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on Banking |
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Issue of 2022‒12‒12
37 papers chosen by Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana |
| By: | Committee, Nobel Prize (Nobel Prize Committee) |
| Abstract: | The 2022 Sveriges Riksbank Prize in Economic Sciences in Honor of Alfred Nobel rewards foundational research on the role of banks in the economy, particularly during financial crises. Financial intermediaries such as traditional banks and other bank-like institutions facilitate loans between lenders and borrowers, and thereby play a key role for the allocation of capital. They enable households to get a mortgage to buy a home, farms to get a loan to buy a harvesting machine, and firms to get a loan to build a new factory. |
| Keywords: | Banking; financial crisis |
| JEL: | E53 G21 G28 |
| Date: | 2022–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2022_002&r=ban |
| By: | Paolo Di Martino; Fabio C. Bagliano |
| Abstract: | Based on a new series and applying econometric techniques, this paper investigates the discount rate policy implemented by the main Italian bank of issue of the time, the Banca d’Italia. We focus on two interrelated aspects of the problem. Firstly, anchoring our analysis to the Bank’s annual reports, we enquiry into the general determinants of its discount rate variations. Secondly, we study the reaction of the Italian rate to exogenous changes in leading international official rates. We show that discount rate variations responded to short-term fluctuations of official rates in the UK and France but, simultaneously, to deviations from long-term equilibrium relations involving two pairs of variables. On the one hand, a relationship between the Italian discount rate and the French open market rate; on the other hand, a link between the Bank’s reserve ratio and its exposure to the national credit market. We also show that reactions to variations in foreign official rates were of a very limited magnitude. This “sterilisation†policy came with little repercussions in terms of exchange rate fluctuations or loss of international reserves, somehow in contrast with the results of the recent literature. |
| Keywords: | Bank of Italy, discount rate policy, international gold standard, sterilization |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:682&r=ban |
| By: | Maureen Cowhey; Seung Jung Lee; Thomas Popeck Spiller; Cindy M. Vojtech |
| Abstract: | We investigate whether the bank examination process provides useful insight into bank future outcomes. We do this by conducting textual analysis on about 5,500 small to medium-sized commercial bank examination reports from 2004 to 2016. These confidential examination reports provide textual context to the components of supervisory ratings: capital adequacy, asset quality, management, earnings, and liquidity. Each component is given a categorical rating, and each bank is assigned an overall composite rating, which are used to determine the safety and soundness of banks. We find that, controlling for a variety of factors, including the ratings themselves, the sentiment supervisors express in describing most of the components predict relevant future bank outcomes. The sentiment conveyed in the asset quality, management, and earnings sections provides significant information in predicting future outcomes for problem loans, supervisory actions, and profitability, respectively, for all banks. Sentiment conveyed in the capital adequacy section appears to be predictive of future capital ratios for weak banks. These relationships suggest that bank supervisors play a meaningful role in the surveillance of the banking system. |
| Keywords: | CAMELS; Bank examination reports; Natural language processing; Private supervisory information |
| JEL: | G21 G28 |
| Date: | 2022–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-77&r=ban |
| By: | Chiara Punzo; Giulia Rivolta (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | We estimate a money- nancing versus debt- nancing medium-scale dynamic stochastic general equilibrium for the US with Borrower-Saver framework. Our results suggest that the share of net borrowers in a MF regime (17%) is lower than the one in a DF regime (19%). The MF regime enhances the positive e¤ects of scal and risk premium shocks with respect to the DF regime. After an inationary shock the MF regime leads to a mild recession while the DF regime leads to a temporary expansion followed by a sharp recession. The scal shock mainly explains the variance in output and borrowers consumption in a MF regime. The variance of the savers consumption remains mainly linked to the risk premium shock in both regimes. In a DF regime, the wage mark-up shock plays the major role. |
| Keywords: | Borrowers-Savers; Bayesian Estimation; Monetary Policy. |
| JEL: | E32 E42 E52 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def120&r=ban |
| By: | Jackson P. Lautier; Vladimir Pozdnyakov; Jun Yan |
| Abstract: | Risk-based pricing of loans is well-accepted. Left unstudied, however, is the conditional credit risk of a loan that remains current. Using large-sample statistics and asset-level consumer automobile asset-backed security data, we find that default risk conditional on survival converges for borrowers in disparate credit risk bands well before scheduled termination, a phenomenon we call credit risk convergence. We then use actuarial techniques to derive the conditional market-implied credit spread by credit risk band to estimate current deep subprime and subprime borrowers eventually overpay by annual percentage rates of 285-1,391 basis points. Our results are robust to various sensitivity tests. |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2211.09176&r=ban |
