nep-ban New Economics Papers
on Banking
Issue of 2022‒11‒28
thirty-two papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention By Naef, Alain
  2. The U.S. Postal Savings System and the Collapse of B&Ls During the Great Depression By Sebastián Fleitas; Matthew S. Jaremski; Steven Sprick Schuster
  3. Into the Universe of Unconventional Monetary Policy: State-dependence, Interaction and Complementarities By Andrejs Zlobins
  4. Money and Banking with Reserves and CBDC By Dirk Niepelt
  5. Disparities in financial literacy, pension planning, and saving behavior By Bucher-Koenen, Tabea; Hackethal, Andreas; Kasinger, Johannes; Laudenbach, Christine
  6. Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles By Barbara Annicchiarico; Marco Carli; Francesca Diluiso
  7. Assessing Unconventional Monetary Policy in Japan Using Market Operation-based Monetary Policy Indices By Markus HECKEL; INOUE Tomoo; NISHIMURA Kiyohiko G.; OKIMOTO Tatsuyoshi
  8. Assessing the Impact of Country-Specific Sovereign Risk on Financial and Banking System in EMU: the Role of Italy By Capasso Salvatore; D’Uva Marcella,; Fiorelli Cristiana; Napolitano Oreste
  9. An Analysis of the Effects of Service Quality on Society of Mobile Technology Applications Used by Banks By Goyal, Krishna
  10. Information Asymmetry, External Certification, and the Cost of Bank Debt By Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro
  11. Cryptocurrency, Sanctions and Agricultural Prices: An empirical study on the negative implications of sanctions and how decentralized technologies affect the agriculture futures market in developing countries By Agni Rajinikanth
  12. The Case for Convenience: How CBDC Design Choices Impact Monetary Policy Pass-Through By Rodney J Garratt; Jiaheng Yu; Haoxiang Zhu
  13. Optimal GDP-indexed Bonds By Yasin Kürsat Önder
  14. Firm subsidies, financial intermediation, and bank stability By Aleksandr Kazakov; Michael Koetter; Mirko Titze; Lena Tonzer
  15. Do Lenders Price the Brown Factor in Car Loans? Evidence from Diesel Cars By Winta Beyene; Matteo Falagiarda; Steven Ongena; Alessandro Scopelliti
  16. Monetary Policy, Funding Cost and Banks’ Risk-Taking: Evidence from the United States By Constantin Bürgi; Bo Jiang
  17. Financial Intermediation and the Funding of Biomedical Innovation: A Review By Andrew W. Lo; Richard T. Thakor
  18. Which Financial Inclusion Indicators and Dimensions Matter for Income Inequality? A Bayesian Model Averaging Approach By Rogelio Mercado Jr.; Victor Pontines
  19. How Deposit Insurers Account for Inflation: Practices and Existing Guidance By Bert Van Roosebeke; Ryan Defina
  20. Endogenous money interpretation of the operations of the Swiss central bank (2005-2020) By Simona Bozhinovska
  21. Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints By S. Borağan Aruoba; Ronel Elul; Ṣebnem Kalemli-Özcan
  22. Interest rate spreads in Estonia: different stories for different types of loan By Merike Kukk; Natalia Levenko
  23. Bank Risk and Stockholding (1910-1934) By Matthew S. Jaremski
  24. Core inflation over the COVID-19 pandemic By Mikael Khan; Elyse Sullivan
  25. MPC monetary communication: children of the revolution(s) By Delia Sih Chien Macaluso; Michael McMahon
  26. Carbon Default Swap - Disentangling the Exposure to Carbon Risk through CDS By Alexander Blasberg; Rüdiger Kiesel; Luca Taschini
  27. What’s that noise? Analysing sentiment-based variation in central bank communication By Bernd Hayo; Johannes Zahner
  28. Estimating Treatment Effects of Monetary Policies and Macro-prudential Policies: From the Perspectives of Macro-economic Policy Evaluation By Ying Fang; Zongwu Cai; Zeqin Liu; Ming Lin
  29. Motivations for Foreign Bank Entry in Ghana: A Country-level Analysis By Yakubu, Ibrahim Nandom; Bunyaminu, Alhassan; Abdallah, Iliasu
  30. Improving Household Debt Management with Robo-Advice By Ida Chak; Karen Croxson; Francesco D’Acunto; Jonathan Reuter; Alberto G. Rossi; Jonathan M. Shaw
  31. Dancing on the edge of stagflation By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  32. Unconventional Monetary Policy and Inequality By Salvatore Nisticò; Marialaura Seccareccia

  1. By: Naef, Alain
    Abstract: Most countries in the world use foreign exchange intervention, but measuring the success of the policy is difficult. By using a narrative approach, I identify interventions when the central bank manages to reverse the exchange rate based on pure luck. I separate them from interventions when the central bank actually impacted the exchange rate. Because intervention records are daily aggregates, an intervention might appear to have changed the direction of the exchange rate, when it is more likely to have been caused by market news. This analysis allows to have a better understanding of how successful central bank operations really are. I use new daily data on Bank of England interventions in the 1980s and 1990s. Some studies find that interventions work in up to 80% of cases. Yet, by accounting for intraday market moving news, I find in adverse conditions, the Bank of England managed to influence the exchange rate only in 8% of cases. I use natural language processing to confirm the validity of the narrative approach. Using lasso and a VAR analysis, I investigate what makes the Bank of England intervene. I find that only movement on the Deutschmark and not US dollar exchange rate made the Bank intervene. Also, I find that interest rate hikes were mostly a tool for currency management and accompanied by large reserve sales.
