nep-ban New Economics Papers
on Banking
Issue of 2022‒12‒05
28 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Understanding the Maker Protocol By Jason Chen; Kathy Fogel; Kose John
  2. How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions By Neil Bhutta; Aurel Hizmo; Daniel R. Ringo
  3. Give Me a Pass: Flexible Credit for Entrepreneurs in Colombia By Lasse Brune; Xavier Giné; Dean Karlan
  4. The Taylor Rule and its Aftermath: Elements for an Interpretation along Classical-Keynesian lines By Levrero, Enrico Sergio
  5. Disparities in financial literacy, pension planning, and saving behavior By Bucher-Koenen, Tabea; Hackethal, Andreas; Kasinger, Johannes; Laudenbach, Christine
  6. Distinguishable Cash, Bosonic Bitcoin, and Fermionic Non-fungible Token By Zae Young Kim; Jeong-Hyuck Park
  7. Demand Segmentation in the Federal Funds Market By Manjola Tase
  8. Trade Conflicts and Credit Supply Spillovers: Evidence from the Nobel Peace Prize Trade Shock By Jin Cao; Valeriya Dinger; Ragnar E. Juelsrud; Karolis Liaudinskas
  9. Climate Change and the Role of Regulatory Capital: A Stylized Framework for Policy Assessment By Michael Holscher; David Ignell; Morgan Lewis; Kevin J. Stiroh
  10. Quantitative Easing and the U.K. Economy By De Koning, Kees
  11. The Eurozone as an Inflation Target Zone By Pompeo Della Posta; Roberto Tamborini
  12. The Welfare Effects of Bank Liquidity and Capital Requirements By Skander J. Van den Heuvel
  13. Managing Bank Liquidity Hoarding during Uncertain Times: The Role of Board Gender Diversity By Denis DAVYDOV; Tatiana GARANINA; Laurent WEILL
  14. Credit Reallocation and Technological Change By Mehmet Furkan Karaca, Mehmet Furkan Karaca; Minetti, Raoul; Murro, Pierluigi
  15. FUNGSI DAN PERANAN LEMBAGA KEUANGAN BANK DAN NON BANK By Arief, A. Anggie Zabrina; Wahidah, Intan Nurul; Taha, Muh. Ridwan; khasanah, uswatun
  16. The augmented bank balance-sheet channel of monetary policy By Bittner, Christian; Bonfim, Diana; Heider, Florian; Saidi, Farzad; Schepens, Glenn; Soares, Carla
  17. Mortgage Appraisal Waivers and Prepayment Speeds By Joshua Bosshardt; William M. Doerner; Fan Xu
  18. This Letter quantifies how ATM cash withdrawals in Ireland have been affected by the Covid-19 pandemic. We find: (i) that there was a one-off downward step shift in monthly ATM withdrawals in spring 2020, with withdrawals moving in a narrow range subsequently; (ii) withdrawals have been sensitive to the degree of government policy stringency in relation to public health; (iii) against the background of the recent pickup in inflation, the nominal value of cash withdrawals is increasing in line with higher consumer prices. By Cronin, David; McInerney, Niall
  19. Islam and Entrepreneurship: The Role of Islamic Banking By Mohammad Reza Farzanegan; Ahmed M. Badreldin
  20. How capital inflows translate into new bank lending: tracing the mechanism in Latin America By Carlos Cantù; Catherine Casanova; Rodrigo Alfaro; Fernando Chertman; Gerald Cisneros; Toni dos Santos; Roberto Lobato; Calixto Lopez; Facundo Luna; David Moreno; Miguel Sarmiento; Rafael Nivin
  21. DeFi vs TradFi: Valuation Using Multiples and Discounted Cash Flow By Teng Andrea Xu; Jiahua Xu; Kristof Lommers
  22. Crypto trading and Bitcoin prices: evidence from a new database of retail adoption By Raphael Auer; Giulio Cornelli; Sebastian Doerr; Jon Frost; Leonardo Gambacorta
  23. Too Sunny to Borrow: Sunshine and Borrower Discouragement By Jérémie BERTRAND; Laurent WEILL
  24. Quantitative Easing in the US and Financial Cycles in Emerging Markets By Marcin Kolasa; Grzegorz Wesołowski
  25. How Do Deposit Rates Respond to Monetary Policy? By Alena Kang-Landsberg; Matthew Plosser
  26. Individualism Reduces Borrower Discouragement By Francis OSEI-TUTU; Laurent WEILL
  27. Interest Rate Shocks and the Composition of Sovereign Debt By Gonzalez-Aguado, Eugenia
  28. Факторы риска, прибыльности и вероятности дефолта в российском банковском секторе By Bekirova, Olga; Zubarev, Andrey

  1. By: Jason Chen; Kathy Fogel; Kose John
    Abstract: This paper discusses a decentralized finance (DeFi) application called MakerDAO. The Maker Protocol, built on the Ethereum blockchain, enables users to create and hold currency. Current elements of the Maker Protocol are the Dai stable coin, Maker Vaults, and Voting. MakerDAO governs the Maker Protocol by deciding on key parameters (e.g., stability fees, collateral types and rates, etc.) through the voting power of Maker (MKR) holders. The Maker Protocol is one of the largest decentralized applications (DApps) on the Ethereum blockchain and is the first decentralized finance (DeFi) application to earn significant adoption. The objective of this paper is to analyze and discuss the significance, uses, and functions of this DeFi application.
    Date: 2022–10
  2. By: Neil Bhutta; Aurel Hizmo; Daniel R. Ringo
    Abstract: We assess racial discrimination in mortgage approvals using new data on mortgage applications. Minority applicants tend to have significantly lower credit scores, higher leverage, and are less likely than white applicants to receive algorithmic approval from race-blind government automated underwriting systems (AUS). Observable applicant- risk factors explain most of the racial disparities in lender denials. Further, we exploit the AUS data to show there are risk factors we do not directly observe, and our analysis indicates that these factors explain at least some of the residual 1-2 percentage point denial gaps. Overall, we find that differential treatment has played a limited role in generating denial disparities in recent years.
    Keywords: Discrimination; Fair lending; Automated underwriting; Credit score; Mortgage lending
    JEL: R30 R51 G21 G28
    Date: 2022–10–18
  3. By: Lasse Brune; Xavier Giné; Dean Karlan
    Abstract: Microcredit promised business growth for small firms lacking access to banking loans. Yet while reaching millions, recent randomized evaluations suggest limited average business impacts. Critics often blame contract rigidity, specifically the fixed and frequent installments, for the lack of productive risk-taking. But such rigidity may instill borrower discipline. We partnered with a Colombian lender that offered first-time borrowers a flexible loan that permitted delaying up to three monthly repayments. We find null effects for revenue and profits but increases in loan defaults. The evidence thus aligns with established microlender practice of offering rigid contracts to first-time borrowers.
    JEL: G21 O21
    Date: 2022–11
  4. By: Levrero, Enrico Sergio (Roma Tre University)
    Abstract: The aim of this paper is to assess to what extent the Taylor rule can be considered an appropriate representation of the tendency of central banks to react to price inflation. After an overview of the origin and use of the Taylor rule, the paper stresses some difficulties in its implementation according to the modern theory of central banking and the limits of its interpretation by the New Consensus models. Finally, an alternative interpretation of this rule along Classical-Keynesian lines is advanced. In this context, it has to be interpreted, as it is in actual fact, as a flexible and non-mechanical benchmark for monetary policies which are seen to affect income distribution between wages and profits.
    Keywords: Monetary policy; Taylor rule; Cost-push inflation
    JEL: E11 E12 E52 E58
    Date: 2022–10–31
  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: Zae Young Kim; Jeong-Hyuck Park
    Abstract: Modern technology has brought novel types of wealth. In contrast to hard cashes, digital currencies do not have a physical form. They exist in electronic forms only. Yet, it has not been clear what impacts their ongoing growth will make, if any, on wealth distribution. Here we propose to identify all forms of contemporary wealth into two classes: 'distinguishable' or 'identical'. Traditional tangible moneys are all distinguishable. Financial assets and cryptocurrencies, such as bank deposits and Bitcoin, are boson-like, while non-fungible tokens are fermion-like. We derive their ownership-based distributions in a unified manner. Each class follows essentially the Poisson or the geometric distribution. We contrast their distinct features such as Gini coefficients. Further, aggregating different kinds of wealth corresponds to a weighted convolution where the number of banks matters and Bitcoin follows Bose-Einstein distribution.
