nep-ban New Economics Papers
on Banking
Issue of 2022‒10‒17
29 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Expectations and the Neutrality of Interest Rates By John H. Cochrane
  2. On the anchoring of inflation expectations in the euro area By Stefano Neri; Guido Bulligan; Sara Cecchetti; Francesco Corsello; Andrea Papetti; Marianna Riggi; Concetta Rondinelli; Alex Tagliabracci
  3. Is the EU money market fund regulation fit for purpose? Lessons from the COVID-19 turmoil By Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian
  4. Public and private liquidity during crises times: evidence from Emergency Liquidity Assistance (ELA) to Greek banks By Antonis Kotidis; Dimitris Malliaropulos; Elias Papaioannou
  5. The Rise of Nonbanks and the Quality of Financial Services: Evidence from Consumer Complaints By Ahmet Degerli; Jing Wang
  6. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework in 2020 and 2021 By Corsi, Marco; Mudde, Yvo
  7. Redistributive Policy Shocks And Monetary Policy With Heterogeneous Agents By Ojasvita Bahl; Chetan Ghate; Debdulal Mallick
  8. Fintech in sub-Saharan Africa By Njuguna Ndung'u
  9. Bullard Discusses Raising Fed Funds Rate to Lower Inflation with Bloomberg TV By James B. Bullard
  10. Using Macro-Financial Models to Simulate Macroeconomic Developments During the Covid-19 Pandemic: The Case of Albania By Lorena Skufi; Adam Gersl
  11. Forecasting Banks’ Corporate Loan Losses Under Stress: A New Corporate Default Model By Gabriel Bruneau; Thibaut Duprey; Ruben Hipp
  12. Looking at the evolution of macroprudential policy stance: A growth-at-risk experiment with a semi-structural model By Budnik, Katarzyna; Panos, Jiri; Boucherie, Louis
  13. Corrective regulation with imperfect instruments By Dávila, Eduardo; Walther, Ansgar
  14. A tale of three crises: synergies between ECB tasks By Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin
  15. Financial exposure and bank mergers: micro and macro evidence from the EU By Lebastard, Laura
  16. Consumer payment preferences in the euro area By Kajdi, László
  17. Two-tier system for remunerating excess reserve holdings By Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona
  18. Финансовая грамотность и инфляционные ожидания домашних хозяйств // Financial literacy and inflation expectations of households By Агамбаева Саида // Agambayeva Saida; Конурбаева Наталья // Konurbayeva Natalya
  19. Towards a Better Microcredit Decision By Mengnan Song; Jiasong Wang; Suisui Su
  20. Factors explaining capital market reactions during corporate, sovereign, and pandemic events By He, Jianan
  21. The Reverse Revolving Door in the Supervision of European Banks By Stefano Colonnello; Michael Koetter; Alex Sclip; Konstantin Wagner
  22. Mortgage prepayments and tax-exempted intergenerational transfers: from rich parents to rich children? By Yue Li; Mauro Mastrogiacomo
  23. Financial Stability Surveillance Tools: Evaluating the Performance of Stress Indices By Kaelo Mtwaepelo; Grivas Chiyaba
  24. Introduction to weather extremes and monetary policy By Pablo Garcia Sanchez
  25. What's next for crypto? By Claudia Biancotti
  26. Harnessing the benefit of state-contingent forward guidance By Vivian Chu; Yang Zhang
  27. Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma By Paul Beaudry; Thomas J. Carter; Amartya Lahiri
  28. The Banker's Oath And Financial Advice By Utz Weitzel; Michael Kirchler
  29. A sensitivities based CoVaR approach to assets commonality and its application to SSM banks By Del Vecchio, Leonardo; Giglio, Carla; Shaw, Frances; Spanò, Guido; Cappelletti, Giuseppe

  1. By: John H. Cochrane
    Abstract: Lucas (1972) is the pathbreaking analysis of the neutrality and temporary non-neutrality of money. But our central banks set interest rate targets, and do not even pretend to control money supplies. How is inflation determined under an interest rate target? We finally have a complete theory of inflation under interest rate targets, that mirrors the long-run neutrality and frictionless limit of monetary theory: Inflation can be stable and determinate under interest rate targets, including a k percent rule, i.e. a peg. The zero bound era is confirmatory evidence. Uncomfortably, long-run neutrality means that higher interest rates eventually produce higher inflation, other things (and fiscal policy in particular) constant. With a Phillips curve, we have some non-neutrality as well: Higher nominal interest rates raise real rates and lower output. A good model in which higher interest rates temporarily lower inflation is a harder task. I exhibit one such model. It has the Lucas property that only unexpected interest rate rises can lower inflation. A better model, and empirical understanding, is as crucial to today's agenda as Lucas (1972) was in its day. Much of this is contentious. The issues are crucial for policy: Can the Fed contain inflation without dramatically raising interest rates? Given the state of knowledge, a bit of humility is in order.