    Date: 2022–10–08
  2. By: Sebastián Fleitas; Matthew S. Jaremski; Steven Sprick Schuster
    Abstract: Building and Loan Associations (B&Ls) financed over half of new houses constructed in the U.S. during the 1920s but they lost their predominance within the following decades as they were pushed to convert into Savings and Loans (S&Ls). This study examines whether the U.S. government-insured Postal Savings System attracted funds away from B&Ls precisely when they needed them the most in the Great Depression. Annual town- and county-level data from 1920 through 1935 for 3 states show that the sudden rise in local postal savings was associated with local downturns in B&Ls. Using a panel vector autoregression, we find that postal savings significantly reduced the amount of money in B&Ls, yet B&Ls had no significant effect on postal savings banks. Alternatively, postal savings had no significant effect on commercial banks. The results suggest that this competitive dynamic prevented B&Ls from rebounding in the mid-1930s and helped contribute to Great Depression’s local real estate lending decline.
    JEL: G21 H42 N22
    Date: 2022–10
  3. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper studies the interaction among non-standard monetary policy measures – the negative interest rate policy, forward guidance and quantitative easing – and their ability to substitute conventional policy rate setting when it is constrained by the effective lower bound. In this paper, the euro area serves as our laboratory since the European Central Bank has deployed all three unconventional measures in the past decade to bypass the binding effective lower bound constraint and stabilize the inflation trajectory towards the target. Our empirical setup makes use of a smooth-transition structural vector autoregression, while identification of monetary innovations is done via fusion of high frequency information with narrative sign restrictions, first introduced in Zlobins (2021b) and now further extended to isolate rate cuts in positive/negative territory, allowing to simultaneously identify the impact of both conventional and unconventional policy actions. Our findings show that unconventional measures can substitute the standard policy rate setting but their effectiveness is highly dependent on the overall policy mix and the state of the economy. However, the evidence also suggests that non-standard measures serve as complements to the conventional policy as they are particularly powerful in circumstances when standard policy rate setting loses its stabilization properties, for example, during market turbulence or when the risk of de-anchoring of inflation expectations is elevated.
    Keywords: quantitative easing, negative interest rate policy, forward guidance, monetary policy, non-linearities
    JEL: C54 E50 E52 E58
    Date: 2022–11–11
  4. By: Dirk Niepelt
    Abstract: We analyze retail central bank digital currency (CBDC) in a two-tier monetary system with bank deposit market power and externalities from liquidity transformation. Resource costs of liquidity provision determine the optimal monetary architecture and modified Friedman (1969) rules the optimal monetary policy. Optimal interest rates on reserves and CBDC differ. A calibration for the U.S. suggests a weak case for CBDC in the baseline but a much clearer case when too-big-to-fail banks, tax distortions or instrument restrictions are present. Depending on central bank choices CBDC raises U.S. bank funding costs by up to 1.5 percent of GDP
    Keywords: Central bank digital currency, reserves, two-tier system, bank, liquidity, equivalence
    JEL: E42 E43 E51 E52 G21 G28
    Date: 2022–10
  5. By: Bucher-Koenen, Tabea; Hackethal, Andreas; Kasinger, Johannes; Laudenbach, Christine
    Abstract: Financial literacy affects wealth accumulation, and pension planning plays a key role in this relationship. In a large field experiment, we employ a digital pension aggregation tool to confront a treatment group with a simplified overview of their current pension claims across all pillars of the pension system. We combine survey and administrative bank data to measure the effects on actual saving behavior. Access to the tool decreases pension uncertainty for treated individuals. Average savings increase|especially for the financially less literate. We conclude that simplification of pension information can potentially reduce disparities in pension planning and savings behavior.