    Date: 2022–11
  7. By: Manjola Tase
    Abstract: This paper outlines a model of demand segmentation in the federal funds market with two types of borrowers - the "interest on reserves (IOR) arbitrage'' type and the "regulatory'' type - which have different reservation prices and cannot always be separated. When fed funds trade above IOR, the "regulatory" type is revealed and consequently pays an interest rate closer to its real reservation price, pushing the fed funds rate further up. When fed funds trade below IOR, a decrease in the fed funds rate encourages entry in the market for IOR arbitrage purposes thus counteracting the downward pressure on the fed funds rate. We use probit regression models and daily data for the period April 2018 to February 2020 to provide empirical support for this model. We find the following: 1) When fed funds trade above IOR, there is, on average, a 10 percentage points increase in the probability that the fed funds rate increases the following period. Furthermore, analysis using confidential bank-level data shows that this increase in the probability is higher for banks that report their liquidity profile daily and that were present all trading days during this period. 2) When the fed funds trade below IOR, the probability of a decrease in the fed funds rate decreases with the widening of the spread between the fed funds rate and IOR.
    Keywords: Fed funds; Demand segmentation; Repo; Monetary policy
    JEL: E49 E52 G28
    Date: 2022–11–04
  8. By: Jin Cao; Valeriya Dinger; Ragnar E. Juelsrud; Karolis Liaudinskas
    Abstract: In this paper, we examine how a trade conflict’s impact on the real economy can be amplified by financial intermediaries. After the Norwegian Nobel Peace Prize Committee awarded the 2010 Nobel Peace Prize to Chinese dissident Liu Xiaobo, China in practice banned imports of Norwegian salmon. The ban was an unexpected trade shock to the Norwegian salmon industry. Using bank balance sheet and credit register data, we trace how this trade shock affected the lending behavior of banks highly exposed to the salmon industry when the shock occurred. We find that, in the years following the trade shock, highly exposed banks cut back lending to non-salmon firms and households by 3-6 percent more than other banks. Furthermore, we find that the reduction in lending was not driven by the erosion of bank capital, but rather by the shift in expectations about the performance of loans to salmon producers, which drove highly exposed banks to increase their loan loss provisions and reduce risk-taking.
    Keywords: trade shock, bank lending channel, expectation shock
    JEL: F14 G21
    Date: 2022
  9. By: Michael Holscher; David Ignell; Morgan Lewis; Kevin J. Stiroh
    Abstract: This paper presents a stylized framework to assess conceptually how the financial risks of climate change could interact with a regulatory capital regime. We summarize core features of a capital regime such as expected and unexpected losses, regulatory ratios and risk-weighted assets, and minimum requirements and buffers, and then consider where climate-related risk drivers may be relevant. We show that when considering policy implications, it is critically important to be precise about how climate change may impact the loss-generating process for banks and to be clear about the specific policy objective. While climate change could potentially impact the regulatory capital regime in several ways, an internally coherent approach requires a strong link between specific assumptions and beliefs about how these financial risks may manifest as bank losses and what objectives regulators are pursuing. We conclude by identifying several potential research opportunities to better understand these complex issues and inform policy development.
    Keywords: Climate change; Regulatory capital
    JEL: G21 G28
    Date: 2022–10–18
  10. By: De Koning, Kees
    Abstract: The Bank of England started with Quantitative Easing in 2009 and bought U.K. Gilts for £445 billion. The Bank subsequently bought a further £450 billion. The Bank recently increased its key interest rate to 3%. The pressure on household's budgets is immense. This paper proposes a different approach. Instead of QE aimed at increasing costs of borrowing, it proposes to use home equity - savings made in the past - to be used instead. Why and how this can be done is explained in this paper.
