the major methodologies adopted in studying the implications of climate change and provides an assessment of financial system vulnerabilities identified by the current literature. Third, it discusses how different methodologies can be further developed or combined to assess U.S. CRFSRs.
    Keywords: Climate change; Financial stability and risk
    Date: 2022–07–05
  21. By: Sanyal, Anirban
    Abstract: Capital control is used as policy toolkit for safeguarding domestic economy from the volatility of capital flows. However, the effect of capital control is rather far fetched as the signaling effect of capital control can moderate investor's outlook about domestic economy and thereby outweighs the intended effect. The spillover effect, on the other hand, modulates the capital flows to other countries when one country increases capital account restrictions. Further, the effect of capital control can have varying impact on capital inflows to different sectors as recent studies indicate heterogeneity in the drivers and nature of capital inflows to different institutional sectors. With the background, the paper analyzes the heterogeneous direct and spillover effect of capital control on gross capital flows across three major institutional sectors namely public, banks and corporate. The paper validates the possible heterogeneity in the effect of capital control on the capital inflows to these institutional sectors using spatial econometric models. The paper observes that the direct effect of capital control moderates portfolio inflows to public sector whereas the effect is insignificant on portfolio inflows to banks and corporate sector. Further, the paper observes that the spillover effect of capital control is broad-based i.e. equally prevalent on all sectors. The paper explains the heterogeneity in the capital control effects by introducing signaling effect in a portfolio choice model. The paper argues that the heterogeneous direct effect is driven by private signals of capital control received by the investors about the state of economy whereas the spillover effect of capital control is mainly driven by the hedging and search for better returns. The paper extends the existing literature of capital controls by reviewing the sectoral heterogeneity in the capital flows.
    Keywords: Capital control,Spillover effect,Portfolio Choice,Signaling effect,Spatial Durbin Model
    Date: 2022
  22. By: Joana David Avritzer; Lídia Brochier
    Abstract: The paper develops a Supermultiplier model where household debt-financed consumption is the autonomous component of demand driving growth. However, instead of taking autonomous consumption growth as exogenous - as usually done in canonical Supermultiplier models - we assume households’ debt service ratio partially determines it. More precisely, we define a consumption function that captures: (i) the fact that households’ demand for credit may depend on the burden interest payments have on their income (wages) and (ii) that credit conditions may also affect the pace of household expenditures. There are two equilibria in the model: one with a lower debt ratio and higher growth rate; and the other with a higher debt ratio and lower growth rate. Both equilibria are locally stable for the chosen set of parameters, yet the system converges to the steady state with a lower household debt ratio and higher growth rate. Both real and financial variables affect the steady growth path in the model, with the wage share and firms’ propensity to invest having a positive effect on growth while the interest rate has a negative one.
    Keywords: demand-led growth, Supermultiplier, household debt, consumption, endogenous autonomous demand
    JEL: B50 C61 E11 G15 O41
    Date: 2022–08
  23. By: John Nay
    Abstract: Climate adaptation could yield significant benefits. However, the uncertainty of which future climate scenarios will occur decreases the feasibility of proactively adapting. Climate adaptation projects could be underwritten by benefits paid for in the climate scenarios that each adaptation project is designed to address because other entities would like to hedge the financial risk of those scenarios. Because the return on investment is a function of the level of climate change, it is optimal for the adapting entity to finance adaptation with repayment as a function of the climate. It is also optimal for entities with more financial downside under a more extreme climate to serve as an investing counterparty because they can obtain higher than market rates of return when they need it most. In this way, parties proactively adapting would reduce the risk they over-prepare, while their investors would reduce the risk they under-prepare. This is superior to typical insurance because, by investing in climate-contingent mechanisms, investors are not merely financially hedging but also outright preventing physical damage, and therefore creating economic value. This coordinates capital through time and place according to parties' risk reduction capabilities and financial profiles, while also providing a diversifying investment return. Climate-contingent finance can be generalized to any situation where entities share exposure to a risk where they lack direct control over whether it occurs (e.g., climate change, or a natural pandemic), and one type of entity can take proactive actions to benefit from addressing the effects of the risk if it occurs (e.g., through innovating on crops that would do well under extreme climate change or vaccination technology that could address particular viruses) with funding from another type of entity that seeks a targeted return to ameliorate the downside.
    Date: 2022–07
  24. By: Kotovskaia, Anastasia; Meier, Nicola
    Abstract: Large technology firms ("BigTechs") increasingly extend their influence in finance, primarily taking over market shares in payment services. A further expansion of their businesses into the territory of cryptocurrencies could entail new and unprecedented risks for the future, namely for financial stability, competition in the private sector and monetary policy. When creating a regulatory toolbox to address these risks, financial regulatory, antitrust, and platform-specific solutions should be closely intertwined in order to fully absorb all the potential threats and to take account of the complex risks these platform companies bear. This policy letter evaluates the solutions lately proposed by the European Commission, with specific focus on the upcoming regulation of Markets in crypto-assets (MiCA), but also the Digital Markets Act (DMA) and Digital services act (DSA), against the background of cryptocurrencies issued by BigTechs and sheds light on financial regulatory, competition and monetary law issues coming along with the possible designs of these cryptocurrencies.