    JEL: E4 E5
    Date: 2022–09
  2. By: Stefano Neri (Bank of Italy); Guido Bulligan (Bank of Italy); Sara Cecchetti (Bank of Italy); Francesco Corsello (Bank of Italy); Andrea Papetti (Bank of Italy); Marianna Riggi (Bank of Italy); Concetta Rondinelli (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper assesses the anchoring of long-term inflation expectations in the euro area, a key issue from a monetary policy perspective, using a range of measures of inflation expectations and methods. The overall reading of the evidence is that long-term inflation expectations in the euro area have rapidly returned to levels close to the new 2 per cent symmetric inflation target of the ECB announced in July 2021, in a context of elevated inflationary pressures linked to the recent surge in energy prices and persistent supply-side bottlenecks. Nonetheless, the risk of an upward de-anchoring of long-term inflation expectations deserves close and continuous monitoring. This risk has to be taken into account when assessing the appropriate pace of normalization of the ECB’s monetary policy stance, acknowledging that the inflation outlook is surrounded by high uncertainty, as signalled by all types of expectations.
    Keywords: inflation expectations, survey data, professional forecasters, consumers’ expectations, market based expectations
    JEL: E31 E52 C22 G12
    Date: 2022–09
  3. By: Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian
    Abstract: The market turmoil in March 2020 highlighted key vulnerabilities in the EU money market fund (MMF) sector. This paper assesses the effectiveness of the EU's regulatory framework from a financial stability perspective, based on a panel analysis of EU MMFs at a daily frequency. First, we find that investment in private debt assets exposes MMFs to liquidity risk. Second, we find that low volatility net asset value (LVNAV) funds, which invest in non-public debt assets while offering a stable NAV, face higher redemptions than other fund types. The risk of breaching the regulatory NAV limit may have incentivised outflows among some LVNAV investors in March 2020. Third, MMFs with lower levels of liquidity buffers use their buffers less than other funds, suggesting low levels of buffer usability in stress periods. Our findings suggest fragility in the EU MMF sector and call for a strengthened regulatory framework of private debt MMFs. JEL Classification: G11, G15, G23, G28
    Keywords: COVID-19, financial fragility, money market funds, regulation
    Date: 2022–10
  4. By: Antonis Kotidis (Board of Governors of the Federal Reserve System); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Elias Papaioannou (London Business School and CEPR)
    Abstract: In a surprise move during a crisis, the ECB excluded Greek Government Bonds from the set of eligible collateral in monetary policy operations. In turn, Greek banks turned to Emergency Liquidity Assistance (ELA) to meet their funding needs. ELA replenished losses from all funding sources, consistent with its role as LOLR. However, in anticipation to a switch to ELA, banks reduced their interbank and corporate lending as a result of its higher cost and conditionality. Although multi-lender firms compensated for the associated credit crunch, single-lender firms that were not able to establish new lending relationships experienced a reduction in their exports.
    Keywords: Central Bank Interventions; Lender of Last Resort (LOLR); Collateral Framework; Emergency Liquidity Assistance (ELA)
    JEL: E58 G21 G28
    Date: 2022–09
  5. By: Ahmet Degerli; Jing Wang
    Abstract: We show that as nonbanks' market share increases in a local residential mortgage market, the quality of mortgage services in the market improves. Two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state confirm this finding. We find evidence that as nonbanks grow their market share, they develop a specialty in servicing lower-income borrowers and increase investment in technology, leading to improved service quality. This improvement in service quality is more salient in counties with a higher percentage of minority populations.