    Keywords: saving behavior,retirement planning,digital planning tool
    JEL: D14 G11 G51 G53
    Date: 2022
  6. By: Barbara Annicchiarico (CEIS & DEF, University of Rome "Tor Vergata"); Marco Carli (DEF, University of Rome "Tor Vergata"); Francesca Diluiso (Mercator Research Institute on Global Commons and Climate Change)
    Abstract: We study the performance of alternative climate policies in a dynamic stochastic general equilibrium model that includes an environmental externality and agency problems associated with financial intermediation. Heterogeneous polluting producers finance their capital acquisition by combining their resources with loans from banks, are subject to environmental regulation, are hit by idiosyncratic shocks, and can default. The welfare analysis suggests that a cap-and-trade system will entail substantially lower costs of the business cycle than a carbon tax if financial frictions are stringent, firm leverage is high, and agents are sufficiently risk-averse. Simple macroprudential policy rules can go a long way in reining in business cycle fluctuations, aligning the performance of price and quantity pollution policies, and reducing the uncertainty inherent to the chosen climate policy tool.
    Keywords: Business Cycle; Cap-and-Trade; Carbon Tax; E-DSGE
    JEL: Q58 E32 E44
    Date: 2022–10–31
  7. By: Markus HECKEL; INOUE Tomoo; NISHIMURA Kiyohiko G.; OKIMOTO Tatsuyoshi
    Abstract: Open market operations (MOs) were not originally designed for making monetary policy changes during normal times. However, they became an integral part of the unconventional monetary policy (UMP) when the policy rates hit the effective lower bound during the 2008 global financial crisis in the major advanced countries. This study quantifies the effect of UMP carried out by MO on the macroeconomy in Japan, from 2002 to 2019, based on four market operation-based monetary policy indices (MO-MPIs), namely a broadly-defined quantitative easing index and three liquidity supply indices targeting different financial market segments. Our results indicate that there were three distinctive regimes with different policy impacts: (1) before mid-2008, (2) mid-2008 – mid-2016, and (3) after mid-2016. Moreover, UMP carried out using MO was the most effective in the second regime, with very strong effects of all MO-MPIs on almost all macroeconomic variables. Furthermore, MO-MPIs became substantially less effective in the third regime (after mid-2016) after the Bank of Japan introduced yield curve control.
    Date: 2022–11
  8. By: Capasso Salvatore (Università di Napoli Parthenope, ISMed-CNR, and CSEF.); D’Uva Marcella, (Università di Napoli Parthenope); Fiorelli Cristiana (Università di Napoli Parthenope); Napolitano Oreste (Università di Napoli Parthenope)
    Abstract: This work investigates the bank-sovereign risk transmission across EMU countries, assessing how sovereign risk in Italian government bonds can affect the sovereign and credit risk of non-stressed countries. We employ a GVAR technique and measure spatial proximity by using the cross-country “distance” in debt-to-GDP ratio. Our results confirm the hypothesis of a sovereign-bank loop: a shock in Credit Default Swaps spread of one country propagates to other CDS and bank indices. The effects are stronger in more fragile financial systems. Overall, our findings highlight the importance of spillover effects and suggest a monetary policy tailored on “back-door” propagation of shocks.
    Keywords: sovereign CDS, GVAR, spillovers, euro area.
    JEL: C31 C58 E44
  9. By: Goyal, Krishna
    Abstract: The banking industry has undergone significant changes over the past few decades as a result of changes in consumer demand as well as technological advancements, particularly in the area of computer and online technology, as well as increased competition from banks and other financial institutions. Banks today are increasingly reliant on technological advancements and techniques to be able to provide their customers with the services they need. As a result of the proliferation of mobile applications, many banks are now providing their services through different mobile applications, taking the place of traditional brick-and-mortar banks. Technology advancements in the banking industry, particularly those relating to mobile applications, have been a major source of competitiveness among banks and financial institutions. The use of technology has opened up the ways for banks to reduce their costs, increase productivity, and build efficient customer relationships. In developed and developing countries alike, most banks providing mobile banking services are using mobile apps banking as a means of meeting their customers' needs and providing services. It is important for banks to pay more attention to the service parameters related to mobile services in order to maintain a positive relationship between them and their customers in terms of customer trust.