    Keywords: Quantitative Easing; Home Equity as a source of Economic Growth
    JEL: E2 E21 E31 E4 E44 E52 E58
    Date: 2022–11–05
  11. By: Pompeo Della Posta; Roberto Tamborini
    Abstract: In the revised monetary policy strategy of the European Central Bank (ECB), “price stability is best maintained by aiming for two per cent inflation over the medium term”, with “symmetric commitment” to this target. “Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable”. In this article, we therefore analyse this policy strategy through a model of inflation target zone, with a central value and symmetric upper and lower bounds on inflation, within which the central bank may decide not to intervene, provided inflation is expected to fluctuate around the central value. We show that the policy benefits guaranteed by a target zone can be dissipated if market agents are uncertain about its width.
    Keywords: European Central Bank, monetary policy strategy, inflation target zones
    JEL: E31 E42
    Date: 2022
  12. By: Skander J. Van den Heuvel
    Abstract: The stringency of bank liquidity and capital requirements should depend on their social costs and benefits. This paper investigates their welfare effects and quantifies their welfare costs using sufficient statistics. The special role of banks as liquidity providers is embedded in an otherwise standard general equilibrium growth model. Capital and liquidity requirements mitigate moral hazard from deposit insurance, which, if unchecked, can lead to excessive credit and liquidity risk at banks. However, these regulations are also costly because they reduce the ability of banks to create net liquidity and can distort investment. Equilibrium asset returns reveal the strength of demand for liquidity, yielding two simple sufficient statistics that express the welfare cost of each requirement as a function of observable variables only. Based on U.S. data, the welfare cost of a 10 percent liquidity requirement is equivalent to a permanent loss in consumption of about 0.02%, a modest impact. Even using a conservative estimate, the cost of a similarly-sized increase in the capital requirement is roughly ten times as large. Even so, optimal policy relies on both requirements, as the financial stability benefits of capital requirements are found to be broader.
    Keywords: Capital requirements; Convenience yields; Banking; Welfare; Liquidity requirements; Sufficient statistics
    JEL: G28 G21 E44
    Date: 2022–11–04
  13. By: Denis DAVYDOV (Hanken School of Economics); Tatiana GARANINA (University of Vaasa); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    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. These results argue for policies to promote gender diversity of bank boards as a means of limiting detrimental effects of economic policy uncertainty.
    Keywords: Liquidity hoarding; Bank boards; Gender diversity; Economic policy uncertainty.
    JEL: G18 G21 G34 P26
    Date: 2022
  14. By: Mehmet Furkan Karaca, Mehmet Furkan Karaca (Michigan State University); Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (Luiss University)
    Abstract: This paper studies the dynamic process of credit reallocation and its interaction with aggregate innovative activity. To draw out theoretical predictions, we build a discrete time model to investigate the consequences of lenders’ decision on reallocating credit and borrowers’ choice on innovating. We show that an escalation in credit reallocation disrupts innovative activities. Using a novel dataset on bank balance sheets and the aggregate number of patents for Italy, we examine the effect of credit reallocation on innovation. We construct measures of credit reallocation and collect data on the aggregate number of patents as a measure of innovative activity across Italian provinces. We find that an increase in credit reallocation reduces innovative activity while aggregate credit growth helps to expand it.
    Keywords: Credit Market; Credit Reallocation; Technological Change; Innovation
    JEL: E44 G21 O30
    Date: 2022–10–19
  15. By: Arief, A. Anggie Zabrina; Wahidah, Intan Nurul; Taha, Muh. Ridwan; khasanah, uswatun
    Abstract: Islamic financial institutions are divided into two, namely bank financial institutions and non-bank financial institutions. Bank financial institutions are business entities that carry out activities in the financial sector by collecting funds from the public in the form of deposits and channeling them back to the public in the form of financing. Non-bank Financial Institutions (NBFIs/Nonbank Financial Institutions) are business entities that carry out activities in the financial sector that directly or indirectly raise funds by issuing securities and distributing them to the public to finance company investments. The purpose of this paper is to further explain the functions and roles of Islamic banks and non-bank financial institutions. The results obtained that the functions and roles of bank institutions consist of three main functions, namely the main functions of Islamic banks, the functions of Islamic banks that earn profits and social functions. The function of non-bank financial institutions is to provide services as intermediaries between capital owners and the money market who are responsible for channeling funds from investors to companies that need these funds.