| By: | Sebastian Doerr; Gazi Kabas; Steven Ongena |
| Abstract: | What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios, especially where they operate no branches. Laxer lending standards also lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit in ows due to seniors' propensity to save in deposits; and depressed local investment opportunities due to seniors' lower credit demand. Banks thus look for riskier clients in no-branch counties. |
| Keywords: | risk-taking, financial stability, low interest rates, population aging, demographics. |
| JEL: | E51 G21 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1050&r=ban |
| By: | Stephen Murchison; Maria teNyenhuis |
| Abstract: | We estimate the share of variable-rate mortgages with fixed payments that reached the so-called trigger rate—the interest rate at which mortgage payments no longer cover the principal. Amid rising interest rates, this share was close to 50% at the end of October 2022 and could potentially reach 65% in 2023. |
| Keywords: | Credit and credit aggregates; Financial institutions; Interest rates; Recent economic and financial developments |
| JEL: | D1 E4 E5 G2 G21 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:22-19&r=ban |
| By: | Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Neng Wang (Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)); Yuan Zhang (Shanghai University of Finance and Economics) |
| Abstract: | “Buy Now, Pay Later” (BNPL) and other forms of consumer credit create a wedge between consumption and payments. We introduce this wedge into a standard consumption-based asset pricing model (CCAPM). In equilibrium, the pricing kernel equals the marginal utility of consumption divided by the return on the annuity with BNPL duration. When this duration is stochastic and co-moves with market risk, the BNPLCCAPM pricing kernel can jointly price size- and book-to-market-sorted stock portfolios and maturity-sorted bond portfolios. |
| Keywords: | asset pricing, yield curve, buy-now-pay-later, consumer credit, financial frictions, credit frictions |
| JEL: | D11 D50 D51 D53 E21 E51 G12 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2285&r=ban |
| By: | Blanchflower, David G. (Dartmouth College); Bryson, Alex (University College London) |
| Abstract: | Central bankers are raising interest rates on the assumption that wage-push inflation may lead to stagflation. This is not the case. Although unemployment is low, the labor market is not 'tight'. On the contrary, we show that what matters for wage growth are the non-employment rate and the under-employment rate. Both are high and act as brakes on wage growth. By lowering already low levels of consumer confidence, higher interest rates are liable to exacerbate workers' inability to maintain their real wages by reducing labor demand still further. Furthermore, we argue inflationary pressures have been generated by short-term supply side problems, rather than excessive demand in the economy. Under these conditions, just as in the Great Recession we anticipate deflation in the near future, coupled with rising joblessness and recession. |
| Keywords: | unemployment, non-employment, wages, inflation, labor market |
| JEL: | E31 E43 J2 J3 J64 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp15695&r=ban |
| By: | Wenqian Huang (Bank for International Settlements); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Andreas Schrimpf (CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department); Fabricius Somogyi (D’Amore-McKim School of Business) |
| Abstract: | We study dealers’ liquidity provision in the currency market. We show that at times when dealers’ intermediation capacity is constrained their cost of liquidity provision increases disproportionately relative to dealer-provided volume. As a result, the elasticity of dealers’ liquidity provision weakens by at least 80% relative to periods when they are unconstrained. We identify constrained periods based on leverage ratios, Value-at-Risk measures, credit default spreads, and debt funding costs. We interpret our novel empirical findings within a parsimonious model that sheds light on the key mechanisms of how liquidity provision by dealers tends to weaken when intermediary constraints are tightening. |
| Keywords: | Currency markets, dealer constraints, market liquidity, foreign exchange, liquidity provision. |
| JEL: | F31 G12 G15 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2282&r=ban |
| By: | Marina Emiris (: Economics and Research Department, National Bank of Belgium); François Koulischer (University of Luxembourg); Christophe Spaenjers (Leeds School of Business, University of Colorado Boulder) |
| Abstract: | We model mortgage refinancing as a bargaining game involving the borrowing household, the incumbent lender, and an outside bank. In equilibrium, the borrower’s ability to refinance depends both on the competitiveness of the local banking market and on the cost of switching banks. We find empirical support for the key predictions of our model using a unique data set containing the population of mortgages in Belgium. In particular, households’ refinancing propensities are positively correlated with the number of local branches and negatively correlated with local mortgage market concentration. Moreover, households are more likely to refinance externally if they already have a relation with more than one bank, but the effect is mitigated if their current mortgage lender has a branch locally. |
| Keywords: | mortgage markets; refinancing; bargaining; bank competition; switching costs |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202210-422&r=ban |