    Keywords: Banking, Competitiveness, Mobile Banking, Financial Transactions, Remittance, Telecom Operators, Mobile Banking apps, Mobile Technology
    JEL: O32 O35 O4 O43
    Date: 2022–10–16
  10. By: Andrea Bellucci (Universita' degli Studi dell'Insubria and MoFiR); Alexander Borisov (Lindner College of Business, University of Cincinnati and MoFiR); Germana Giombini (Department of Economics, Society and Politics, University of Urbino Carlo Bo and MoFiR); Alberto Zazzaro (Department of Economics and Statistics, University of Naples Federico II, CSEF, and MoFiR)
    Abstract: This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that a certification is associated with a lower cost of debt for the recipients if the amount of private information of the lender is low. As the bank accumulates more information over the course of the lending relationship with a borrower, public information loses importance and no longer has a significant effect. Our results highlight a potential positive effect of external certification, and suggest that public and private information can be substitutes in the pricing of bank debt.
    Keywords: Information, Financial Contracting, Interest rate, SMEs Financing
    JEL: D83 D21 G21 G30 L11
    Date: 2022–11
  11. By: Agni Rajinikanth
    Abstract: The 2022 Russia Ukraine War has led to many sanctions being placed on Russia and Ukraine. The paper will discuss the impact the 2022 Russian Sanctions have on agricultural food prices and hunger. The paper also uses Instrumental Variable Analysis to find how Cryptocurrency and Bitcoin can be used to hedge against the impact of sanctions. The 6 different countries analyzed in this study including Bangladesh, El Salvador, Iran, Nigeria, Philippines, and South Africa, all of which are heavy importers of wheat and corn. The paper shows that although Bitcoin may be volatile compared to other local currencies, it might be a good investment to safeguard assets since it is not correlated with commodity prices.Furthermore, the study demonstrates that transaction volume has a strong relationship with prices.
    Date: 2022–10
  12. By: Rodney J Garratt; Jiaheng Yu; Haoxiang Zhu
    Abstract: Banks of different sizes respond differently to interest on reserve (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-though of IOR rate changes to deposit rates. In these circumstances, a central bank digital currency (CBDC) may be used to provide competitive pressure to drive up deposit rates and improve monetary policy transmission. We explore the implications of two design features: interest rate and convenience value. Increasing the CBDC interest rate past a point where it becomes a binding floor, increases deposit rates but leads to a wider divergence of market shares in both deposit and lending markets and can reduce the responsiveness of deposit rates to changes in the IOR rate. In contrast, increasing convenience, from sufficiently high levels, increases deposit rates, causes market shares to converge and can increase the responsiveness of deposit rates to changes in the IOR rate.
    Keywords: central bank digital currency, interest on reserves, payment convenience, deposit rates, bank lending.
    JEL: E42 G21 G28 L11 L15
    Date: 2022–10
  13. By: Yasin Kürsat Önder (-)
    Abstract: I investigate the introduction of GDP-indexed bonds as an additional source of government borrowing in a quantitative default model. The idea of linking debt payments to developments in GDP resurfaced with the 1980s debt crisis and peaked with the COVID-19 outbreak. I show that the gains from this idea depend on the underlying indexation method and are highest if payments are symmetrically tied to developments in GDP. Optimized indexed debt can eradicate default risk, halve consumption volatility, and increase asset prices while raising the government’s debt balances. These changes occur because an optimally chosen indexation method does a better job at completing the markets.
    Keywords: GDP-indexed bonds, sovereign default, risk sharing, state-contingent assets
    JEL: G11 G23 F34
    Date: 2022–11
  14. By: Aleksandr Kazakov (Halle Institute for Economic Research); Michael Koetter (University of Magdeburg); Mirko Titze (University of Halle); Lena Tonzer (Vrije Universiteit Amsterdam)
    Abstract: We use project-level information for the largest regional economic development program in German history to study whether government subsidies to firms affect quantity and quality of bank lending. We combine 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: Government subsidies, Financial intermediation, Bank stability
    JEL: G21 G28 H25
    Date: 2022–11–13
  15. By: Winta Beyene (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Matteo Falagiarda (European Central Bank (ECB)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Alessandro Scopelliti (KU Leuven, Department Accounting, Finance and Insurance; University of Zurich - Department of Banking and Finance)
    Abstract: The transition to a green economy strongly depends on the existence of appropriate economic incentives for agents. The loan market for car purchases is a paradigmatic example in this respect, as lenders may set credit conditions which may discourage or support the purchase of high emission vehicles. Using car loan-level data we study whether banks adjust their lending terms and conditions in response to different shocks to the perceived environmental quality of diesel vehicles. Focusing on the impact of the diesel emissions scandal in the automobile sector in 2015 and on local policy changes regarding circulation restrictions due to air pollution, we find that bank lending particularly by captive banks may further reinforce the market and regulatory failures that led to extensive levels of pollution by the automobile sector.