    Keywords: Cryptocurrencies,Big Techs,MiCA,DMA,DSA,European Commision
    Date: 2022
  25. By: Herr, Hansjörg; Nettekoven, Zeynep Mualla
    Abstract: The Covid-19 pandemic hitting the world in 2020 also caused a high death toll in Germany and in the European Monetary Union (EMU) at large. The health crisis worldwide and the precautions against Covid-19 rapidly induced a demand and supply recession simultaneously. The Covid-19 crisis was marked as the worst crisis since the Great Depression of the 1930s. It hit the EMU in an unfortunate moment, when economic growth was already low before the Covid-19 crisis started. The effects of the Great Financial Crisis and Great Recession 2008/2009 were not overcome at the beginning of the Covid-19 recession. Mega-expansionary monetary policy was still in place stimulating bubbles in stock and real estate markets in an overall constellation of partly very high levels of private and public debt. Macroeconomic policies in form of expansionary monetary policy, large-scale fiscal stimuli, and public guarantees, in Germany and the EMU smoothed the disastrous economic and social effects of the pandemic. Overall, the stabilisation policy during the Covid-19 pandemic in Germany was successful and prevented escalating inequalities. But the pandemic intensified long-lasting problems which have to be solved in the future. Public debt quotas cannot increase permanently without leading to an economically fragile situation. It also shows the need for a fiscal union in the EMU as an equal partner for the European Central Bank (ECB). In early 2022, the ECB is in a difficult situation. Price shocks drove the inflation rate up, but restrictive monetary policy as a response to such shocks slowdown growth and lead to unemployment.
    Keywords: Covid-19 crisis,Germany,EU,fiscal policy,monetary policy
    JEL: E61 F62 I18
    Date: 2022
  26. By: Minesso, Massimo Ferrari; Pagliari, Maria Sole
    Abstract: This paper presents DSGE Nash, a toolkit to solve for pure strategy Nash equilibria of global games in macro models. Although primarily designed to solve for Nash equilibria in DSGE models, the toolkit encompasses a broad range of options including solutions up to the third order, multiple players/strategies, the use of user-de_ned objective functions and the possibility of matching empirical moments and IRFs. When only one player is selected, the problem is re-framed as a standard optimal policy problem. We apply the algorithm to an open-economy model where a commodity importing country and a monopolistic commodity producer compete on the commodities market with limits to entrance. If the commodity price becomes relevant in production, the central bank in the commodity importing economy deviates from the _rst best policy to act strategically. In particular, the monetary authority tolerates relatively higher commodity price volatility to ease barriers to entry in commodity production and to limit the market power of the dominant exporter. JEL Classification: C63, E32, E61
    Keywords: computational economics, DSGE model, optimal policies
    Date: 2022–07
  27. By: Fender, Ingo; McMorrow, Mike; Zulaica, Omar
    Abstract: Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One key motivation is the need to mobilise funds for the large-scale public sector investment required to reach the goals of the Paris Agreement on climate change. This paper explores the role central banks’ foreign exchange (FX) reserves portfolios can play in this context. Central banks’ frameworks for managing FX reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Incorporating sustainability requires expanding this usual triad into a tetrad. This can be achieved either explicitly, by introducing new economic uses of reserves, or implicitly, by recognising the ways in which sustainability affects existing policy objectives – or through a combination of both approaches. Pursuing sustainability, however, may give rise to trade-offs over and above the usual tensions between liquidity and safety and return. This paper explores sustainability-enhanced reserve management in the context of these trade-offs and outlines 12 different channels (classified into four different types) that reserve managers can use to ‘green’ their operations. Each of these channels comes with its own advantages and limitations, so – given the constraints faced at the individual reserve manager’s level – choosing the right channels is key.
    JEL: F3 G3
    Date: 2022–07–08
  28. By: Pavel Ciaian; Andrej Cupak; Pirmin Fessler; d'Artis Kancs
    Abstract: Individuals invest in Environmental-Social-Governance (ESG)-assets not only because of (higher) expected returns but also driven by ethical and social considerations. Less is known about ESG-conscious investor subjective beliefs about crypto-assets and how do these compare to traditional assets. Controversies surrounding the ESG footprint of certain crypto-asset classes - mainly on grounds of their energy-intensive crypto mining - offer a potentially informative object of inquiry. Leveraging a unique representative household finance survey for the Austrian population, we examine whether investors' ESG preferences can explain cross-sectional differences in individual portfolio exposure to crypto-assets. We find a strong association between investors' ESG preferences and the crypto-investment exposure. The ESG-conscious investor attention is higher for crypto-assets compared to traditional asset classes such as bonds and shares.
    Date: 2022–06

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