    Keywords: Product quality; Mortgage lending; Banks; Nonbanks
    JEL: G21 G28 L13 L15
    Date: 2022–09–01
  6. By: Corsi, Marco; Mudde, Yvo
    Abstract: The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs) that are either part of the standard toolbox or are developed to deal with major economic and financial events with a potential adverse impact on price stability and/or the transmission of monetary policy. In the review period covered by this report (2020-2021), monetary policy action was dominated by the Eurosystem’s response to the negative economic effects of the outbreak of the COVID-19 pandemic. Through its action, the Eurosystem continued to expand its balance sheet, in particular by scaling up its outright asset purchases and easing the conditions of its targeted longer-term refinancing operations (TLTROs), complemented by temporary changes in the collateral framework. The accommodative monetary policy stance was preserved by maintaining the key ECB interest rates at record-low levels, reinforced by the ECB’s forward guidance on policy rates. This report provides a full overview of the Eurosystem’s monetary policy implementation over the years 2020 and 2021. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2022–09
  7. By: Ojasvita Bahl; Chetan Ghate (Institute of Economic Growth, Delhi University, Delhi); Debdulal Mallick
    Abstract: Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions usually involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a tractable two-sector-two-agent NK DSGE model calibrated to the Indian economy. We show that for an inflation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not.
    Keywords: TANK models, Inflation Targeting, Emerging Market and Developing Economies, Procurement and Redistribution, DSGE.
    JEL: E31 E32 E44 E52 E63
    Date: 2022–09–01
  8. By: Njuguna Ndung'u
    Abstract: This paper traces the development of fintech in sub-Saharan Africa, its evolution over time, and the unfolding benefits attained at each stage of its adoption and market evolution. From the onset, fintechs have revolutionized retail electronic payment systems—a revolution that has evolved into a technological platform to manage micro-savers' accounts, virtual savings and credit systems, public financial management, and cross-border remittances, and has led to the adoption of new monetary policy frameworks.
    Keywords: Fintech, Financial inclusion, Saving, Technology, Sub-Saharan Africa
    Date: 2022
  9. By: James B. Bullard
    Abstract: St. Louis Fed President Jim Bullard discussed the need to continue raising interest rates to put downward pressure on inflation. He spoke in a Bloomberg TV interview at the Jackson Hole Economic Symposium in Wyoming. Bullard reiterated that the Federal Open Market Committee should lift the federal funds rate target to 3.75%--4% by the end of the year. “I'd like to get to that level, and sooner is better as far as I'm concerned,” he said. Complementing the rate hikes has been the steady reduction in the Federal Reserve’s balance sheet, which has put some upward pressure on longer-term interest rates, Bullard said. He also noted that quantitative tightening is global. “And so you've got many central banks moving in the same direction here, all at once. That may push longer-term yields higher and help us keep inflation under control globally,” Bullard said. In addition, he talked about the responsiveness of the market to rising interest rates.
    Keywords: interest rates; inflation
    Date: 2022–08–26
  10. By: Lorena Skufi (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The recent Covid-19 pandemic has increased the importance of properly forecasting macro-financial developments in turbulent times. Only a limited number of studies focus on how to employ macro-financial models to project key real and financial sector variables under large shocks and unusual assumptions. The aim of this paper is to examine whether a pre-constrained linear model can project the developments seen during the Covid-19 pandemic. We develop a macro-financial model for Albania and, using suitable assumptions, run two types of simulations and compare the results with the outturn. We also take into account the increased forecast risk by constructing uncertainty bands using a quantile regression approach. The results indicate that a linear model is flexible enough to analyse non-linear events and be used in abnormal times, but its precision is lower especially due to the government measures such as repayment moratoria that broke the link between the real and financial sector.
    Keywords: macro-financial model, scenario, quantile regression, uncertainty bands, pandemic
    JEL: E66 C53 C32
    Date: 2022–09
  11. By: Gabriel Bruneau; Thibaut Duprey; Ruben Hipp
    Abstract: We develop a corporate default model to forecast corporate loan losses of the Canadian banking sector under stress. First, we tackle a data gap by reconstructing historical default probabilities for banks’ loan portfolios. Second, we estimate tail elasticities to capture non-linear relationships between macrofinancial conditions and default probabilities. By explicitly modelling default probabilities associated with macroeconomic tail events, this model significantly improves the Bank of Canada’s stress-testing infrastructure.