    Date: 2022–10
  16. By: Constantin Bürgi; Bo Jiang
    Abstract: How much deposits and equity a bank has influences how a banks’ lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We show in a value-at-risk RTC model that the lending for banks with relatively more equity and non-interest-bearing deposits should respond less to monetary policy tightening. This suggests that non-interest-bearing deposits act as “pseudo capital”. In a panel of US banks, we find strong evidence in support of our model for various risk measures.
    Keywords: bank lending, deposits, value-at-risk, pseudo capital
    JEL: E43 E52 G21
    Date: 2022
  17. By: Andrew W. Lo; Richard T. Thakor
    Abstract: We review the literature on financial intermediation in the process by which new medical therapeutics are financed, developed, and delivered. We discuss the contributing factors that lead to a key finding in the literature—underinvestment in biomedical R&D—and focus on the role that banks and other intermediaries can play in financing biomedical R&D and potentially closing this funding gap. We conclude with a discussion of the role of financial intermediation in the delivery of healthcare to patients.
    JEL: D21 G21 G24 G31 G32 L65
    Date: 2022–10
  18. By: Rogelio Mercado Jr.; Victor Pontines
    Abstract: This paper employs Bayesian model averaging (BMA) and uses posterior inclusion probability (PIP) values to evaluate which financial inclusion indicators, dimensions, and other determinants of income inequality should be considered in an empirical specification assessing the relationship between financial inclusion and income inequality, given model uncertainty. The results show that for the low-income country group, financial access and usage indicators and dimensions are the most relevant indicators. Unfortunately, nowhere in our baseline results and in almost all our sensitivity tests do we find PIP values higher than our set threshold value for any of our financial depth indicators and dimension. These results suggest that theoretical models linking financial inclusion and income inequality could well focus on the role of financial access and usage by providing theoretical foundations on the mechanics as to how these two dimensions of financial inclusion impact income inequality.
    Keywords: Bayesian model averaging, financial inclusion, income inequality, Bayesian inference
    JEL: C11 C52 O15 O16
    Date: 2022–10
  19. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: IADI Guidance in place recommends a review of deposit insurance coverage levels more frequently than every five years if consumer price inflation is high. This review may not necessarily lead to a change of coverage levels. Although data availability on this topic is very limited, we find: On a self-reported basis and irrespective of inflation, only half of deposit insurers “periodically†review the coverage level. Although this share has been growing over the past decade, evidence from a sub-sample suggests that irrespective of inflation, periodic review of coverage levels by deposit insurers may regularly take place at intervals exceeding five years. Linking data on coverage review to historical inflation figures on an individual jurisdictional level, we found no substantial evidence that high inflation correlates with more regular periodic review of coverage levels. As to changes of coverage levels – which are observable, in contrast to reviews – we find some early evidence to suggest that coverage levels are adjusted more frequently in jurisdictions with higher levels of inflation.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–11
  20. By: Simona Bozhinovska (CEPN - Centre d'Economie de l'Université Paris Nord - LABEX ICCA - UP13 - Université Paris 13 - Université Sorbonne Nouvelle - Paris 3 - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité - Université Sorbonne Paris Nord - CNRS - Centre National de la Recherche Scientifique - Université Sorbonne Paris Nord)
    Abstract: The present article deals with the evolution of the operational framework of the Swiss central bank, brought forward by its extensive official foreign exchange purchases following the outburst of the global financial crisis. It provides an endogenous money interpretation of the operations of the Swiss National Bank under both shortage and surplus in the aggregate liquidity position of the banking sector vis-à-vis the central bank, reinforcing thus the claim that the compensating movements on the central bank balance sheet in response to foreign exchange accumulation are nothing more than interest rate targeting operations. Given the rather unusual choice of a longer-term interest rate abroad as its policy rate, initially the SNB only partially compensated these movements, so as to ensure a rather generous supply of central bank reserves and bring this rate down to its targeted level, while domestic market rates were set lower. The later adoption of a floor system with ample reserves, allowed the SNB to maintain a near-perfect control over its policy interest rate while at the same time establishing a direct link between foreign reserves and the monetary base, leaving little room to assume a further quantitative effect from this expansion of central bank reserves.
