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on Banking |
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Issue of 2022‒11‒21
twenty-one papers chosen by Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana |
| By: | Nabi Arjmandi (Department of Economics, University of Missouri-Columbia); Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia) |
| Abstract: | Financial intermediaries simultaneously engage in two separate relationships: they accept deposits and they make loans. Yet, researchers have focused either on deposit contracts or loan contracts. In this paper, we develop a theory in which deposit contracts and loan contracts are determined in equilibrium. Borrowers have limited commitment and the banks have access to a direct, safe long-term investment. We then study how changes in the borrower’s creditworthiness affects deposit and loan contracts. We study this relationship across different trading protocols. With deteriorating credit conditions, we find that loan rates can decline (declining spreads) and loan quantities can increase. This is the opposite direction used when constructing things like credit indicators. This relationship is not robust to changes in market structures. Lastly, we show how an aggregate fundamental shock can induce bank runs. However, the bank run is less likely in the worst credit-condition category. |
| Keywords: | deposit contracts, loan contracts, credit conditions, financial indicators |
| JEL: | D53 E44 G21 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:2209&r=ban |
| By: | Michaelis, Henrike |
| Abstract: | Exploiting confidential data on individual German bank balance-sheets, I analyse what characterises a bank that opts to apply negative interest rates to corporate deposits. The results suggest that banks that are highly exposed to the negative interest rate policy (NIRP), i.e. funded by a larger share of household deposits, are more likely to apply negative corporate deposit rates. Furthermore, I examine whether banks adjusted their fee and commission strategy during the NIRP period and if they do what characterises those banks. My results show that banks adjusted their strategy in deposit business with households during the NIRP period. Compared with before, they generated higher net commission income on their outstanding household deposit holdings. |
| Keywords: | Monetary policy transmissions,negative rates,deposits,excess liquidity,interest rate pass-through,fees and commissions |
| JEL: | E52 E43 E44 E58 G20 G21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:332022&r=ban |
| By: | Müller, Isabella; Nguyen, Huyen; Trang Nguyen |
| Abstract: | We examine whether banks manage firms' climate transition risks via corporate loan securitization. Results show that banks are more likely to securitize loans granted to firms that become more carbon-intensive. The effect is more pronounced if banks have a lower willingness to adjust loan terms. Exploiting the election of Donald Trump as an exogenous shock that lowers transition risk, we show that banks respond by a lower securitization of loans given to firms that become more carbon-intensive. This is mainly driven by banks that have no or low preferences for sustainable lending and domestic lenders. |
| Keywords: | climate change,risk shifting,securitization,syndicated lending,Trumpelection |
| JEL: | G21 G28 K11 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:222022&r=ban |
| By: | Kazakov, Aleksandr; Koetter, Michael; Titze, Mirko; Tonzer, Lena |
| Abstract: | We use granular project-level information for the largest regional economic development program in German history to study whether government subsidies to firms affect the quantity and quality of bank lending. We combine the universe of recipient firms under the Improvement of Regional Economic Structures program (GRW) with their local banks during 1998-2019. The modalities of GRW subsidies to firms are determined at the EU level. Therefore, we use it to identify bank outcomes. Banks with relationships to more subsidized firms exhibit higher lending volumes without any significant differences in bank stability. Subsidized firms, in turn, borrow more indicating that banks facilitate regional economic development policies. |
| Keywords: | bank stability,financial intermediation,government subsidies |
| JEL: | G21 G28 H25 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:242022&r=ban |
| By: | Mohamad Hud Saleh Huddin (Malaysia Deposit Insurance Corporation); Mark Lee (Malaysia Deposit Insurance Corporation); Mohd Sobri Mansor (Malaysia Deposit Insurance Corporation) |