    Date: 2022–10–21
  16. By: Bittner, Christian; Bonfim, Diana; Heider, Florian; Saidi, Farzad; Schepens, Glenn; Soares, Carla
    Abstract: This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use credit registry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards. JEL Classification: E44, E52, E58, E63, F45, G20, G21
    Keywords: bank balance sheets, bank lending, bank risk taking, euro-area heterogeneity, transmission of monetary policy
    Date: 2022–11
  17. By: Joshua Bosshardt (Federal Housing Finance Agency); William M. Doerner (Federal Housing Finance Agency); Fan Xu (Federal Housing Finance Agency)
    Abstract: This paper examines factors affecting the use of appraisal waivers for mortgages guaranteed by Fannie Mae and Freddie Mac and the effect of appraisal waivers on prepayment speeds. We find that the alignment of Freddie Mac’s eligibility criteria with those of Fannie Mae around the start of the COVID-19 pandemic was associated with an increase in the use of appraisal waivers. Conditional on satisfying the basic eligibility criteria, appraisal waivers are more common for refinance loans, loans serviced by nonbanks, and less risky borrowers. We also find that appraisal waivers were associated with higher conditional prepayment rates during 2020, but to a lesser extent in 2021 as refinancing activity slowed down. Much of this association can be explained by correlations between appraisal waivers and other observable determinants of prepayment speeds.
    Keywords: appraisal waiver, prepayment, nonbanks
    JEL: G21 G23
    Date: 2022–11
  18. By: Cronin, David (Central Bank of Ireland); McInerney, Niall (Central Bank of Ireland)
    Date: 2022–10
  19. By: Mohammad Reza Farzanegan (Marburg University); Ahmed M. Badreldin (Marburg University)
    Abstract: Studies on the relationship between religion and Entrepreneurship suggest that Islam discourages entrepreneurship. This is sometimes used to explain the excessively high unemployment figures for Muslim majority countries. However, we argue that studies that support this claim have missed a critical moderating factor, namely the presence of Shariah-compliant financing through Islamic banks. Using a multivariate regression analysis of 69 countries, our research shows empirically that the negative effect of Islam on entrepreneurship only applies in the absence of Shariah-compliant access to finance. This negative effect disappears in the presence of Islamic banks, thus disproving the generalized claim that Islam discourages entrepreneurship and showing that Muslim majority countries with high unemployment would do well to encourage the establishment of Shariah-complaint modes of financing to allow inclusion of religious entrepreneurs who would otherwise be excluded from the economy.
    Keywords: Islam, Entrepreneurship, Islamic Finance, Islamic Banking, Financial development, New Business Formation, Shariah
    Date: 2022
  20. By: Carlos Cantù; Catherine Casanova; Rodrigo Alfaro; Fernando Chertman; Gerald Cisneros; Toni dos Santos; Roberto Lobato; Calixto Lopez; Facundo Luna; David Moreno; Miguel Sarmiento; Rafael Nivin
    Abstract: We explore the mechanism that links capital inflows from abroad with domestic bank lending. Five Latin American countries use their credit registry data to examine the changes in outstanding loans and prices that are charged by banks with different balance sheet characteristics. Our meta-analysis sums up their results. We find that high capital inflows generally induce weak banks to relax their lending standards. For the most vulnerable market segment, where weak banks lend to risky firms, only banks with low capital ratios tend to lend more and charge less during periods of high capital inflows. Financial stability concerns could arise, but they are limited as even low-capital banks are above the regulatory minimum.
    Keywords: credit registry data, international capital flows, bank lending, SME financing.
