nep-ban New Economics Papers
on Banking
Issue of 2023‒01‒09
58 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Multiple equilibria By Dybvig, Philip
  2. Financial Intermediation and Financial Crises By Diamond, Douglas
  3. Cultural Stereotypes of Multinational Banks By Barry Eichengreen; Orkun Saka
  4. Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data By Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
  5. Intra-financial assets and the intermediation role of the financial sector By Daniel Carvalho
  6. Monetary policy, inflation, and crises: New evidence from history and administrative data By Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Bjoern Richter
  7. Estimation of Systemic Shortfall Risk Measure using Stochastic Algorithms By Sarah Kaakai; Anis Matoussi; Achraf Tamtalini
  8. Understanding Post-COVID Inflation Dynamics By Martin Harding; Jesper Lindé; Mathias Trabandt
  9. Gone with the fire: Market reaction to cryptocurrency exchange shutdown By Lee, Hanol; Wie, Dainn
  10. A Fiscal Theory of Trend Inflation By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  11. Dynamic analysis of the interest rate determinant in microfinance institutions By Djibril Faye; Zaka Ratsimalahelo
  12. A literature review of securities holdings statistics research and a practitioner’s guide By Martijn Boermans
  13. Endogenous Network Valuation Adjustment and the Systemic Term Structure in a Dynamic Interbank Model By Zachary Feinstein; Andreas Sojmark
  14. Information Asymmetry, External Certification, and the Cost of Bank Debt By Andrea Bellucci; Alexander Borisov; Germana Giombini; Alberto Zazzaro
  15. Quantifying the Costs and Benefits of Quantitative Easing By Andrew T. Levin; Brian L. Lu; William R. Nelson
  16. Crowding in During the Seven Years' War By Nuno Palma; Carolyn Sissoko
  17. An Exchange Rate History of the United Kingdom, 1945–1992 By Naef, Alain
  18. Attitude Towards Financial Planning of Italian Households By Marianna Brunetti; Rocco Ciciretti; Monica Gentile; Nadia Linciano; Paola Soccorso
  19. Buy Now Pay Later: market overview and outlook By Lorenzo Gobbi
  20. Risk management, expectations and global finance: The case of Deutsche Bank 1970-1990 By Nützenadel, Alexander
  21. Central Bank Digital Currencies, an Old Tale With a New Chapter By Michael D. Bordo; William Roberds
  22. (Un)Conventional Monetary and Fiscal Policy By Jing Cynthia Wu; Yinxi Xie
  23. Bank bond holdings and bail-in regulatory changes: evidence from euro area security registers By Altavilla, Carlo; Fernandes, Cecilia Melo; Ongena, Steven; Scopelliti, Alessandro
  24. The Effects of Firm and Bank Balance Sheet Conditions to Net Interest Margins: Evidence from Loan-level Firm Survey Data By Tomoko AIZAWA-Tanemura; Shin-Ichi Nishiyama
  25. Explaining the Financial Exclusion of the Urban Poor through the Lens of Othering:A Case Study in Bengaluru, India By Rao, Jahnavi
  26. Misdirected Money Transfers in Korea By Sangjae Lee; Jeongeun Park
  27. