nep-ban New Economics Papers
on Banking
Issue of 2022‒10‒24
35 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Gender and the financialization of Spanish retail banking, 1949-1970 By Batiz-Lazo, Bernardo; Martínez-Rodríguez, Susana
  2. A Model of the Gold Standard By Jesús Fernández-Villaverde; Daniel Sanches
  3. External Wealth of Nations and Systemic Risk By Alin Marius Andries; Alexandra-Maria Chiper; Steven Ongena; Nicu Sprincean
  4. Economic research at central banks: Are central banks interested in the history of economic thought? By Ivo Maes
  5. EBITDA Add-backs in Debt Contracting: A Step Too Far? By Miguel Faria-e-Castro; Radhakrishnan Gopalan; Avantika Pal; Juan M. Sanchez; Vijay Yerramilli
  6. Central Bank Digital Currency: Financial Inclusion vs. Disintermediation By Jeremie Banet; Lucie Lebeau
  7. What drives Indian inflation? Demand or supply By Ashima Goyal; Abhishek Kumar
  8. Nestedness in the Brazilian Financial System By Michel Alexandre; Felipe Jordão Xavier; Thiago Christiano Silva; Francisco A. Rodrigues
  9. Creditor Rights and Bank Competition By Thiago Christiano Silva; Dimas Mateus Fazio
  10. The rich, poor, and middle class: Banking crises and income distribution By Mehdi El Herradi; Aurélien Leroy
  11. Movables as Collateral and Corporate Credit: Loan-Level Evidence from Legal Reforms across Europe By Steven Ongena; Walid Saffar; Yuan Sun; Lai Wei
  12. Corrective regulation with imperfect instruments By Dávila, Eduardo; Walther, Ansgar
  13. Corporate Tax Shields and Capital Structure: Levelling the Playing Field in Debt vs Equity Finance By Cao, Yifei; Whyte, Kemar
  14. Credit Card Debt Puzzle: Liquid Assets to Pay Bills By Claire Greene; Joanna Stavins
  15. Estimating Causal Effects of Monetary Policy for a Small Open Economy: Econometric Model and Estimation Framework By Markus Brueckner
  16. Типови промена концентрације у банковном сектору Србије: декомпозиција индекса Хиршмана-Херфиндала By Bukvić, Rajko
  17. Grasping De(centralized) Fi(nance) Through the Lens of Economic Theory By Jonathan Chiu; Charles M. Kahn; Thorsten Koeppl
  18. Global Monetary and Financial Spillovers: Evidence from a New Measure of Bundesbank Policy Shocks By James Cloyne; Patrick Hürtgen; Alan M. Taylor
  19. Efficiency-stability Trade-off in Financial Systems: a multi-objective optimization approach By Michel Alexandre; Krzystof Michalak; Thiago Christiano Silva; Francisco A. Rodrigues
  20. The Financial Stability Implications of Digital Assets By Pablo Azar; Garth Baughman; Francesca Carapella; Jacob Gerszten; Arazi Lubis; JP Perez-Sangimino; David E. Rappoport; Chiara Scotti; Nathan Swem; Alexandros Vardoulakis; Aurite Werman
  21. The effect of structural risks on financial downturns By Hodula, Martin; Pfeifer, Lukáš; Janků, Jan
  22. What drives the risk of European banks during crises? New evidence and insights By Ion Lapteacru
  23. The impact of risk cycles on business cycles: a historical view By Jón Daníelsson; Marcela Valenzuela; Ilknur Zer
  24. Know Your Customer: Informed Trading by Banks By Rainer Haselmann; Christian Leuz; Sebastian Schreiber
  25. Assessment of the Nature of the Pandemic Shock: Implications for Monetary Policy By Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
  26. Determinants of and barriers to people’s financial inclusion in Mexico By Steven Cassimon; Alessandro Maravalle; Alberto González Pandiella; Lou Turroques
  27. The inverted leading indicator property and redistribution effect of the interest rate By Patrick Pintus; Yi Wen; Xiaochuan Xing