    JEL: E0 F0 F1
    Date: 2022–11
  21. By: Teng Andrea Xu; Jiahua Xu; Kristof Lommers
    Abstract: As of August 2022, blockchain-based assets boast a combined market capitalisation exceeding one trillion USD, among which the most prominent are the decentralised autonomous organisation (DAO) tokens associated with decentralised finance (DeFi) protocols. In this work, we seek to value DeFi tokens using the canonical multiples and Discount Cash Flow (DCF) approaches. We examine a subset of DeFi services including decentralised exchanges (DEXs), protocol for loanable funds (PLFs), and yield aggregators. We apply the same analysis to some publicly traded firms and compare them with DeFi tokens of the analogous category. Interestingly, despite the crypto bear market lasting for more than one year as of August 2022, both approaches evidence overvaluation in DeFi.
    Date: 2022–10
  22. By: Raphael Auer; Giulio Cornelli; Sebastian Doerr; Jon Frost; Leonardo Gambacorta
    Abstract: Prices for cryptocurrencies have undergone multiple boom-bust cycles, together with ongoing entry by retail investors. To investigate the drivers of crypto adoption, we assemble a novel database (made available with this paper) on retail use of crypto exchange apps at daily frequency for 95 countries over 2015–22. We show that a rising Bitcoin price is followed by the entry of new users. About 40% of these new users are men under 35, commonly identified as the most "risk-seeking" segment of the population. To establish a causal effect of prices on adoption, we exploit two exogenous shocks: the crackdown of Chinese authorities on crypto mining in mid2021 and the social unrest in Kazakhstan in early 2022. During both episodes price changes have a significant effect on the entry of new users. Results from a PVAR model corroborate these findings. Overall, back of the envelope calculations suggest that around three-quarters of users have lost money on their Bitcoin investments.
    Keywords: bitcoin, cryptocurrencies, cryptoassets, regulation, decentralised finance, DeFi, retail investment.
    JEL: E42 E51 E58 F31 G28 L50 O32
    Date: 2022–11
  23. By: Jérémie BERTRAND (IESEG School of Management); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: We test the hypothesis that sunshine affects the discouragement of borrowing firms. Using a sample of about 45,000 firms from 124 countries, for the period 2010-2020, we find that higher sunshine is associated with a greater probability to be discouraged for the borrowing firm. We further establish that the discouraging impact of sunshine on the decision to apply for a loan is only observed in low latitude zones. We explain these findings by the fact that greater sunshine creates a negative mood in hot regions. Additional results suggest that managerial features affect the discouraging impact of sunshine.
    Keywords: access to credit, borrower discouragement, sunshine, developing countries.
    JEL: G21 G41
    Date: 2022
  24. By: Marcin Kolasa (SGH Warsaw School of Economics and International Monetary Fund); Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences)
    Abstract: Large international capital movements tend to be associated with strong fluctuations in asset prices and credit, contributing to domestic financial cycles and posing challenges for stabilization policies, especially in emerging market economies. In this paper we argue that these challenges are particularly severe if the global financial cycle is driven by quantitative easing (QE) in the US, and when the local banking sector has large holdings of government bonds, like in many Latin American (LA) countries. We first investigate empirically the impact of a typical round of QE by the US Fed on LA economies, finding a persistent expansion in credit to households and house prices as well as a significant loss of price competitiveness in this group of economies. We next develop a quantitative macroeconomic model of a small open economy with segmented asset markets and banks, which accounts for these observations. In this framework, foreign QE creates tensions between macroeconomic and financial stability as a contractionary impact of exchange rate appreciation is accompanied by booming credit and house prices. As a consequence, conventional monetary policy accommodation aimed at stabilizing output and inflation would further exacerbate domestic financial cycle. We show that an effective way of resolving this trade-off is to impose a time-varying tax on capital inflows. Combining foreign exchange interventions with tightening of local credit policies can also restore macroeconomic and financial stability, but at the expense of a large redistribution of wealth between borrowers and savers.