    Keywords: Economic models; Financial institutions; Financial stability; Financial system regulation and policies
    JEL: C22 C53 G17 G28
    Date: 2022
  12. By: Budnik, Katarzyna; Panos, Jiri; Boucherie, Louis
    Abstract: This paper proposes a methodology for measuring the macroprudential policy stance based on a distance-to-tail metric perspective. This approach employs a large-scale semi-structural model reflecting the dynamics of 91 significant euro area banks and 19 euro area economies and is presented through an assessment of the stance evolution for the aggregate euro area economy and for the individual euro area countries. Our results uncover mild tightening of the macroprudential policy stance before the end of 2019. This trend is abruptly interrupted at the onset of the Covid-19 pandemic but reappears at the end of 2020 before picking up again over the first half of 2021. Our assessment also reveals a marginal impact of the macro-financial policies applied, which is particularly notable throughout 2020. JEL Classification: E37, E58, G21, G28
    Keywords: distance-to-tail metric, growth-at-Risk, lending-at-Risk, macroprudential policy, macroprudential policy stance
    Date: 2022–09
  13. By: Dávila, Eduardo; Walther, Ansgar
    Abstract: This paper studies optimal second-best corrective regulation, when some agents/activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that a subset of policy elasticities, leakage elasticities, determine optimal second-best policy, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities, uniform regulation across agents/activities, and costly regulation. We illustrate our results in applications to financial regulation with environmental externalities, shadow banking, behavioral distortions, asset substitution, and fire sales. JEL Classification: H23, Q58, G28, D62
    Keywords: corrective regulation, Pigouvian taxation, second-best policy
    Date: 2022–09
  14. By: Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin
    Abstract: This paper provides a chronology of the main financial events over the last 15 years, spanning three main crises. The first is the global financial crisis in 2008-09, and the second is the euro area sovereign debt crisis in 2010-12. Both events heralded significant reforms of the EU’s governance and financial architecture. On the tail of these two crises, the ongoing COVID-19 crisis that started in early 2020 enables us to assess the working of the resulting financial framework. Two aspects stand out. The first is that the coronavirus crisis was, in its origin, exogenous from previous banking sector behaviours -which was not the case during the 2008-2012 period. The second aspect stems from the combined policy responses to the pandemic, which lacked in the 2008-2012 period. Against this background, the aim of this paper is twofold. The first is to highlight the sequence of regulatory and institutional changes, with a focus on the ECB and Eurosystem, vis-Ã -vis the unfolding events and against the background of broader financial reforms. The second aim of this paper is to investigate whether the sequence of financial reforms has improved the sector’s ability to deal with major macro-financial shocks at the EU/euro area level, reducing the sovereign-bank doom loop. We focus primarily on developments affecting the banking sector, while noting that during the same period major developments within the EU non-bank financial sector were observed. The COVID-19 crisis has been characterized by the positive interaction of rapid fiscal and monetary responses (macro polices), and joint financial and supervisory responses. In this new policy environment the message of the paper is that the sequence of financial reforms, including the acquisition of supervisory and financial stability tasks by the ECB, have been instrumental in facilitating the effective response to the COVID-19 crisis thus far, especially compared to the previous two crises. The increased resilience and resolvability of the EU banking sector has enabled it to withstand the large and unexpe JEL Classification: E42, E58, F36, G21
    Keywords: banking supervision, banking union, decision-making process., European Central Bank (ECB), financial stability, macroprudential policies, monetary policy, systemic risks
    Date: 2022–09
  15. By: Lebastard, Laura
    Abstract: This paper studies for the first time the links between interbank liability and equity markets (financial exposure), and mergers and acquisitions (M&As) in the European banking sector, both at the micro and macro level. Using a binary logit model, the paper first examines – at the micro level – how financial exposures between banks affect the probability of M&A. It finds that financial interlinkages significantly increase the chances of them taking place. Using a gravity model, the paper then investigates – at the macro level – whether the micro results hold. Not only do financial links are positively and significantly correlated with the number of M&As between countries, but they are also a better predictor than trade – traditionally used in the macro literature on M&A. Since the Capital Market Union would help to geographically diversify banks’ portfolio, it would therefore also foster cross-border M&As. Finally, the paper builds a M&A compatibility index for each pair of EU countries. The study highlights strong M&As prospects linked to high financial interlinkages in core Europe, which could be the sign of a future asymmetrical financial integration in the EU. JEL Classification: G21, G34, F21, F34, F36
    Keywords: Bank consolidation, financial exposure, gravity model, logit model
    Date: 2022–09
  16. By: Kajdi, László