| By: | Kevin J. Stiroh |
| Abstract: | This paper presents a stylized framework of bank risk-taking to help clarify the concept of "double materiality," the idea that supervisory authorities should consider both the risks that banks face from climate change and the impact of a bank’s actions on climate change. The paper shows that the concept of double materiality can be coherently embedded in a microprudential framework, but the practical implications could be quite similar to the implications of a single materiality perspective. The importance of a double materiality perspective becomes larger when one considers macroprudential objectives driven by financial sector externalities. The framework illustrates the critical importance of being clear on the supervisory mandate and objectives when assessing policy alternatives. |
| Keywords: | Bank risk; Risk management; Climate change |
| JEL: | G21 |
| Date: | 2022–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-66&r=ban |
| By: | Mark A. Carlson; Rebecca Zarutskie |
| Abstract: | This paper considers the use of the Federal Reserve's ability to provide loans to depository institutions under its discount window lending authority in support of achieving its monetary policy objectives through a funding for lending program. Broadly, a funding for lending program could be structured as one in which the Federal Reserve makes ample low-cost funding available to banks or a program in which the Federal Reserve only provides low-cost funding conditional on the banks meeting certain lending targets. We provide a general description of how a funding for lending program could be structured along each of these lines and review important considerations, costs, and benefits of any such program. We also review the literature regarding various lending programs implemented previously in the United States by a variety of agencies and abroad by foreign central banks that shed light on the potential effectiveness of funding for lending programs. |
| Keywords: | Funding for lending; Discount window; Federal Reserve; Monetary policy tools |
| JEL: | E58 E60 G21 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-70&r=ban |
| By: | Daniel E. Rigobon; Ronnie Sircar |
| Abstract: | We formulate a model of the banking system in which banks control both their supply of liquidity, through cash holdings, and their exposures to risky interbank loans. The value of interbank loans jumps when banks suffer liquidity shortages, which can be caused by the arrival of large enough liquidity shocks. In two distinct settings, we compute the unique optimal allocations of capital. In the first, banks seek only to maximize their own utility -- in a decentralized manner. Second, a central planner aims to maximize the sum of all banks' utilities. Both of the resulting financial networks exhibit a `core-periphery' structure. However, the optimal allocations differ -- decentralized banks are more susceptible to liquidity shortages, while the planner ensures that banks with more debt hold greater liquidity. We characterize the behavior of the planner's optimal allocation as the size of the system grows. Surprisingly, the `price of anarchy' is of constant order. Finally, we derive capitalization requirements that cause the decentralized system to achieve the planner's level of risk. In doing so, we find that systemically important banks must face the greatest losses when they suffer liquidity crises -- ensuring that they are incentivized to avoid such crises. |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2211.12404&r=ban |
| By: | Laura Barbosa de Carvalho; Gilberto Tadeu Lima, Gustavo Pereira Serra |
| Abstract: | Motivated to some extent by the empirical significance of student loans in the U.S., this paper incorporates knowledge capital formation by working households financed through debt to a demand-led dynamic model of physical and knowledge capital utilization and output growth. Average labor productivity varies positively with the average knowledge capital across the labor force. A rise in labor productivity resulting from knowledge capital accumulation is fully passed on to the real wage, so that the wage share remains constant. In the unique long-run equilibrium, which is stable, an exogenous rise in the wage share raises the rates of physical capital utilization and output growth but has an ambiguous effect on the rate of employment (which also measures the rate of knowledge capital utilization). The long-run equilibrium also features the following interrelated results: the output growth rate is greater than the exogenous interest rate; the debt ratio (working households’ debt as a ratio of either the physical or the knowledge capital, or the output) is independent from the interest rate; and the allocation of a higher (lower) proportion of wage income to debt repayment (consumption) raises instead of lowers the debt ratio, which we dub the paradox of debt repayment. |
| Keywords: | Household debt; knowledge capital; capacity utilization; employment rate; output growth |
| JEL: | E12 E22 E24 |
| Date: | 2022–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2022wpecon23&r=ban |
| By: | Jeffrey B. Dawson |
| Abstract: | While considerable attention has focused on China’s credit boom and the rise of China’s domestic debt levels, another important development in international finance has been growth in China’s lending abroad. In this post, we summarize what is known about the size and scope of China’s external lending, discuss the incentives that drove this lending, and consider some of the challenges these exposures pose for Chinese lenders and foreign borrowers. |
| Keywords: | China; Banks and Banking; international economics |