  28. Central bank digital currency and cryptocurrency in emerging markets By Le, Anh H.
  29. Systemic bank runs without aggregate risk: how a misallocation of liquidity may trigger a solvency crisis By Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy
  30. Managing Public Portfolios By Leo R. Aparisi de Lannoy; Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
  31. A Rescue or a Trap?—An Analysis of Parent PLUS Student Loans By Wenhua Di; Carla Fletcher; Jeff Webster
  32. Are West Virginia Banks Unique? By Eduardo Minuci; Scott Schuh
  33. A Note on the Use of Syndicated Loan Data By Isabella Müller; Felix Noth; Lena Tonzer
  34. Banking across Borders in Luxembourg By Gabriele Di Filippo
  35. Financial Development, Reforms and Growth By Spyridon Boikos; Theodore Panagiotidis; Georgios Voucharas

  1. By: Batiz-Lazo, Bernardo; Martínez-Rodríguez, Susana
    Abstract: This article analyzes a previously unexplored register of Spanish banks’ marketing material to document changes in the access of large numbers of women to the retail banking sector. In 1949 the Franco dictatorship deployed a Censorship Bureau to control and supervise all retail bank marketing. Initially, this office was part of the Finance Ministry but in 1962 it was relocated to the central bank. Examination of the surviving printed material allows us to map a shift in banks' strategies towards large-scale consumer banking and, indeed, the beginning of a new period that some have labelled ‘financialization’ and the extent to which it precedes or follows that of ‘bankarization’. We identify three ‘events’ or moments in this shift, in which women appear first as figureheads, second, the first steps to attract women as customers, and third, the direct recruitment of female customers. This work contributes to the history of marketing and the business history of banking, but also sheds light on the less explored beginnings of the financialization of everyday life.
    Keywords: banks, financialization, gender, retail finance, Spain, marital licence
    JEL: J12 J16 M3 N24 N84
    Date: 2022–09
  2. By: Jesús Fernández-Villaverde; Daniel Sanches
    Abstract: The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold standard can explain the limited adherence by peripheral countries because of the potential risks to their economies. We argue that the gold standard can be sustainable at the core but not at the periphery.
    JEL: E42 E58 G21
    Date: 2022–09
  3. By: Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Alexandra-Maria Chiper (Alexandru Ioan Cuza University of Iasi); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: External imbalances played a pivotal role in the run-up to the global financial crisis, being an important underlying cause of the ensuing turmoil. While current account (flow) imbalances have narrowed in the aftermath of the crisis, net international investment position (stock) imbalances still persist. In this paper, we explore the implications of countries’ net foreign positions on systemic risk. Using a sample composed of 450 banks located in 46 advanced, developing and emerging countries over the period 2000-2020, we document that banks can reduce their systemic risk exposure when the countries where they are incorporated maintain creditor positions vis-à-vis the rest of the world. However, only the equity components of the net international investment positions are responsible for this outcome, whereas debt flows do not contribute significantly. In addition, we find that the heterogeneity across countries is substantial and that only banks located in advanced markets that maintain their creditor positions have the potential to improve their resilience to system-wide shocks. Our findings are relevant for policy makers who seek to improve banks’ resilience to adverse shocks and to maintain financial stability.
    Keywords: External Wealth of Nations, External Imbalances, Net International Investment Position, Systemic Risk, Financial Stability
    JEL: F32 G21 G32
    Date: 2022–09
  4. By: Ivo Maes (: Robert Triffin Chair, University of Louvain and ICHEC Brussels Management School)
    Abstract: With central banks becoming monetary authorities, research departments have become a core element of a modern central bank. Crucial elements of a central bank research department are contributing to monetary policymaking and sustaining a dialogue with the academic community. The importance of historical research (and central banks do not really make a difference between economic history and the history of economic thought) varies a lot. The historical curiosity of influential central bankers and the commemoration of anniversaries are important factors hereby. Historical research can allow central banks to take more distance and can help to avoid a “this time is different” view.
    Keywords: : central banking, economic research, economic history, history of thought.
    JEL: E42 E58 G28 N10
    Date: 2022–09
  5. By: Miguel Faria-e-Castro; Radhakrishnan Gopalan; Avantika Pal; Juan M. Sanchez; Vijay Yerramilli
    Abstract: Financial covenants in syndicated loan agreements often rely on definitions of EBITDA that deviate from the GAAP definition. We document the increased usage of non-GAAP addbacks to EBITDA in recent times. Using the 2013 Interagency Guidance on Leveraged Lending, which we argue led to an exogenous increase in non-GAAP EBITDA addbacks, we show that these addbacks increase the likelihood of loan delinquency and default, and also increase the likelihood of the borrower experiencing a ratings downgrade. Greater use of non-GAAP EBITDA addbacks also makes it more likely that lead arrangers lower their loan share exposures through secondary market sales. Our results highlight that covenants based on customized measures of EBITDA hurt loan performance by worsening lead arrangers’ incentives to monitor borrowers and by hampering their ability to take timely corrective actions.
    Keywords: syndicated loans; credit agreements; financial covenants; EBITDA; add-backs; GAAP; leveraged lending guidance; borrower performance; loan performance; lead arranger; lender monitoring; loan sales
    JEL: G21 G23 G28 G32 G34
    Date: 2022–09–22
  6. By: Jeremie Banet; Lucie Lebeau
    Abstract: An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents’ choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the U.S. income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.
    Keywords: central bank digital currency; financial inclusion; payments; monetary policy
    JEL: E42 E51 E58 G21
    Date: 2022–09–24
  7. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Abhishek Kumar
    Abstract: Understanding the drivers of inflation is an important issue in business cycle research and has been a matter of debate. In this paper, using data from a large emerging economy, we identify a structural shock (inflation shock) that explains the maximum forecast error variance of consumer prices. The inflation shock explains more than 80 per cent of the forecast error variance of consumer price up to 40 quarters. This shock increases prices and decreases output, implying that it is a supply shock. We also show that the food inflation shock is the primitive shock, which makes the inflation shock a supply shock and also feeds into non-food inflation. A large interest rate reaction to this shock leads to a prolonged decline in credit, investment, and output. Using the shocks obtained from a medium-scale new Keynesian model, we provide additional evidence that most of the variance of estimated inflation and food inflation shocks is explained by model-based supply shocks. These results suggest that central banks in emerging economies need to be more pragmatic in implementing inflation-targeting policies.
    Keywords: Inflation, India, SVAR, FEV, supply shock, demand shock
    JEL: E43 E44 E52
    Date: 2022–09
  8. By: Michel Alexandre; Felipe Jordão Xavier; Thiago Christiano Silva; Francisco A. Rodrigues
    Abstract: In this paper, we assess the nestedness in the Brazilian financial system. We rely on data from two Brazilian financial networks: the bank-firm credit network and the interbank network. We computed the nestedness of the networks, as well as the Individual Nestedness Contribution (INC) for each node. The analysis of the determinants of the INC shows lenders – in both networks – have their INC mainly determined by the degree, while the INC of borrowers has not a clear main determinant. Moreover, we found nodes with a higher INC would cause more damage to the network if they were hit by a shock, but are not necessarily those more vulnerable to shocks on the network.
    Date: 2022–09
  9. By: Thiago Christiano Silva; Dimas Mateus Fazio
    Abstract: This paper examines if and how creditor rights reforms affect banking market competition. By decreasing the expected loss given default of creditors, policies aimed at improving creditor protection may also change the banking market structure. We study a Brazilian bankruptcy reform in 2005 that improved the recoverability of secured creditors in bankruptcy proceedings. We find that local banking concentration decreases in Brazilian municipalities that were more affected by the reform. This result is explained by non-leader banks gaining market share over local leader banks due to the reform. These results are robust to controlling for financial constraints variables. Furthermore, consistent with stronger collateral value reducing information asymmetry, more opaque firms benefit the most from the reform. Overall, our results highlight the role of creditor rights reforms in breaking the information monopoly of incumbent banks.
    Date: 2022–09
  10. By: Mehdi El Herradi (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Aurélien Leroy (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: How do banking crises affect rich, middle-class and poor households? This paper quantifies the distributional implications of banking crises for a panel of 132 economies over the 1970–2017 period. We rely on different empirical settings, including an instrumental variable approach, that exploit the geographical diffusion of banking crises across borders. Our results show that banking crises systematically reduce the income share of rich households and positively affect middle-class households. We also find that income inequality increases during periods preceding the occurrence of a banking crisis.
    Keywords: Banking crises,income distribution,inequality
    Date: 2022
  11. By: Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Walid Saffar (Hong Kong Polytechnic University - School of Accounting and Finance); Yuan Sun (Hong Kong Polytechnic University - School of Accounting and Finance); Lai Wei (Lingnan University - Department of Finance and Insurance)
    Abstract: Does pledging movables as collateral alter corporate borrowing? To answer this question, we study the effect of collateral law reforms on syndicated bank loans granted across nine European countries that facilitated pledging movables between 1995 and 2019, comparing them to nineteen countries that did not. We find that although the reforms have enabled firms to issue more secured loans, the average cost of the loans and the number of covenants has also increased. Banks may demand more to compensate for both the potential wealth redistribution induced by newly issued secured credit and the extra monitoring involved to mitigate concerns about using movables as collateral.
    Keywords: Cost of Debt, Collateral Laws, Access to Credit
    JEL: G30 G20
    Date: 2022–09
  12. 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, environmental externalities, financial regulation, leakage elasticities, Pigouvian taxation, policy elasticities, regulatory arbitrage, second-best policy
    Date: 2022–09
  13. By: Cao, Yifei; Whyte, Kemar
    Abstract: A common feature within most corporate income tax systems is that the cost of debt is deductible as an expenditure when calculating taxable profits. An unintended consequence of this tax distortion is the creation of under-capitalized firms - raising default risk in the process. Using a difference-in-differences approach, this paper shows that a reduction in tax discrimination between debt and equity finance leads to better capitalized banks. The paper exploits the exogenous variation in the tax treatment of debt and equity created by the introduction of an Allowance for Corporate Equity (ACE) system in Italy, to identify whether an ACE positively impacts banks' capital structure. The results demonstrate that a move to an unbiased corporate tax environment increases bank capital ratios, driven by an increase in equity rather than a reduction in lending activities. The change also leads to a reduction in risk taking for ex-ante low capitalized banks. Overall, these results suggest that the ACE could be a valuable policy instrument for prudential bank regulators.
    Keywords: Bank capital structure, Banking regulation, Tax shields, Banking stability
    JEL: G21 G28 G32 H25
    Date: 2022–10
  14. By: Claire Greene; Joanna Stavins
    Abstract: Using transaction data from a US consumer payments diary, we revisit the credit card debt puzzle—a scenario in which consumers revolve credit card debt while also keeping liquid assets as bank account deposits. This scenario is very common: 42 percent of consumers in our sample were borrower-savers in 2019 (those who carry $100 or more in credit card debt and $100 or more in liquid assets). We explain the puzzle by showing that consumers need their liquid assets to pay monthly bills and other necessary expenses, including mortgage or rent. More than 80 percent of bills by value were paid out of bank accounts and could not be charged to credit cards, so bank account balances were needed to cover those basic expenses. On average, borrower-savers' credit card debt exceeded their liquid assets. The average borrower-saver carried almost $6,400 in unpaid credit card debt and had $5,400 in liquid assets, including checking and savings accounts, cash, and general-purpose prepaid cards. Only 40 percent of borrower-savers had liquid assets greater than their unpaid credit card balance. In addition, borrower-savers' monthly expenses (bills and purchases) averaged 77 percent of their liquid assets, not leaving enough to repay their credit card debt. On average, the value of their liquid assets could cover only about 60 percent of their unpaid debt plus monthly bills. In almost every category of assets or debts, both housing- and nonhousing-related, borrower-savers were significantly worse off financially than savers. Thus, the differences between borrower-savers and savers are much broader than just their credit card debt and bank account balances; the differences extend to mortgage debt and home equity. Even when we control for income and demographics in a regression, we find that carrying a mortgage or other debt (such as auto or educational loans) is associated with a higher probability of revolving on a credit card, suggesting that various types of household debt are complements rather than substitutes. During the COVID-19 pandemic in 2020, consumers' unpaid credit card debt decreased, and their liquid assets increased, so the fraction of borrower-savers dropped to 35 percent of the sample.
    Keywords: credit card debt; liquid assets; consumer payments
    JEL: D12 D14 E42
    Date: 2022–08–17
  15. By: Markus Brueckner
    Abstract: This paper provides an econometric model and estimation framework that enables to obtain estimates of causal effects of monetary policy in a small open economy. The model and estimation framework explicitly takes into account the endogeneity of monetary policy: i.e. if the central bank has an target inflation, then monetary policy itself is a function of economic shocks that affect inflation and other macroeconomic outcomes of interest. This is the standard simultaneity problem, which to date has not been satisfactorily addressed in the empirical monetary policy literature. The simultaneity problem can only be addressed if one has a valid instrument for monetary policy. In this paper I provide a local projections instrumental variables framework that enables to provide causal estimates of the dynamic effects that monetary policy in a small open economy has on inflation, the output gap, credit growth, and the exchange rate in the presence of external shocks.
    JEL: C3 E3 E4 E6
    Date: 2022–10
  16. By: Bukvić, Rajko
    Abstract: Serbian: На основу података завршних рачуна банака о пет билансних величина (актива, депозити, капитал, пословни приход, кредити) обрачунати су индекси Хиршмана-Херфиндала за период 2016–2021 (I–IX). Добијене вредности декомпоноване су поступком који су предложили Бахо и Салас, чиме је добијен утицај броја банака и дисперзије њихових удела на вредности индекса концентрације. Затим је извршено класификовање промена концентрације у зависности од односа стопа промена двају фактора. Они су били неједнаки и варирали по годинама. Међу издвојеним типовима промена преодладава пад индекса изазван смањењем неједнакости тржишних удела и смањењем броја банака, при чему је прво веће. Најзад, у 2021. смањен је броја банака уз раст дисперзије њихових удела, што је с теоријског становишта јасан услов раста индекса концентрације. English: On the basis of five balance variables in bank balances (total assets, deposits, capital, operating income, and loans), the Hirschman–Herfindahl indices for period 2016–2021 (I–IX) are calculated. The indices values are decomposed by the Bajo and Salas approach, and the impacts of number of banks and dispersion of its market shares are established. Then we classified the concentration changes, depending on relations between the rates of changes of two factors. They were unequal and vary during the years. Among the identified types of changes there was the most frequent decrease of HHI, caused by decrease of inequality of market shares and decrease of number of banks, where the first was greater. At the end, in 2021 there was the decrease of banks number with increase of dispersion of its shares, which is in theoretical sense condition for the increase of concentration index.
    Keywords: концентрација, банковни сектор, декомпозиција индекса Хиршмана-Херфиндала, број банака, дисперзија тржишних удела, типови промена степена концентрације, concentration, banking sector, decomposition of the index Hirschman–Herfindahl, number of banks, dispersion of market shares, types of the concentration degree changes
    JEL: C38 G21 L10 L19
    Date: 2022
  17. By: Jonathan Chiu; Charles M. Kahn; Thorsten Koeppl
    Abstract: In this article, we use a simple stylized model of collateralized lending to analyze the value proposition and limitations of decentralized finance (DeFi). DeFi uses a decentralized ledger to run smart contracts that automatically enforce the terms of a lending contract and safeguard the collateral. DeFi can lower the costs associated with intermediated lending and improve financial inclusion. Limitations are the volatility of the crypto collateral and stablecoins used for settlement, the possible incompleteness of smart contracts and the lack of a reliable oracle. A proper infrastructure reducing such limitations could improve the value of DeFi.
    Keywords: Digital currencies and fintech; Payment clearing and settlement systems
    JEL: G2
    Date: 2022–10
  18. By: James Cloyne; Patrick Hürtgen; Alan M. Taylor
    Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
    JEL: E32 E52 F42 F44
    Date: 2022–09
  19. By: Michel Alexandre; Krzystof Michalak; Thiago Christiano Silva; Francisco A. Rodrigues
    Abstract: In this paper, we address the efficiency-stability trade-off in the interbank (IB) market. The decision variable to be chosen by the financial regulator is the net worth-to-IB assets ratio assigned to each bank – the capital requirement (CR) – , aiming at minimizing both the fraction of IB assets lost as a consequence of an exogenous initial shock and the total net worth as a fraction of total IB assets. This framework is applied to a Brazilian data set considering two CR regimes: the homogeneous (same CR for all banks) and the heterogeneous regime (different CRs for each bank). The optimization in the heterogeneous regime is performed through a multi-objective optimization problem (MOP), solved through a multi-objective evolutionary algorithm based on decomposition (MOEA/D). We have found that the heterogeneous regime brings a Pareto gain over the homogeneous one: a smaller level of losses is achieved for the same aggregate CR. In the heterogeneous case, for each level of the initial shock, there is a critical value of aggregate CR below which financial crises become more frequent and more severe. Moreover, the decision variable assigned by different critical Pareto optimal points – i.e., those which generate values of CR close to its critical value – varies significantly. Finally, this variable is smaller and less dispersed for banks with a higher degree (i.e., those with more connections in the IB market, as well as a higher volume of IB assets and liabilities).
    Date: 2022–09
  20. By: Pablo Azar; Garth Baughman; Francesca Carapella; Jacob Gerszten; Arazi Lubis; JP Perez-Sangimino; David E. Rappoport; Chiara Scotti; Nathan Swem; Alexandros Vardoulakis; Aurite Werman
    Abstract: The value of assets in the digital ecosystem has grown rapidly amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself to be highly fragile. However, adverse digital asset market shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial services outside the ecosystem, and it exhibits limited interconnections with the traditional financial system. The paper describes emerging vulnerabilities that could present risks to financial stability in the future if the digital asset ecosystem becomes more systemic, including run risks among large stablecoins, valuation pressures in crypto-assets, fragilities of DeFi platforms, growing interconnectedness, and a general lack of regulation.