    Abstract: Payments are a key focus of central banks, as - together with the safe, efficient operation of the payments market – wide access to cash is fundamentally important for a healthy economy. In this study, three main research areas were investigated: 1. socioeconomic characteristics that can be associated with financial inclusion; 2. factors behind consumers´ payment choices; 3. underlying factors for holding cash in a wallet (i.e. for transactional purposes). Regression results for the first research question confirmed the findings of international literature, i.e. mainly older age, lower income and lower educational level is associated with the lack of access to electronic payment options. The study pursues various approaches to investigate consumer payments choices, and the results from most models showed that those with higher level of income and education, or lower level of cash income are more likely to prefer and actually use electronic payment methods. Finally, concerning the holding of cash the initial expectations were confirmed i.e. those who do not use cash for daily transactions tend to keep less cash in their wallet, while those who indicated preference for cash payments or higher importance of cash payment option are more likely to keep higher cash amounts. JEL Classification: D11, D12, E42, J33
    Keywords: cash, financial inclusion, payments
    Date: 2022–09
  17. By: Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona
    Abstract: This paper reviews the experience of the ECB with the two-tier system for excess reserve remuneration that exempted a portion of banks’ excess liquidity (EL) holdings from the negative interest rate of the ECB’s deposit facility. JEL Classification: E41, E43, E52, E58, G11, G12
    Keywords: excess liquidity, exemption scheme, monetary policy transmission, negative interest rates, two-tier system
    Date: 2022–09
  18. By: Агамбаева Саида // Agambayeva Saida (National Bank of Kazakhstan); Конурбаева Наталья // Konurbayeva Natalya (National Bank of Kazakhstan)
    Abstract: Имеющийся в литературе опыт изучения инфляционных ожиданий свидетельствует о гетерогенности их формирования у разных агентов. В данной работе мы исследуем, связана ли эта неоднородность с различиями в уровне финансовой грамотности домашних хозяйств. Используя микроданные опросов по инфляционным ожиданиям казахстанских домашних хозяйств, мы построили индикатор «финансовой грамотности». Согласно полученным результатам, данный индикатор помогает объяснить уровень инфляционных ожиданий: респонденты с относительно более высоким уровнем финансовой грамотности, как правило, имеют относительно более низкие и более точные инфляционные ожидания.
    Keywords: инфляционные ожидания, финансовая грамотность, опросы домохозяйств, inflation expectations, financial literacy, household survey
    JEL: E31 E42 E58 D84 E71
    Date: 2022
  19. By: Mengnan Song; Jiasong Wang; Suisui Su
    Abstract: Reject inference comprises techniques to infer the possible repayment behavior of rejected cases. In this paper, we model credit in a brand new view by capturing the sequential pattern of interactions among multiple stages of loan business to make better use of the underlying causal relationship. Specifically, we first define 3 stages with sequential dependence throughout the loan process including credit granting(AR), withdrawal application(WS) and repayment commitment(GB) and integrate them into a multi-task architecture. Inside stages, an intra-stage multi-task classification is built to meet different business goals. Then we design an Information Corridor to express sequential dependence, leveraging the interaction information between customer and platform from former stages via a hierarchical attention module controlling the content and size of the information channel. In addition, semi-supervised loss is introduced to deal with the unobserved instances. The proposed multi-stage interaction sequence(MSIS) method is simple yet effective and experimental results on a real data set from a top loan platform in China show the ability to remedy the population bias and improve model generalization ability.
    Date: 2022–08
  20. By: He, Jianan
    Abstract: The presented studies show evidence of the semi-strong market efficiency, where security prices react significantly to public announcements of the events that are crucial to firms’ valuation. We focus on two trends in capital markets. One is industry integration, where companies improve their efficiency to adapt to the changing environment. In this context, many firms choose M&A to achieve external growth and strengthen their competitiveness. The other is investment diversification, where investors actively search for low correlated markets and assets with global portfolios to reduce their investment risk. These two trends have been well explored in previous studies, where researchers provide deep insights to market participants. Nevertheless, the recent changes in regulation and market environment have put many findings in question, and some emerging markets and assets are still unfamiliar to investors. These unknowns gain more importance during the Covid-19 crisis. On the one side, the pandemic has accelerated the industry integration as many inefficient firms suffered liquidity shortages and were acquired by better-positioned firms; on the other side, investors have been searching for alternatives to diversify investment risk as central banks have injected massive liquidity into capital markets, leading to soaring inflation risk. This dissertation addresses new findings on the aforementioned trends and important implications for different groups of interests.