    Keywords: central bank operations,foreign exchange accumulation,monetary policy implementation,Swiss National Bank
    Date: 2022–10–31
  21. By: S. Borağan Aruoba; Ronel Elul; Ṣebnem Kalemli-Özcan
    Abstract: We quantify the role of heterogeneity in households' financial constraints in explaining the large decline in consumption between 2006 and 2009. Using household-level data, we show that in addition to a direct effect of changes in house prices, there are sizable indirect effects from general equilibrium feedback and bank health. About 60% of the aggregate response of consumption to changes in house prices is explained by ex-ante and ex-post financial constraints, where only a specific set of households face binding ex-post financial constraints as a result of declining house prices. We find a negligible wealth effect once we account for the role of heterogonous financial constraints.
    JEL: E0
    Date: 2022–10
  22. By: Merike Kukk; Natalia Levenko
    Abstract: The paper studies the determinants of the interest rate spreads in Estonia, a country that stands out among European countries for its wide spreads. Four distinct credit markets are considered for housing loans, consumer loans, long-term corporate loans and short-term corporate loans. The paper uses quarterly panel data from 2000Q1–2021Q1. It uses a two-stage approach to disaggregate the observed spread into a component determined by the bank-specific factors and a component determined by the market-specific factors, which is labelled in the literature as the pure spread. For each of the two components, the paper finds substantial differences in the determinants of the spreads across different types of loan. While credit risk is important for long-term corporate and housing loans, operating costs are significant in the segment of short-term loans. Similarities found between the loan markets were that the pure spreads are found to be related to the business cycle and market concentration, while the relationship with interest rate risk is found to be insignificant.
    Keywords: interest rate spreads, interest rate margins, banking sector, housing loans, consumer loans, corporate loans, market concentration
    JEL: G21 G28 D40 E43
    Date: 2022–11–09
  23. By: Matthew S. Jaremski
    Abstract: The massive rise in U.S. stockholding during the early twentieth century resulted in the deepening of securities markets, the spread of investment banks, and the expansion of publicly held corporations. This paper makes use of a unique panel database of South Dakota bank stockholders from 1910-1934 to study bank stockholder growth as well as its effect on bank composition and risk. Overall, the average number of stockholders in a bank rose from 8 to 21 over the period with much of the rise occurring after 1924, but many banks remained highly concentrated. The new stockholders are associated with a subsequent increase in a bank’s proportion of loans-to-assets, but no direct effect on bank closure outside of this balance sheet effect. The data thus illustrate the start of a movement towards more diffuse bank stockholding and its potential consequences for the industry.
    JEL: G21 G3 N22
    Date: 2022–11
  24. By: Mikael Khan; Elyse Sullivan
    Abstract: We assess the usefulness of various measures of core inflation over the COVID-19 pandemic. We find that Cpi-trim and CPI-median provided the best signal of underlying inflation. The favourable performance of these measures stems from their lack of reliance on historical experience, an especially valuable feature in unprecedented times.
    Keywords: Econometric and statistical methods; Inflation and prices; Monetary policy
    JEL: C18 E E3 E31
    Date: 2022–11
  25. By: Delia Sih Chien Macaluso; Michael McMahon
    Abstract: The Bank of England’s Monetary Policy Committee (MPC) celebrated 25 years of existence in June 2022. This period is marked by a global trend toward greater transparency and more communication in central banks. While some of these changes took place before the Bank of England was given independent operational control of monetary policy, the Bank has played a leading role in many of these trends. This short paper takes a look back the communication of the Bank of Eng¬land, and considers the impact of current trends going forward.
    Date: 2022–10–11
  26. By: Alexander Blasberg; Rüdiger Kiesel; Luca Taschini
    Abstract: Using Credit Default Swap spreads, we construct a forward-looking, market-implied carbon risk factor and show that carbon risk affects firms’ credit spread. The effect is larger for European than North American firms and varies substantially across industries, suggesting the market recognises where and which sectors are better positioned for a transition to a low-carbon economy. Moreover, lenders demand more credit protection for those borrowers perceived to be more exposed to carbon risk when market-wide concern about climate change risk is elevated. Finally, lenders expect that adjustments in carbon regulations in Europe will cause relatively larger policy-related costs in the near future.