| JEL: | F0 G2 |
| Date: | 2022–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95008&r=ban |
| By: | Clemens Possnig; Andreea Rot\u{a}rescu; Kyungchul Song |
| Abstract: | Spillover of economic outcomes often arises over multiple networks, and distinguishing their separate roles is important in empirical research. For example, the direction of spillover between two groups (such as banks and industrial sectors linked in a bipartite graph) has important economic implications, and a researcher may want to learn which direction is supported in the data. For this, we need to have an empirical methodology that allows for both directions of spillover simultaneously. In this paper, we develop a dynamic linear panel model and asymptotic inference with large $n$ and small $T$, where both directions of spillover are accommodated through multiple networks. Using the methodology developed here, we perform an empirical study of spillovers between bank weakness and zombie-firm congestion in industrial sectors, using firm-bank matched data from Spain between 2005 and 2012. Overall, we find that there is positive spillover in both directions between banks and sectors. |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2211.08995&r=ban |
| By: | Linda S. Goldberg; Stone Kalisa |
| Abstract: | Currency values are important both for the real economy and the financial sector. When faced with currency market pressures, some central banks and finance ministries turn to foreign exchange intervention (FXI) in an effort to reduce realized currency depreciation, thus diminishing its economic and financial consequences. This post provides insights into how effective these interventions might be in limiting currency depreciation. |
| Keywords: | exchange rates; foreign exchange interventions; exchange market pressure; balance of payments; currency |
| JEL: | F00 |
| Date: | 2022–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95026&r=ban |
| By: | María Fernanda Meneses-González; Angélica María Lizarazo-Cuellar; Diego Fernando Cuesta-Mora; Daniel Osorio-Rodríguez |
| Abstract: | This paper estimates the effect of financial development on the transmission of monetary policy. To do so, the paper employs a panel data set containing financial development indicators, policy rates, lending rates, and deposit rates for 43 countries for the period 2000-2019 and applies the empirical strategy of BrandaoMarques et al. (2020): firstly, monetary policy shocks are estimated using a Taylor-rule specification that relates changes in the policy rate to inflation, the output gap and other observables that are likely to influence monetary policy decisions; secondly, the residuals of this estimation (policy shocks) are used in a specification that relates lending or deposit rates to, among others, policy shocks and the interaction between policy shocks and measures of financial development. The coefficient on this interaction term captures the effect of financial development on the relationship between policy shocks and lending or deposit rates. The main findings of the paper are twofold: on the one hand, financial development does strengthen the monetary policy transmission channel to deposit rates; that is, changes in the policy rate in economies with more financial development induce larger changes (in the same direction) in deposit rates than is the case in economies with less financial development. This result is particularly driven by the effect of the development of financial institutions on policy transmission – the effect of financial markets development turns out to be smaller in magnitude. On the other hand, financial development does not strengthen the transmission of monetary policy to lending rates. This is consistent with a credit channel which weakens in the face of financial development in a context where banks cannot easily substitute short-term funding sources. These results highlight the relevance of financial development for the functioning of monetary policy across countries, and possibly imply the necessity of a more active role of monetary authorities in fostering financial development. **** Este trabajo estima el efecto del desarrollo financiero en la transmisión de la política monetaria. Con este objetivo, el documento utiliza una base de datos que contiene indicadores de desarrollo financiero, tasas de política monetaria, tasas de interés de créditos y depósitos para 43 países para el período 2000-2019 y aplica una estrategia empírica propuesta por Brandao-Marques et al. (2020): en primer lugar, se estiman choques de política monetaria por país utilizando una aproximación a la regla de Taylor que relaciona los cambios en la tasa de política con la tasa de inflación, la brecha del producto y otras variables observables que probablemente influyan en las decisiones de política monetaria; en segundo lugar, los residuos de esta estimación (choques de política) se utilizan en una especificación de un modelo panel que relaciona las tasas activas o pasivas con, entre otros, choques de política y la interacción entre choques de política y medidas de desarrollo financiero. El coeficiente de este término de interacción capta el efecto del desarrollo financiero en la relación entre los choques de política monetaria y las tasas activas o pasivas. Los principales hallazgos del documento son dos: por un lado, el desarrollo financiero fortalece el canal de transmisión de la política monetaria a las tasas de los depósitos; es decir, cambios en la tasa de política en economías con mayor desarrollo financiero inducen cambios mayores (en la misma dirección) en las tasas de depósitos que en el caso de las economías con menor desarrollo financiero. Este resultado está particularmente impulsado por el efecto del desarrollo de las instituciones financieras en la transmisión, ya que el efecto del desarrollo de los mercados financieros resulta ser de menor magnitud. Por otro lado, los resultados obtenidos sugieren que el desarrollo financiero no fortalece la transmisión de la política monetaria a las tasas activas. Esto es consistente con un canal de crédito que se debilita ante el desarrollo financiero en un contexto donde los bancos no pueden sustituir fácilmente las fuentes de financiamiento de corto plazo. Estos resultados resaltan la relevancia del desarrollo financiero para el funcionamiento de la política monetaria y posiblemente implican la necesidad de un papel más activo de las autoridades monetarias en el fomento del desarrollo financiero. |
| Keywords: | Financial development, monetary policy transmission, monetary policy shocks, desarrollo financiero, transmisión de política monetaria, choques de política monetaria |
| JEL: | G10 G18 G20 G28 E44 E52 E58 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1219&r=ban |
| By: | Arigoni, Filippo (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland); Yao, Fang (Central Bank of Ireland) |
| Abstract: | The link between mortgage credit and the housing market is central to the objectives of macroprudential policy. In this Note we describe the role that macroprudential policy plays in guarding against the emergence of an unsustainable relationship between credit and house prices, and introduce two models available to the Central Bank of Ireland to assess the likely effects of changes in the calibration of LTI or LTV limits on the aggregate house price to income ratio. Relative to a baseline projection, the recalibration of the mortgage measures for 2023 onward is estimated to increase the aggregate HPI by between 2.8 and 4 per cent over a three year horizon. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:11/fs/22&r=ban |
| By: | Andrea Barbon (University of St. Gallen; University of St.Gallen); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute) |
| Abstract: | This paper explores the new world of Non-Fungible Tokens (NFT), which are unique digital assets providing proof of ownership and verification of authenticity held in the blockchain. After describing what a NFT is, we shed light on the main reasons it has value both as a financial instrument and as a new product. Second, we discuss the various types of existing NFTs, including digital artworks, play-to-earn video games, and (digital) real estate. Third, we explain how NFTs and smart contracts are created. In doing so, we discuss some technical aspects such as blockchain, non-fungible versus semi-fungible, and minting. Finally, we give an overview of existing marketplaces followed by a more general discussion of how NFTs could help improve some of market inefficiencies and could contribute to the social welfare and banking industry. |
| Keywords: | Non-Fungible Tokens, Blockchain, Smart Contract; Digital Assets |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2284&r=ban |
| By: | Christian Keuschnigg (University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Michael Kogler (University of St. Gallen); Johannes Matt (London School of Economics & Political Science (LSE)) |
| Abstract: | How do banks facilitate creative destruction and shape firm turnover? We develop a dynamic general equilibrium model of bank credit reallocation with endogenous firm entry and exit that allows for both theoretical and quantitative analysis. By restructuring loans to firms with poor prospects and high default risk, banks not only accelerate the exit of unproductive firms but also redirect existing credit to more productive entrants. This reduces banks’ dependence on household deposits that are often supplied inelastically, thereby relaxing the economy’s resource constraint. A more efficient loan restructuring process thus fosters firm creation and improves aggregate productivity. It also complements policies that stimulate firm entry (e.g., R&D subsidies) and renders them more effective by avoiding a crowding-out via a higher interest rate. |
| Keywords: | creative destruction, reallocation, bank credit, productivity |
| JEL: | E23 E44 G21 O4 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2283&r=ban |
| By: | Read, Oliver; Diefenbach, Carolin |
| Abstract: | This paper provides background to the upcoming EU regulation on Markets in Crypto-Assets (MiCA). The first step to regulate crypto-assets at EU level was taken by including virtual currencies in the revision of the Anti-Money Laundering Directive (5AMLD) which came into force 2018. Initial coin offerings fueled growth to a market with a variety of crypto-assets (payment, investment/security, utility and hybrid tokens). In principle, MiFID II should cover investment/security tokens by treating these as financial instruments. In January 2019, EBA and ESMA identified regulatory gaps at EU level. The announcement on the stablecoin project Libra in June 2019 sent shockwaves and led to defensive reaction against global stablecoins by regulators in light of significant risks and challenges posed. The EU institutions adopted strict positions against global stablecoins taken by the G7 and the G20. In September 2020, the European Commission launched the MiCA draft legislation to plug regulatory gaps concerning payment (including stablecoins) and utility tokens. Issuers, offerors and service providers of crypto-assets that are not financial instruments would be regulated under MiCA at EU level. Stricter rules should apply for stablecoins. After negotiations between the EU institutions, the final agreed MiCA text will go to plenary vote soon. The EU regulation will come into force in the EU member states in 2024. Many additional areas of action (Decentralized Finance, non-fungible tokens, EU taxonomy for sustainable activities) had to be left out from the MiCA scope for the sake of finalising the legislation. |