    Keywords: quantitative easing, global financial cycle, domestic credit, exchange rate interventions, capital controls, macroprudential policy
    JEL: E44 E58 F41 F42 F44
    Date: 2022
  25. By: Alena Kang-Landsberg; Matthew Plosser
    Abstract: When the Federal Open Market Committee (FOMC) wants to raise the target range for the fed funds rate, it raises the interest on reserve balances (IORB) paid to banks, the primary credit rate offered to banks, and the award rate paid to participants that invest in the overnight reverse repo (ON RRP) market to keep the fed funds rate within the target range (see prior Liberty Street Economics posts on this topic). When these rates change, market participants respond by adjusting the valuation of financial products, of which a significant category is deposits. Understanding how deposit terms adapt to changes in policy rates is important to understanding the impact of monetary policy more broadly. In this post, we evaluate the pass through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles and discuss factors that affect deposit rates.
    Keywords: deposits; beta; fed funds; monetary policy
    JEL: G2 E5
    Date: 2022–11–21
  26. By: Francis OSEI-TUTU (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Borrower discouragement contributes to reduce access to credit worldwide. In this paper, we test the hypothesis that individualism influences discouragement of borrowers. We use data on borrower discouragement and individualism at the firm level for a large dataset of 32,000 firms from 59 countries. We find that firms in individualistic countries are less likely to be discouraged from applying for loans. We further find that individualistic norms reduce borrower discouragement through its impact on lower corruption in lending and weak informal support networks. Our results hold after controlling for other cultural dimensions, addressing potential endogeneity and sample selection issues. Thus, our findings provide evidence that individualism reduces borrower discouragement, thereby improving access to credit of firms.
    Keywords: individualism, collectivism, borrower discouragement, access to credit.
    JEL: G21 Z10
    Date: 2022
  27. By: Gonzalez-Aguado, Eugenia
    Abstract: There has been a growing concern about the vulnerability of emerging countries to fluc-tuations in international interest rates. Empirical evidence shows that these countries suffer significant output drops when developed countries raise their interest rates. In this paper, I document that an important determinant of the magnitude of this effect is the ability of coun-tries to issue sovereign debt domestically, rather than to external creditors. Moreover, I find that the level of financial development of domestic markets is positively related to the share of total public debt that is domestically held. I build a model that integrates a domestic banking sector into a sovereign default model where governments can issue domestic and external debt and decide whether to default on debt selectively. Due to financial frictions, issuing domestic debt crowds out investment in capital. As financial markets develop, crowding-out costs decrease, and banks demand lower interest rates on domestic bonds. Both effects reduce the relative cost to the government of borrowing domestically, leading to a higher share of domestic debt. The results of the quantitative solution of the model are consistent with the patterns of vulnerabil-ity to world interest rates and sovereign debt composition observed in the data. I show that financial development, through a less costly access to domestic debt, decreases the vulnerability of emerging economies to external shocks.
    Keywords: Sovereign debt; Interest rates; International spillovers; Financial development
    JEL: E44 F34 F42
    Date: 2022–11–04
  28. By: Bekirova, Olga; Zubarev, Andrey
    Abstract: Banks, acting as intermediaries in conducting settlements and providing liquidity to economic agents, play an important role in modern economic systems. At the same time, banking activity is associated with many risks that necessitates control from the regulator. Over the past 9 years, the Russian banking sector has experienced a transformation that resulted in a more than halving of the number of players in the banking system. However, a revoking a bank's license is not always associated with financial difficulties. In this paper, based on quarterly data on the financial statements of Russian banks for the period from mid-2013 to early 2022, using econometric methods of analysis, we estimated the factors that affect both the probability of bank default as well as other indicators of its activity – the risk of insolvency and profitability. The Z-score was used as an indicator of insolvency risk and the return on assets was used as an indicator of profitability. The results obtained showed that balance sheet ratios are significantly correlated with the probability of bank default, its risk of insolvency and profitability. The results support the “too-big-to-fail” hypothesis for the Russian banking sector, since larger banks have a lower probability of default, but a higher risk of insolvency. The insolvency risk is significantly negatively correlated with the probability of default and profitability.
    Keywords: banking sector, banking license revocation, insolvency risk, Z-score, return on assets, liquidity creation, Bank of Russia
    JEL: G21 G28 G33
    Date: 2022–10

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