| Abstract: | Islamic fintech has emerged as a niche sector within the broader development of Islamic finance, and can be defined as 'technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets, institutions, and the provision of Islamic financial services with observation of Shariah requirements' (adapted from the Financial Stability Board’s definition of fintech). The prospects for Islamic fintech are encouraging. Several reasons stand out, including the propitious demographics of a young and digitally savvy global Muslim population, potential contribution of digital Islamic social finance towards poverty alleviation, and increasing consumer demand for ethical financial products and services. Globally, more than 200 companies are involved in Islamic fintech, primarily from Asia, the Middle East and Europe. By a measure of collective activity among the Organisation of Islamic Cooperation’s (OIC) 57 member countries, Islamic fintech is nascent. At USD 49 billion, its size translates into 0.7% of the total global fintech transaction volume in 2020. However, this is expected to grow to USD 128 billion by 2025 (CAGR: 21%). Meanwhile, a global composite index assessed the Islamic fintech ecosystems of various countries. Jurisdictions from Southeast Asia (Malaysia, Indonesia), the Middle East (Saudi Arabia, the United Arab Emirates), and the United Kingdom were found to have the most favourable conditions. In Malaysia, Islamic finance is a key priority sector. Islamic banking has grown significantly and Malaysia is actively involved in the international issuance of Islamic bonds (Sukuk). In terms of Islamic fintech, technology firms as well as incumbent Islamic commercial banks are involved in providing Islamic digital financial services. Several factors have contributed to the growth of Islamic fintech in Malaysia. These include digital readiness (IT infrastructure, online and mobile banking penetration), clear regulatory arrangements, focused government support for development of the Islamic digital economy, as well as an established Islamic financial community. Emerging opportunities for Islamic fintech in Malaysia are to enable social finance and close financial inclusion gaps. On the other hand, the industry is confronted with key challenges. These include the lack of start-up funding, an inadequate local talent pool, low levels of financial and digital literacy among specific segments of society, and the need for more collaboration between incumbent Islamic banks and fintech companies. For Islamic deposit insurers and resolution authorities, Islamic fintech can help by improving operational efficiency and effectiveness in areas such as the management of Islamic deposit insurance funds, identification of Shariah noncompliance risks for better governance, reimbursement of Islamic deposits, and enhancing resolution processes for Islamic banks. For the broader Islamic financial industry, Islamic fintech is used among others, to support products such as Shariah compliant e-money, and the business of Islamic digital banking. This is essential to provide Islamic depositors and financial consumers with the assurance and availability of end-to-end Shariah compliant digital financial products and services, that meet their expectations concerning religious laws and ethical standards. In summary, this Fintech Brief seeks to raise awareness of Islamic fintech and in turn, foster its growth. The brief provides an overview of the global state of play, and explores Malaysia's experience in the regulation and development of Islamic fintech. It closes by highlighting potential uses of Islamic fintech for deposit insurance and bank resolution. |
| Keywords: | deposit insurance, bank resolution |
| JEL: | G21 G33 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:awl:finbri:11&r=ban |
| By: | Drott, Constantin; Goldbach, Stefan; Nitsch, Volker |
| Abstract: | This short paper examines the effect of financial sanctions at the most disaggregated level possible, individual bank accounts. Using data from the Eurosystem's real-time gross settlement system TARGET2, we provide empirical evidence that sanctions imposed by the European Union on Russian banks following the country's military interventions in Ukraine in 2014 and 2022 have sizably reduced financial transactions with sanctioned Russian bank accounts. Among the various sanction measures taken, exclusion from SWIFT, a global provider of secure financial messaging services, turns out to have the largest effects. |
| Keywords: | financial flows,transactions,restrictions |
| JEL: | F38 F51 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:382022&r=ban |
| By: | Drott, Constantin; Goldbach, Stefan; Jochem, Axel |
| Abstract: | This paper examines German and foreign bank factors that can explain cross-border central bank liquidity flows between Germany and the rest of the euro area. Using data from the German component of Eurosystem's real-time gross settlement system TARGET2 and BankFocus for the period between 2009 and 2021, we provide empirical evidence that only few balance sheet items and profit and loss accounts affect flows with Germany. We control for bilateral bank-specific relationships and time-varying macroeconomic country effects in our regressions. In general, German bank factors seem to be more important than characteristics of foreign banks. A German bank that exhibits relatively high claims against a central bank seems to attract less additional central bank liquidity from abroad than a German bank with fewer existing central bank claims. However, higher overall liquidity of a German credit institution corresponds to additional net inflows. Foreign bank factors only matter for central bank payments and intragroup payments. We also document heterogeneities across different types of transactions which influence the German TARGET2 balance. While customer payments, interbank payments and central bank payments have increased net flows to Germany in sum, intragroup payments and ancillary systems' transactions have led to net outflows. |
| Keywords: | Capital flows,TARGET2 transactions,central bank liquidity |
| JEL: | F3 F32 G15 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:402022&r=ban |
| By: | Shala, Iliriana; Schumacher, Benno |
| Abstract: | Climate change causes natural disasters to occur at higher frequency and increased severity. Using a unique dataset on German banks, this paper explores how regionally less diversified banks in Germany adjusted their loan loss provisioning following the severe summer flood of 2013, which affected widespread regions mostly in Eastern Germany. The analysis uses a difference-in-differences estimation with banks being allocated to the treatment and control group based on the region of their primary operational activities. This paper yields various results: German savings and cooperative banks located in the affected regions experienced a significantly higher, but ephemeral, impairment flow in the years following the flood. Impairments were mostly driven by corporate loans concentrated in specific sectors, such as agriculture and manufacturing, and to some extent by retail mortgage loans. While results suggest that the profitability of banks is impacted by additional factors, we do not find evidence that banks suffered from damages to their own property. The results are robust to various model specifications. |
| Keywords: | Natural disaster,climate change,credit risk,profitability,difference-in-differences |
| JEL: | C12 C21 C23 G21 Q54 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:362022&r=ban |
| By: | Abhinav Shanbhag |
| Abstract: | Americans across demographic groups tend to have low financial literacy, with low-income people and minorities at highest risk. This opens the door to the exploitation of unbanked low-income families through high-interest alternative financial services. This paper studies the causes and effects of financial illiteracy and exclusion in the most at-risk demographic groups, and solutions proven to bring them into the financial mainstream. This paper finds that immigrants, ethnic minorities, and low-income families are most likely to be unbanked. Furthermore, the causes for being unbanked include the high fees of bank accounts, the inability of Americans to maintain bank accounts due to low financial assets or time, banking needs being met by alternative financial services, and being provided minimal help while transitioning from welfare to the workforce. The most effective solutions to financial illiteracy and exclusion include partnerships between nonprofits, banks, and businesses that use existing alternative financial service platforms to transition the unbanked into using products that meet their needs, educating the unbanked in the use of mobile banking, and providing profitable consumer credit products targeting unbanked families with features that support their needs in addition to targeted and properly implemented financial literacy programs. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2210.11403&r=ban |
| By: | James B. Bullard |
| Abstract: | St. Louis Fed President Jim Bullard welcomed Eswar S. Prasad, who delivered the 2022 Homer Jones Memorial Lecture. Prasad is Tolani Senior Professor of Trade Policy and professor of economics at Cornell University. He is also a senior fellow at the Brookings Institution. Prasad’s 2021 book, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, was the subject of his lecture. |
| Keywords: | digital currencies |
| Date: | 2022–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:94968&r=ban |
| By: | Dobson, Anya (University of Warwick) |
| Abstract: | This paper investigates the impact of ECB Unconventional Monetary Policy an-nouncements on the 10-year sovereign bond yields of eleven Euro area countries. Thispaper uses event study methodology to examine expansionary UMP announcements between 1st January 2007 and 31st December 2021. Consistent with the literature, I findsignificant negative announcement effects on sovereign yields collectively examining all programmes. Differences in the magnitude and significance of individual countryreactions are closely related to their solvency status. This is persistent for the most recent programmes in response to the Covid-19 pandemic which extends the scope of current literature. This paper also incorporates intraday analysis to more closely examine the determinants of announcement effects on their respective dates. |