| Keywords: | Bitcoin,crypto-assets,crypto-asset service providers,cryptocurrencies,distributed ledger technology (DLT),Diem,electronic money,initial coin offering (ICO),Libra,Meta,Markets in Cryptoassets (MiCA),non-fungible token (NFT),payment tokens,security tokens,stablecoins,TerraUSD,Transfer of Funds Regulation (ToFR),utility tokens |
| JEL: | E42 G15 G28 O33 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wifinw:132022&r=ban |
| By: | Gaffney, Edward (Central Bank of Ireland) |
| Abstract: | In this Note, I describe a model of mortgage home loan lending in Ireland, focusing on estimates of the loan-to-income (LTI) ratio distribution of new lending under different macroprudential policy calibrations. The model can be used to estimate responses by borrowers and lenders to the calibration of the Central Bank of Ireland’s mortgage measures, which control shares of lending extended at high loan-to-income ratios to owner-occupiers. It covers three responses to an increase in the limits: leveraging among borrowers willing and able to access larger credit amounts, a plausible change in residential property prices in response to credit availability, and the possibility that new borrowers participate in the market. Under the revised calibration of the mortgage measures, and assuming that broader credit conditions remain comparable to the early 2020s, raising the first-time buyer LTI limit from 3.5 to 4 would increase average LTI ratios from 2.95 to 3.20 in the medium term. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:10/fs/22&r=ban |
| By: | Jonathan Benchimol (Bank of Israel); Caroline Bozou (Centre d'Économie de la Sorbonne) |
| Abstract: | Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives. |
| Keywords: | Banking Concentration, Imperfect Competition, Financial Stability, Welfare Analysis, DSGE Model |
| JEL: | D43 E43 E51 G21 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2022.18&r=ban |
| By: | Inaki Aldasoro; Luitgard A M Veraart |
| Abstract: | We provide a framework for modelling risk and quantifying payment shortfalls in cleared markets with multiple central counterparties (CCPs). Building on the stylised fact that clearing membership is shared among CCPs, we show how this can transmit stress across markets through multiple CCPs. We provide stylised examples to lay out how such stress transmission can take place, as well as empirical evidence to illustrate that the mechanisms we study could be relevant in practice. Furthermore, we show how stress mitigation mechanisms such as variation margin gains haircutting by one CCP can have spillover effects on other CCPs. The framework can be used to enhance CCP stress-testing, which currently relies on the "Cover 2" standard requiring CCPs to be able to withstand the default of their two largest clearing members. We show that who these two clearing members are can be significantly affected by higher-order effects arising from interconnectedness through shared clearing membership. Looking at the full network of CCPs and shared clearing members is therefore important from a financial stability perspective. |
| Keywords: | central counterparties, systemic risk, contagion, stress testing, Cover 2. |
| JEL: | C60 C62 G18 G21 G23 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1052&r=ban |
| By: | Sarah Kuypers (: Herman Deleeck Centre for Social Policy, University of Antwerp); Gerlinde Verbist (Herman Deleeck Centre for Social Policy, University of Antwerp) |
| Abstract: | Household debt has increased significantly since the second half of the 20th century, making it one of the cornerstones of household financial behaviour. It is, however, necessary to monitor that indebtedness does not spiral out of control, as it can have negative consequences both at the micro and macro level. In this paper, we measure over-indebtedness in the poverty framework, while also taking into account the (potential) leverage by assets. We focus on a case study of Belgium, using data from four waves of the Eurosystem Household Finance and Consumption Survey (HFCS). Our results are relevant both in terms of the levels of over-indebtedness measured as well as from the point of household heterogeneity and policy relevance. While the classical indicators mainly identify those who initially borrow large amounts as over-indebted, our analyses point towards the importance of low disposable income and the ownership of non-mortgage debt in explaining over-indebtedness, poverty and financial vulnerability. We also simulate two potential policy reforms which address these two main risk factors. |
| Keywords: | debt, over-indebtedness, poverty, social policy, Belgium |
| JEL: | G51 I32 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202210-420&r=ban |
| By: | Lara Coulier (: Department of Economics, Ghent University); Selien De Schryder (Department of Economics, Ghent University) |
| Abstract: | This paper analyzes whether housing-related macroprudential policy has heterogeneous effects on house price growth in local housing markets. More specifically, we employ an extensive dataset of Belgian municipalities containing a multitude of drivers of local house price dynamics and examine the potential heterogeneity of housing-related macroprudential policy changes driven by local characteristics related to financial constrained and high-risk borrowers, the degree of local housing market activity, and changes in local household indebtedness. We find more dampening effects of the common macroprudential policy tightenings on local house price growth for municipalities characterized by low-income and young citizens, which furthermore increase in hot housing markets. Our findings shed more light on the geographical heterogeneity of national macroprudential policy changes, which indicate the possibility to stabilize local housing market booms. |