    Keywords: climate change, carbon risk, credit risk, Credit Default Swap spreads
    JEL: C21 C23 G12 G32 Q54
    Date: 2022
  27. By: Bernd Hayo (Marburg University); Johannes Zahner (Marburg University)
    Abstract: To which degree can variation in sentiment-based indicators of central bank communication be attributed to changes in macroeconomic, financial, and monetary variables; idiosyncratic speaker effects; sentiment persistence; and random ‘noise’? Using the Loughran and McDonald (2011) dictionary on a text corpus containing more than 10,000 speeches and press statements, we construct sentiment-based indicators for the ECB and the Fed. An analysis of variance (ANOVA) shows that sentiment is strongly persistent and influenced by speaker-specific effects. With about 80% of the variation in sentiment being due to noise, our findings cast doubt on the reliability of conclusions based on variation in dictionary-based indicators.
    Keywords: Sentiment index, monetary policy, central banks, Loughran and McDonald (2011) dictionary, information content of sentiment indices
    JEL: C55 E58 E61 Z13
    Date: 2022
  28. By: Ying Fang (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics & Data Science, School of Economics, Xiamen University, Xiamen, Fujian 361005, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Zeqin Liu (School of Statistics, Shanxi University of Finance and Economics, Taiyuan, Shanxi 030006, China); Ming Lin (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics & Data Science, School of Economics, Xiamen University, Xiamen, Fujian 361005, China)
    Abstract: The main goal of macro prudential policies is to maintain financial stability. Macro prudential policy framework is a dynamic one, consisting of capital requirements, leverage ratio, liquidity requirements, etc. The concept of macro prudential, developed mainly after the 2008 financial crisis, is the counterpart to micro prudential. Micro prudential policies focus on individual financial institutions, believing that the stability of individual financial institutions could guarantee the stability of the entire financial system. With the outbreak of the financial crisis in 2008, people realized that the sum of micro prudential was not equal to macro prudential, and the sum of healthy micro entities could not guarantee a healthy macro whole. Therefore, many countries and international organizations began to focus on the whole financial system and the macro prudential policy framework came into being. Just as the effectiveness of monetary policies is the core issue in the research of monetary policy theory, the effectiveness of macro prudential policies is also the core issue in the research of macro prudential theory. Existing research generally believes that specific macro prudential policy is effective for the specific objective, such as macro prudential policies for credit could effectively reduce the systemic risk caused by increased credit or asset prices rise (Lim et al. (2011), Dell'Ariccia et al. (2012), Cerutti et al. (2017), Akinci and Olmstead-Rumsey (2018), Fang Yi (2016), Liang Qi et al. (2015)). However, as pointed by Lim et al. (2011) and Dell'Ariccia et al. (2012), the highly targeted characteristic of macro prudential policies would lead to the transfer of risks to sectors with weak supervision due to regulation and cross-border arbitrage, which may lead to more serious consequences. Therefore, it is of great theoretical value and practical significance to explore the effectiveness of macro prudential policies from the perspective of overall financial stability and systemic financial risk. The aim of this paper is to empirically evaluate the effects of the macro prudential policies on financial stability in China. Firstly, the paper proposes adopting the macro-econometric policy evaluation method under the Rubin causal effect framework to evaluate the impact of China's macro prudential policies on financial stability during the sample period 2007-2020. The method is a new route to empirically evaluate macroeconomic policy effects. Different from the panel data methods and micro-level data analyses used in existing studies, the method can evaluate the combined effects of various macro prudential tools for a specific country. Secondly, based on the macro prudential databases of Shim (2013) and Global Macro prudential Policy Instruments (GMPI) survey database of IMF during 2013- 2014, the paper comprehensively explores the practice of macro prudential policies in China since 2000, and constructs a monthly macro prudential policy index to quantitatively measure the intensity of China's macro prudential policies for the period from January 2000 to May 2022. Thirdly, the paper uses the systemic financial risk index, termed as SRISK proposed by Brownlees and Engle (2017), to measure China's systemic financial risk. And then evaluates the macro prudential policies' effects on the systemic financial risk, cross-sectoral contagion of systemic financial risk and important intermediate variables in the credit channel. Our empirical findings indicate that loose macro prudential policies can increase the risks of intermediate variables in the credit channel, and the risks lead to a significant rise in SRISK of house sector, but for the SRISK of financial and manufacturing sectors, the cumulative effects in 24 periods are not significant. However, in addition to a significant rise in commercial banks' capital adequacy ratio growth, tight macro prudential policies have no significant effects on the other intermediate variables in the credit channel, and further have no obvious effects on SRISK of financial, house and manufacturing sectors. Based on the conclusions, we suggest that systemic risk indicators should be further researched to provide more comprehensive and systematic targets for macro prudential authorities. Moreover, the transmission channel of macro prudential policies on financial stability should be improved to enhance the efficiency of regulation. Finally, more attentions should be paid to the cross-sectoral contagion of systemic financial risk to prevent systemic financial risk from a systemic perspective.