    Keywords: digital assets; stablecoins; DeFi; financial stability; financial vulnerabilities; systemic risk
    JEL: G20 G21 G28
    Date: 2022–09–01
  21. By: Hodula, Martin; Pfeifer, Lukáš; Janků, Jan
    Abstract: We investigate the extent to which various structural risks exacerbate the materialization of cyclical risk. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of cyclical and credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks. JEL Classification: E32, G15, G21, G28
    Keywords: cyclical risk, event study, financial cycle, panel regression, structural risks, systemic risk
    Date: 2022–09
  22. By: Ion Lapteacru (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Based on an extensive dataset of 1,156 European banks over the 1995-2015 period, we aim to provide new insights on the determinants of European banks' risk-taking during crisis events, employing a novel asymmetric Z-score. Our results suggest that more capital, lower ratios of loans to deposits and of liquid assets to total assets and lower share of non-deposit and short-term funding in total funding are associated with lower bank risk and this relationship is stronger during the crises. Moreover, having low costs compared to their revenues reduces the risk of European banks in normal times and has the same impact during the crises. Being involved in non-interest-generating activities makes banks riskier. Finally, being large and having higher net interest margin make banks more stable, but this positive effect is diminished for the size and vanished for the profitability during crisis times. And some differences are observed between Western and Eastern European countries.
    Keywords: European banking,bank risk,financial crisis,Z-score. JEL: G21
    Date: 2022–09–12
  23. By: Jón Daníelsson; Marcela Valenzuela; Ilknur Zer
    Abstract: We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.
    Keywords: Stock market volatility; Uncertainty; Monetary policy independence; Financial instability; Risk-taking; Global financial cycles
    JEL: F30 F44 G15 G18 N10 N20
    Date: 2022–09–09
  24. By: Rainer Haselmann; Christian Leuz; Sebastian Schreiber
    Abstract: This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks' proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced in situations when banks are likely to possess private information about their borrowers, and cannot be explained by specialized expertise in certain industries or certain firms. The results suggest that banks' lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking, which have been a prominent concern in the regulatory debate for a long time. Our analysis illustrates how combining large data sets can uncover unusual trading patterns and enhance the supervision of financial institutions.
    JEL: G01 G14 G15 G18 G21 G24 G28 G38 K22
    Date: 2022–09
  25. By: Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
    Abstract: The coronavirus pandemic and the related anti-epidemic measures represented an unprecedented negative shock to the global economy in the form of a dramatic fall in economic activity. Since the onset of the pandemic, the question has been to what extent the contraction of economic activity, largely related to anti-epidemic measures (lockdowns), can be interpreted as a negative anti-inflationary shock to demand and, conversely, what proportion of the observed decline in GDP can be attributed to a negative (cost) inflationary shock on the supply side. To contribute to the debate, we have set out our own narrative and conducted model analyses. We have focused on the world's two largest advanced economies - the US and the euro area. An empirical comparison of the pandemic-induced crisis with the global financial and economic crisis and model simulations indicate that the sharp economic downturn observed in 2020 bears, for the most part, the hallmarks of a supply shock. The combination of a negative supply shock, worldwide accommodative monetary policy and large fiscal stimuli led to strong inflationary overheating across the globe. The Czech National Bank reassessed the macroeconomic story from a demand to supply driven economic downturn. This reassessment, together with a gradual, but steady, recovery of economic activity, enabled the CNB - as one of the first central banks in the world to do so - to appropriately tighten its monetary policy from mid-2021 onwards.
    Keywords: E31, E32, F47
    Date: 2022–09
  26. By: Steven Cassimon; Alessandro Maravalle; Alberto González Pandiella; Lou Turroques
    Abstract: Individuals’ access to finance is particularly low in Mexico. Widening access to finance would boost growth and inclusion. This paper uses microdata from the National Survey for Financial Inclusion to assess the drivers of and the barriers to people’s financial inclusion in Mexico. Results show that working in the formal sector, the level of wealth and income, educational attainment, and age are the socio-economic characteristics that most affect the likelihood of holding any formal financial product. The relative importance of these characteristics, however, varies across financial products. Economic barriers to individuals’ financial inclusion are strongly associated with widespread informality and a low level of education and income. These results suggest that financial education programmes and credit registries considering a wider set of data to assess informal workers' credit worthiness would be promising avenues to help more Mexicans access financial services.