| Keywords: | macroprudential policy, local housing markets, heterogeneity, dynamic panel data, quantile regressions |
| JEL: | C22 C23 E58 O18 R3 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202210-421&r=ban |
| By: | Beere, Brendan (Central Bank of Ireland); Byrne, Shane (Central Bank of Ireland); Kelly, Jane (Central Bank of Ireland); Pratap Singh, Anuj (Central Bank of Ireland) |
| Abstract: | The forced migration of over 1 million current and deposit accounts from two exiting banks in Ireland represents a significant challenge for consumers and the Irish retail banking system. In this Note, we examine potential barriers to timely consumer engagement from a behavioural economics perspective, which should be considered by the retail banks in their engagement with customers to encourage and support them effectively through the process. Evidence shows that consumer inertia is pervasive and deeply entrenched across financial product markets, even where the financial incentive to switch providers appears to be overwhelming. It is also clear that particular groups can be more at risk from the costs of inaction. This includes consumers with pre-existing sources of vulnerability, such as lower income and education, as well as customers with a long history with one bank, or who are distrustful of financial institutions. Some of these groups also appear to be more inert based on recent Irish survey data. As part of their package of measures to support affected consumers, we outline some approaches that financial institutions can use to try to encourage consumer engagement - framing customer notifications to convey urgency, setting out clearly the steps a customer needs to follow to take action, and making the consumer experience as frictionless as possible, but emphasise that there is no ‘silver bullet’ to entirely overcome the risk of consumer inaction. The forced migration of such a large volume of customer accounts is unprecedented in the Irish market. Critically, consumers are not choosing to switch, they are being forced to do so and this could create a significant challenge for consumers if not effectively managed by the exiting and remaining banks. As such, it is incumbent on financial institutions (including banks, direct debt originators etc.) to do all they can to support their consumers through the process, drawing on all available research and resources. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:13/fs/22&r=ban |
| By: | Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin |
| Abstract: | Before the era of large central bank balance sheets, banks relied on incoming payments to fund outgoing payments in order to conserve scarce liquidity. Even in the era of large central bank balance sheets, rather than funding payments with abundant reserve balances, we show that outgoing payments remain highly sensitive to incoming payments. By providing a window on liquidity constraints revealed by payment behavior, our results shed light on thresholds for the adequacy of reserve balances. Our findings are timely, given the ongoing shrinking of central bank balance sheets around the world in response to inflation. |
| Keywords: | real-time gross settlement (RTGS) systems, quantitative tightening, balance sheet management, reserve balances |
| JEL: | E42 E44 E52 E58 G21 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1053&r=ban |
| By: | M S, Navaneeth; Siddiqui, Ismail |
| Abstract: | It is clear that the rapid expansion of the post-World War two economy, financed through Bretton Wood Institutions is not a model path. The role of financial institutions is increasingly being recognised in this domain as a way to redeem the perceived environmental disregard. The development agenda received a critical rethinking as it became clear by the late 1980s that the pre-existing models of industrialisation prescribed to the ‘developing-world’ meant deep neglect of the environment. In order to go ahead with attaining the 2030 Sustainable Development Goals (SDGs), there is a major push required for green projects. Green bonds can unleash the power that the financial sector holds, as it will bestow a strong motivation upon banks and investors to move the capital from dirty industries to cleaner ones. |
| Keywords: | Green Finance; Climate Change; Green bonds; SDG |
| JEL: | G38 Q56 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115344&r=ban |
| By: | Jan Ditzen (Free University of Bozen-Bolzano); Yiannis Karavias (University of Birmingham); Joakim Westerlund (Lund University; Deakin University) |
| Abstract: | Economists are concerned about the many recent disruptive events such as the 2007-2008 global financial crisis and the 2020 COVID-19 outbreak, and their likely effect on economic relationships. The fear is that the relationships might have changed, which has implications for both estimation and policymaking. Motivated by this last observation, the present paper develops a new toolbox for multiple structural break detection in panel data models with interactive effects. The toolbox includes several tests for the presence of structural breaks, a break date estimator, and a break date confidence interval. The new toolbox is applied to a large panel data set covering 3,557 US banks between 2005 and 2021, a period characterized by a number of massive quantitative easing programs to lessen the impact of the global financial crisis and the COVID-19 pandemic. The question we ask is: Have these programs been successful in spurring bank lending in the US economy? The short answer turns out to be: ``No''. |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2211.06707&r=ban |