    Date: 2022
  21. By: Stefano Colonnello (Department of Economics, University Of Venice CÃ Foscari; Halle Institute For Economic Research (IWH), Italy); Michael Koetter (Halle Institute for Economic Research (IWH); Otto-von-Guericke University Magdeburg; Deutsche Bundesbank, Germany); Alex Sclip (University of Verona, Italy); Konstantin Wagner (Halle Institute for Economic Research (IWH))
    Abstract: We show that the presence of executive directors with prior experience in the finance industry is pervasive on the boards of European national banking supervisors. Up to one executive out of three has previously held positions in the industry she supervises (or in closely connected ones). Appointments of such executives impact more favorably bank valuations than those of executives without a finance background. The proximity to supervised banks rather than superior financial expertise or intrinsic skills appears to drive the positive differential effect of finance-related executives. Finally, the presence of former finance professionals in the board of banking authorities associates with lower regulatory capital and faster growth of banks,pointing to a more lenient supervisory style.
    Keywords: Revolving Doors, Banking Supervision, Conflicts of Interest
    JEL: G14 G21 G28
    Date: 2022
  22. By: Yue Li; Mauro Mastrogiacomo
    Abstract: The Dutch government modified twice the taxation of intergenerational transfers aimed at mortgage down-payments and prepayments. We identify the causal effects of the tax exemption on prepayments and inter vivos transfers separately by exploiting changes in the policy design. Subsequent policy changes resulted in two expansions of the tax-free transfers that caused a significant increase in the probability of receiving such transfers — a relatively rare event — which translated then in a more modest increase in the probability to make prepayments, that are far more common. Initially the amounts prepaid increased by a similar magnitude, while the second expansion only increased the amounts being transferred but not the prepayments. The macroprudential policy goal of the reform was to reduce the number of underwater mortgages, at the time constituting more than onethird of all mortgages. We find that the prepayments triggered by the policy change increased mostly for borrowers with low original loan to value (LTV) ratios. This implies that most transfers were made from wealthy parents to housing-rich children. This because the policy was too generic, so it did not help to reduce the share of underwater mortgages.
    Keywords: mortgage repayments; intergenerational transfers; household indebtedness;
    JEL: G5 H2
    Date: 2022–09
  23. By: Kaelo Mtwaepelo (Department of Economics, University of Reading); Grivas Chiyaba (Department of Economics, University of Reading, and Central Bank of the UAE, Abu Dhabi)
    Abstract: In this study, we aim to address the emerging debate about whether financial stress indices (FSIs) constructed using advanced methods such as the dynamic factor model and the principal component analysis method, perform better than those aggregated using simple averages, for the case of South Africa. To do so, we construct three FSIs using: the equal-variance weighting method (EVM), the principal component analysis method (PCA) and the dynamic factor model (FAM). We compare the performance of the indices for the period 2009-2020, using four criteria: quantile regressions, ordered probit model, local projections and the autoregressive integrated moving average (ARIMA) forecasting model. The results suggest that FSIs aggregated using the dynamic factor model and the principal component analysis method have a significant comparative advantage in predicting a financial crisis and capturing the vulnerability of the South African financial system to external monetary policy shocks. This suggests that the aggregation method and weighting system involved in constructing a financial stress index affects its performance in monitoring financial stability.
    Keywords: financial stress index, forecasts, local projections, ordered probit model, quantile regression
    JEL: B26 C22 C43 C53 E44 E47
    Date: 2022–08–24
  24. By: Pablo Garcia Sanchez
    Abstract: I begin this note by reviewing the economic effects of past weather shocks. I explore the empirical literature and present three case studies: the fall of the Roman Empire, the French Revolution of 1848, and Kansas in the 1880s. The second part of the note discusses how more frequent and severe weather extremes could risk price stability, and offers some thoughts on the modelling of weather shocks, a crucial step in designing good monetary policy. My main message is this: even in wealthy economies, weather events will affect central banks’ ability to achieve their primary goal - keeping prices in check.
    Keywords: Extreme Weather Events, Climate Change
    JEL: A10 Q01
    Date: 2022–08
  25. By: Claudia Biancotti (Bank of Italy)
    Abstract: The crypto world is at a turning point. In the spring of 2022, idiosyncratic weaknesses and adverse macro conditions combined to precipitate a major crisis. Is this the end of crypto? Not necessarily. As bad projects fall by the wayside, the industry is being pushed to find technical solutions that will restore public trust and deliver better performances. At the same time, key jurisdictions around the world are deploying regulations that will make the sector more orderly. Innovation and legal certainty may be the twin foundations upon which crypto flourishes, provided that regulators and the industry cooperate constructively and creatively. This will not always be easy, as crypto culture and any legal framework are at odds in some domains. The main examples are: tokens that do not embed claims on any entity, anonymity, and censorship resistance, i.e. the technical impossibility of blocking transactions on permissionless blockchains. Achieving a compromise on many facets of these problems looks possible, while for others, the authorities may have to prohibit behaviour that some crypto enthusiasts consider to be non-negotiable.
    Keywords: Crypto-assets, financial regulation, blockchain
    JEL: G18 O30 O38
    Date: 2022–09
  26. By: Vivian Chu; Yang Zhang
    Abstract: A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.
    Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission
    JEL: E E27 E37 E4 E58
    Date: 2022–09
  27. By: Paul Beaudry; Thomas J. Carter; Amartya Lahiri
    Abstract: Central banks in most advanced economies have reacted similarly to the increase in inflation that started in 2021. They initially looked through the rising inflation by leaving monetary policy relatively unchanged. Then, after inflation continued to increase, central banks pivoted by quickly tightening monetary policy. The pivot was explained, at least in part, as aiming to anchor drifting inflation expectations. Why might central banks want to look through supply-driven inflation sometimes and pivot away at other times? When does a change in monetary policy stance help anchor expectations? When is a strong monetary policy tightening compatible with a soft landing? In this paper we present a simple environment that helps clarify these issues by offering an optimal policy perspective on recent central bank behaviour. In particular, we examine optimal policy in an environment where there is a risk of wage-price spirals and where the central bank views wage- and price-setters as having bounded rationality. We show how this can provide a coherent explanation of many aspects of recent central bank behaviour.
    Keywords: Central bank research; Economic models; Inflation and prices; Monetary policy; Monetary policy and uncertainty; Monetary policy communications
    JEL: E12 E24 E31 E58 E65
    Date: 2022–09
  28. By: Utz Weitzel; Michael Kirchler
    Abstract: Financial misbehavior is widespread and costly. The Dutch government legally requires every employee in the financial sector to take a Hippocratic oath, the so-called "banker's oath." We investigate whether nudges that (in)directly remind financial advisers of their oath affect their service. In a large-scale audit study, professional auditors confronted 201 Dutch financial advisers with a conflict of interest. We find that when auditors apply a nudge that directly refers to the banker's oath, advisers are less likely to prioritize bank's interests. In additional prediction tasks, we find that Dutch regulators expect stronger effects of the oath than observed.
    Keywords: experimental finance, audit study, banker's oath, nudges, financial advice
    JEL: C92 D84 G02 G14
    Date: 2022
  29. By: Del Vecchio, Leonardo; Giglio, Carla; Shaw, Frances; Spanò, Guido; Cappelletti, Giuseppe
    Abstract: One important source of systemic risk can arise from asset commonality among financial institutions. This indirect interconnection may occur when financial institutions invest in similar or correlated assets and is also described as overlapping portfolios. In this work, we propose a methodology to quantify systemic risk derived from asset commonality and we apply it to assess the degree of indirect interconnection of banks due to their financial holdings. Based on granular information of asset holdings of European significant banks, we compute the sensitivity based ∆ CoVaR which captures the potential sources of systemic risk originating from asset commonality. The novel indicator proves to be consistent with other indicators of systemic importance, yet it has a more transparent foundation in terms of the source of systemic risk, which can contribute to effective macroprudential supervision. JEL Classification: C58, E32, G01, G12, G18, G20, G32
    Keywords: CoVaR, Financial networks, Financial regulation, Overlapping portfolios, Systemic risk
    Date: 2022–09

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