| Keywords: | Monetary Policy ; ECB ; government bond yields ; Covid-19 JEL Classification: G21 ; G28 ; E58 ; F45 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wrkesp:33&r=ban |
| By: | Michelle Neal |
| Abstract: | Remarks at the Singapore FinTech Festival, Singapore. |
| Keywords: | FinTech; digital assets; payments |
| Date: | 2022–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:94984&r=ban |
| By: | Kai Schellekens; Patty Duijm |
| Abstract: | At the start of the COVID-19 pandemic the increased market volatility and risk aversion led to a deterioration of U.S. Dollar funding conditions in the Euro Area. The swap line interventions by the ECB and Federal Reserve on March 15, 2020 aimed to alleviate the mispricing of EUR/USD FX swaps. We find that these swap line interventions were effective since they alleviated part of the mispricing. The announcement effect of the interventions is however limited; the impact of the swap line interventions is larger and more significant closer to the implementation date. This study provides insight into the effectiveness of central bank interventions in the FX swap market during turbulent periods. |
| Keywords: | Central Bank Policy: FX Swaps: Financial Markets: Covid-19 |
| JEL: | E58 G2 G15 H12 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:752&r=ban |
| By: | Sangyup Choi; Gabriele Ciminelli; Davide Furceri |
| Abstract: | Theory and conventional wisdom suggest that an increase in uncertainty in one country scares away foreign investment. But, due to the limited availability of cross-country uncertainty data, empirical evidence remains scarce, and mostly confined to a limited set of countries. This paper provides a systematic analysis of how foreign capital inflows react to an increase in political and economic uncertainty, proxied using the World Uncertainty Index. We focus on bank credit, portfolio debt, and portfolio equity capital inflows into 143 countries from 51 source countries. We find that an increase in domestic uncertainty induces a substantial and persistent decrease in bank credit and portfolio debt inflows, and (to a lesser extent) in equity inflows. The effects on portfolio inflows are larger for countries with more open capital markets. We also uncover important differences in the response of portfolio inflows through actively-managed versus passive funds. The formers are similarly sensitive to changes in uncertainty that are country-specific (purely local uncertainty) and common across countries (global uncertainty), while the latter are only sensitive to global uncertainty. |
| Keywords: | Uncertainty, Capital flows, World Uncertainty Index, Mutual funds, ETFs, COVID-19 |
| JEL: | F21 F32 F42 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-64&r=ban |
| By: | Davydov, Denis; Garanina, Tatiana; Weill, Laurent |
| Abstract: | This paper examines the effect of executive board gender diversity on the relationship between economic policy uncertainty (EPU) and bank liquidity hoarding (LH). We focus on the Russian banking sector, which, relative to most of the world, has a high share of women on bank executive boards. Using the news-based EPU index developed by Baker, Bloom, and Davis (2016) and LH measures proposed by Berger, Guedhami, Kim, and Li (2022), we exploit a unique dataset from the Russian banking sector. While higher economic policy uncertainty tends to increase liquidity hoarding, we find this effect diminishes as gender diversity of the board increases. We attribute this finding to the moderating influence of gender diversity on stability and overreaction in decision-making. Additionally, we find that the channel through which board gender diversity affects the impact of economic policy uncertainty on liquidity hoarding takes place via the hoarding of liquid assets. Our findings are robust to the use of alternative measures for economic policy uncertainty and gender diversity. As women are still significantly under-represented on bank boards in most countries, these results argue for policies to promote gender diversity of bank boards as a means of limiting detrimental effects of economic policy uncertainty. |
| JEL: | G18 G21 G34 P26 |
| Date: | 2022–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2022_011&r=ban |
| By: | Baltzer, Markus; Schlepper, Kathi; Speck, Christian |
| Abstract: | The Eurosystem's asset purchase programmes reduced the free float of German Bunds. Market participants feared impaired market functioning in the Bund market and monetary policymakers unintended consequences for monetary policy transmission. We study the intended and unintended consequences of asset purchases in the repo market with Bund collateral. Bunds that are eligible for APP purchases carry a repo specialness premium even when they are not purchased. This "eligibility premium" is larger than the actual flow effect of purchases identified in previous research. Securities lending (SecL) operations have a flow effect, but its magnitude is even smaller than the flow effect of APP purchases. Therefore, the impact of SecL in the repo market is only of a quite limited extent. Furthermore, the effects of APP and SecL on repo specialness are relatively small compared to those caused by banks' balance sheets window dressing at quarter ends and by the hedging pressure for Bund Futures. |