    Keywords: Macro prudential policies; Financial stability; Systematic risk; Macroeconomic policy evaluation; SRISK; Machine learning
    JEL: E60 E50 G28
    Date: 2022–11
  29. By: Yakubu, Ibrahim Nandom; Bunyaminu, Alhassan; Abdallah, Iliasu
    Abstract: The number of foreign banks operating in emerging market economies has increased significantly in recent years. Financial globalization and technological advancement have dramatically altered the global banking landscape, resulting in an increasing pattern of international banks’ involvement. Aside from the global forces driving bank penetration, this study seeks to assess how country-level factors motivate foreign bank entry in Ghana. In doing so, we employ quarterly data spanning 2000Q1-2017Q4. Applying the autoregressive distributed lag (ARDL) technique, the results establish that while corruption significantly drives foreign bank entry in both short- and long-run, the impact of political stability on foreign bank entry is significant only in the long-run. The findings also show that banking sector profitability and banking sector stability matter for foreign bank entry in both short- and long-term. The study presents some implications for policy based on the findings.
    Keywords: Foreign bank entry, Corruption, Political stability, ARDL, Ghana
    JEL: G20 G21
    Date: 2022–10–28
  30. By: Ida Chak; Karen Croxson; Francesco D’Acunto; Jonathan Reuter; Alberto G. Rossi; Jonathan M. Shaw
    Abstract: Poor debt-management skills lower financial security and wealth accumulation. Because optimal solutions to credit repayment problems depend on neither risk preferences nor beliefs, loan repayment is a prime application for robo-advising. Vulnerable households, though, tend to distrust new technologies and override suggestions that do not align with ingrained heuristics, such as matching the minimum payment on a credit card balance. Lower adoption rates by these groups might increase rather than reduce wealth inequalities. To assess these trade-offs, we design and implement an RCT in which robo-advice for borrower repayment decisions is offered to a set of representative UK consumers. The availability of free robo-advice significantly improves average loan repayment choices. When their willingness to pay is elicited, many subjects report values larger than the monetary benefits of the tool, perhaps due to lower cognitive and psychological costs decision-makers face when making assisted choices. Non-adopters and overriders report lower trust in algorithms at the end of the experiment. We find no evidence of learning from robo-advice, which barely improves subsequent unassisted choices, even when paired with explicit tips. In fact, robo-advice usage crowds out learning-by-doing, which is highest for those who make all choices unassisted.
    JEL: D14 D91 G51 G53
    Date: 2022–11
  31. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: The European Central Bank (ECB) is facing a dangerous trade-off between the control of supply-led inflation and the need to avoid a further recession in the euro area. The paper argues that an effective ECB monetary strategy to handle this trade-off would have been to anticipate the increase in the policy interest rates and postpone the end of the asset net purchase programs. Unfortunately, the ECB did not follow this sequence, which is why its current monetary policy, bound in a tricky balance, risks favoring euro-area stagflation and financial market fragmentation. Moreover, the new anti-fragmentation instrument (TPI) introduced by the ECB appears ineffective and subject to excessive discretion. Therefore, the ECB should instead activate a compelling combination of its rules-based monetary policy with EU centralized and national fiscal policies.
    Keywords: Stagflation; monetary policy; ECB
    JEL: E58 E44 E52
    Date: 2022–11
  32. By: Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome); Marialaura Seccareccia (Department of Economics and Finance, LUISS Guido Carli)
    Abstract: Cyclical inequality and idiosyncratic risk imply additional channels that amplify the transmission of persistent balance-sheet policies, through their effects on private sector's expectations and consumption risk. Through these channels, unconventional monetary policy improves the central bank's ability to anchor expectations and rule out endogenous instability. Moreover, they allow the central bank to optimally complement interest-rate policy in particular in response to financial shocks that expose the economy to the effective-lower-bound on the policy rate, and can promote a swifter exit from the liquidity trap.
    Keywords: Cyclical inequality; idiosyncratic risk; optimal monetary policy; HANK; THANK, ELB.
    JEL: E21 E32 E44 E58
    Date: 2022–11

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