| By: | David Finck (University of Giessen) |
| Abstract: | We use a New Keynesian model that features rational and non-rational households. Assuming that both the fraction of rational households and the expectations formation process are uncertain from the perspective of the central bank, we derive robust optimal discretionary monetary policy in a simple min-max framework where the central bank plays a zero-sum game versus a fictitious, malevolent evil agent. We show that the central bank is able to improve welfare if it accounts for uncertainty while the model is being distorted. Even if the central bank accounts for the worst possible outcomes while the model is being undistorted, the central bank can still reduce the welfare loss by implementing a more aggressive targeting rule that favorably affects the inflation-output stabilization trade-off. |
| Keywords: | Heterogeneous Expectations, Robust Monetary Policy, Policy Implementation, Uncertainty |
| JEL: | E52 D84 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202243&r=ban |
| By: | Kladívko, Kamil (Örebro University School of Business); Österholm, Pär (Örebro University School of Business) |
| Abstract: | In this paper, we analyse how financial market analysts’ expectations in the Czech National Bank’s Financial Market Inflation Expectations survey perform relative to the random-walk forecast when it comes to predicting five financial variables. Using data from 2001 to 2022, our results indicate that the analysts are able to signifi-cantly outperform the random-walk forecast for the repo rate and Prague Interbank Offered Rate at the one-month forecasting horizon. For the five-year and ten-year interest rate swap rate, the random walk significantly outperforms the analysts at both the one-month and one-year forecasting horizons. For the CZE/EUR ex-change rate, no statistically significant differences in forecast precision were found. |
| Keywords: | Survey data; Out-of-sample forecasts; Exchange rates; Interest rates |
| JEL: | E47 G17 |
| Date: | 2022–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oruesi:2022_014&r=ban |
| By: | Iader Giraldo |
| Abstract: | Before the outbreak of the Global Financial Crisis, on May 6, 2007, the Colombian central bank imposed a cap on the Gross Leverage Position in Foreign Exchange Derivatives of financial intermediaries. It was the only country in the world in implementing this prudential policy. By leveraging insights from synthetic control literature we construct counterfactual scenarios and show that this policy intervention, while costly in financial stability terms in the pre-GFC period, was effective in reducing Colombia’s financial stability risks during the crisis. A trade-off between “calm†and “turbulent†periods emerges from our results, which should be taken into account when deciding on the right policy tools to use before a crisis breaks out. |
| Keywords: | PBAsynthetic-controlmacroprudential policy |
| JEL: | E58 E63 F38 |
| Date: | 2022–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:col:000566:020541&r=ban |
| By: | Kansoy, Fatih (University of Warwick) |
| Abstract: | This paper examines whether and to what extent publications of the Federal Open Market Committee (FOMC) minutes contain significant information for the expectation of future monetary policy in the US. We construct measure of new surprise series with intradaily data for the Fed futures contracts and the responses of stock markets, fixed income markets and exchange rates to these surprises during 2004–2017. We find that the release of FOMC minutes affects the market volatility and financial asset prices respond significantly to FOMC minutes announcements. Finally, volatility and the volume of reactions increase during the zero lower bound. Specifically, this research finds that the release of FOMC minutes induces higher than normal volatility and shows that financial markets respond quickly and significantly to the release of FOMC minutes. |
| Keywords: | Central Bank Communication ; FOMC Minutes ; Monetary Policy Shocks JEL Codes: C1 ; D83 ; E5. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1436&r=ban |
| By: | Sandra Daudignon; Oreste Tristani (-) |
| Abstract: | Empirical analyses starting from Laubach and Williams (2003) find that the natural rate of interest is not constant in the long-run. This paper studies the optimal response to stochastic changes of the long-run natural rate in a suitably modified version of the new Keynesian model. We show that, because of the zero lower bound (ZLB) on nominal interest rates, movements towards zero of the long-run natural rate cause an increasingly large downward bias in expectations. To offset this bias, the central bank should aim to keep the real interest rate systematically below the long-run natural rate, as long as policy is not constrained by the ZLB. The neutral rate – the level of the policy rate consistent with stable inflation and the natural rate at its long-run level – will be lower than the long-run natural rate. This is the case both under optimal policy, and under a price level targeting rule. In the latter case, the neutral rate is equal to zero as soon as the long-run natural rate falls below 1%. |
| Keywords: | nonlinear optimal policy, zero lower bound, commitment, liquidity trap, New Keynesian, natural rate of interest |
| JEL: | C63 E31 E52 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:22/1057&r=ban |