    Keywords: banks, credit registry, financial education, financial inclusion, informality
    JEL: D18 G2 G41 G51 G52 G53 O32
    Date: 2022–10–10
  27. By: Patrick Pintus (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Yi Wen (Shanghai Jiao Tong University [Shanghai]); Xiaochuan Xing (Balyasny Asset Management L.P)
    Abstract: The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki–Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling belief shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki–Moore type models with unique equilibrium.
    Keywords: Endogenous collateral constraints,State-contingent interest rate,Redistribution shocks,Multiple equilibria
    Date: 2022–09
  28. By: Le, Anh H.
    Abstract: Blockchain technology has opened up the possibility of digital currency, smart contracts and much more applications including the launch of central bank digital currencies (CBDC). However, literature about the effect of CBDC with the presence of cryptocurrency for an emerging market economy seems to be left behind. In this paper, we introduce a New Keynesian - Dynamic Stochastic General Equilibrium (NK-DSGE) model to examine the implications of CBDC and cryptocurrency in an open economy for emerging markets. In our model, cryptocurrency is implemented as a form of deposit in banks where bankers can also receive deposits from abroad. Lastly, CBDC is introduced as a payment and saving instrument. We find that cryptocurrency has a crucial role in banking sectors and a significant effect on the dynamic of foreign debt which is deeply important for emerging markets. We also conduct optimal monetary policy under different scenarios. Hence, we uncover that a flexible rate in CBDC can affect the responses of the monetary rate and can reinforce the conventional monetary policy to achieve the central bank's targets.
    Keywords: Central bank digital currency, Cryptocurrency, Open-economy, Financial frictions, Optimal monetary policy
    JEL: E50 F30 F31 G15 G18 G23
    Date: 2022–09–20
  29. By: Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy
    Abstract: We develop a general equilibrium model of self-fulfilling bank runs in a setting without aggregate risk. The key novelty is the way in which the banking system's assets and liabilities are connected. Banks issue loans to entrepreneurs who sell goods to households, which in turn pay for the goods by redeeming bank deposits. The return on bank assets is thus contingent on households being able to withdraw their deposits. In a run, not all households that wish to consume manage to withdraw, since part of banks' cash reserves end up in the hands of households without consumption needs. This lowers revenues of entrepreneurs, which causes some of them to default on their loans and thereby rationalises the run in the first place. Interventions that restrict redemptions in a run - such as deposit freezes - can be self-defeating due to their negative effect on demand in goods markets. We show how runs may be prevented with combinations of deposit freezes and redemption penalties as well as with the provision of emergency liquidity by central banks.
    Keywords: Fragility, deposit freezes, emergency liquidity
    JEL: E4 E5 G2
    Date: 2022
  30. By: Leo R. Aparisi de Lannoy; Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
    Abstract: We develop a unified framework for optimally managing public portfolios for a class of macro-finance models that include widely-used specifications for households' risk and liquidity preferences, market structures for financial assets, and trading frictions. An optimal portfolio hedges fluctuations in interest rates, primary surpluses, liquidities and inequalities. It recognizes liquidity benefits that government debts provide and internalizes equilibrium effects of public policies on financial asset prices. We express an optimal portfolio in terms of statistics that are functions only of macro and financial market data. An application to the U.S. shows that hedging interest rate risk plays a dominant role in shaping an optimal maturity structure of government debt.
    JEL: E63 H63
    Date: 2022–09
  31. By: Wenhua Di; Carla Fletcher; Jeff Webster
    Abstract: Parents taking out loans for their children’s college educations may face an excessive debt burden that jeopardizes their own financial security. This paper examines the experience of Parent Loan for Undergraduate Students (PLUS) borrowers using administrative data from a large student loan guaranty agency. We find that PLUS borrowers are more likely to default if their children attend low-resource institutions, typically ones where lower-income enrollments predominate. Although parent PLUS generally outperforms student loans, PLUS performance is sensitive to program costs during difficult economic times. In contrast, student outcomes depend more on educational outcomes. Interviews with borrowers confirm that PLUS borrowers have more experience handling debt than their children, but there is a lack of communication on repayment obligations and expectations between generations. This study reveals the differing consequences of parent and student borrowing for higher education and the troublesome PLUS program design that poses challenges to certain borrowers.
    Keywords: student loans; parent PLUS; default risk; minority serving institutions
    JEL: D04 G51 J15
    Date: 2022–09–09
  32. By: Eduardo Minuci (North Carolina A&T State University); Scott Schuh (West Virginia University, Department of Economics)
    Abstract: Many factors contribute to weak economic growth in Appalachia, but little research has examined the role of banking heterogeneity and efficiency across states. This paper documents how West Virginia (WV) banks'  financial behavior differs from other U.S. banks and shows these differences cannot be explained fully by the composition of banks in the state. Despite experiencing faster banking consolidation, West Virginia still has more and smaller banks that are less efficient and profitable. WV banks' customers and managers heavily favor liabilities (time deposits) and assets (real estate loans) with longer maturity and lower risk and returns. Although shares of time deposits and real estate loans are positively correlated across states in part due to lower interest risk, other factors are needed to fully explain banks'  financial behavior across states and the connections to the real economy. Heterogeneity in the risk aversion of banks' customers and managers is one possible explanation.
    Keywords: Unique banks, West Virginia, Appalachia, state heterogeneity, financial statements, time deposits, real estate loans, mixed-effects model, market structure
    JEL: G21 R11 D22
    Date: 2022–09
  33. By: Isabella Müller (Halle Institute for Economic Research); Felix Noth (Otto-von-Guericke University Magdeburg); Lena Tonzer (Vrije Universiteit Amsterdam)
    Abstract: Syndicated loan data provided by DealScan is an essential input in banking research. This data is rich enough to answer urging questions on bank lending, e.g., in the presence of financial shocks or climate change. However, many data options raise the question of how to choose the estimation sample. We employ a standard regression framework analyzing bank lending during the financial crisis to study how conventional but varying usages of DealScan affect the estimates. The key finding is that the direction of coefficients remains relatively robust. However, statistical significance seems to depend on the data and sampling choice.
    Keywords: Syndicated Lending, DealScan, Scrutiny, Meta-Analysis
    JEL: C50 G15 G21
    Date: 2022–09–16
  34. By: Gabriele Di Filippo
    Abstract: This paper examines the role of Luxembourg in the international banking system through the Locational Banking Statistics compiled by the Bank for International Settlements. Across European countries, Luxembourg features the largest cross-border banking positions relative to GDP. Indeed, Luxembourg is a small open economy with an international financial centre, whose banking sector consists mostly of foreign-controlled banks. The cross-border banking positions focus on loans and deposits between banks and notably intragroup positions. The geographical counterparts of cross-border banking positions in Luxembourg are mainly Western European countries (especially the euro area) and North America (notably the United States), whether for claims or liabilities. By order of importance, the main country counterparts are Germany, France, Great Britain, Switzerland, Italy, the United States, the Netherlands and Belgium. Within the international banking network, the importance of cross-border banking positions in Luxembourg resembles that of Belgium, Ireland, Japan and the Netherlands. These countries feature fewer connections than the United States, Germany and France. At the top of the network, Great Britain stands as the leading international banking centre. The structure of the international banking network evolves over time. During periods of financial stress, the density of connections stagnates or diminishes and the network becomes less resilient. This was notably the case during the global financial crisis of 2007-2008 and the European sovereign debt crisis of 2010-2012. Over time, the international banking network became more fragmented with more communities developing. This suggests a regionalisation of cross-border banking flows, as cross-border banking activity becomes more concentrated within specific groups of countries.
    Keywords: Cross-border banking positions, BIS Locational Banking Statistics, Network analysis
    JEL: F30 E50
    Date: 2022–09
  35. By: Spyridon Boikos (Department of Economics, University of Macedonia); Theodore Panagiotidis (Department of Economics, University of Macedonia); Georgios Voucharas (Department of Economics, University of Macedonia)
    Abstract: Is there any specific structure of the financial system which promotes economic growth or does this structure depend on the level of economic growth itself? Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. We account for unobserved heterogeneity and operate within alternative econometric approaches. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. Financial development does matter for growth, however, the size and significance of the effect vary. Financial reforms affect economic growth more than financial development. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.
    Keywords: Financial Development; Financial Reforms; Economic Growth; Quantile Regression; Panel Data
    JEL: O16 O40 G10 G20 C21 C23
    Date: 2022–09

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