| Keywords: | Repos,Quantitative Easing,Securities Lending,Eurosystem,PSPP |
| JEL: | E43 E58 G12 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:392022&r=ban |
| By: | James B. Bullard |
| Abstract: | St. Louis Fed President Jim Bullard discussed the policy rate needed to get inflation down during an Oct. 19 interview on Bloomberg TV. He gave the interview at the St. Louis Fed ahead of the annual Homer Jones Memorial Lecture. In the September Summary of Economic Projections, the Federal Open Market Committee seemed to be coalescing around further rate increases at upcoming meetings, even by the end of the year, Bullard said. He noted that most of that has been priced into markets. He said he would anticipate that’s having an impact, which is good news for trying to get inflation down. “But we’ll have to follow through on that in the subsequent meetings this year and get the policy rate up to a level where we can put meaningful downward pressure on inflation,” Bullard said. “I think that’s the main goal immediately ahead of us at the committee.” Bullard said that since inflation has continued to surprise to the upside, the rate he had calculated in May as the minimal policy rate level needed to put downward pressure on inflation would be higher now, at 4.5% or 4.75%, closer to FOMC “dot plot” projections. There’s a possibility of a good dynamic in 2023, Bullard said. “I think if inflation does start to decline meaningfully, we can stay where we are at this higher level of the policy rate that meets the committee’s criteria,” he said. “And at that point, we could watch inflation fall and get back to 2%.” Bullard also spoke about the Fed’s balance sheet runoff, the labor market and other economic indicators, including GDP. |
| Keywords: | policy rate; inflation |
| Date: | 2022–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:94969&r=ban |
| By: | Reichlin, Lucrezia (London Business School & CEPR); Ricco, Giovanni (University of Warwick, OFCE SciencesPo & CEPR); Matthieu Tarbe (London Business School) |
| Abstract: | We study the monetary- fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy are analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the cumulated response of the fiscal deficit is positive. Conversely, in response to an unconventional easing affecting the long end of the yield curve, the primary fiscal position barely moves. This is consistent with the long-run effect of unconventional monetary easing on the price index, which is about half that of conventional easing. The aggregate long-run cumulated surplus is mainly driven by Germany's fiscal policy during the period in which unconventional monetary policy was adopted. |
| Keywords: | monetary- fiscal interaction ; fiscal policy ; monetary policy ; intertemporal government budget constraint JEL Codes: E31 ; E63 ; E52 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1432&r=ban |
| By: | Joshua V. Rosenberg |
| Abstract: | Remarks at the Central Bank of Nigeria’s Second National Risk Management Conference (delivered via videoconference). |
| Keywords: | risk management |
| Date: | 2022–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:94974&r=ban |
| By: | Isaac Gross; Andrew Leigh |
| Abstract: | Using the Reserve Bank of Australia’s MARTIN model we compare actual monetary policy decisions to a counterfactual in which the cash rate is set according to an optimal simple rule. We find that monetary policy played a crucial role in avoiding a potential recession in 2001 and mitigating the downturn in 2008-2009. By contrast we find that the cash rate was too high during 2016-2019, keeping inflation below the Reserve Bank’s target band. Optimal monetary policy in 2016-2019 would have involved a substantially lower cash rate and would have produced significantly better employment outcomes. |
| Keywords: | optimal monetary policy, unemployment, output gap, inflation |
| JEL: | E47 E52 E58 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9959&r=ban |
| By: | Michael Junho Lee; Antoine Martin; Benjamin Müller |
| Abstract: | Distributed ledger technologies (DLTs) have garnered growing interest in recent years and are making inroads into traditional finance. One purported benefit of DLTs is their ability to bring about “atomic” settlement. Indeed, several recent private sector projects (SDX, Fnality, HQLAx) aim to do just that. But what exactly is atomic settlement? In this post, we explain that atomic settlement, as it is often defined, combines two distinct properties: instant settlement and simultaneous settlement, which should be kept separate. |
| Keywords: | Intermediation (Finance); atomic settlement; distributed ledger technology; digital assets |
| JEL: | E42 G2 |
| Date: | 2022–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:94981&r=ban |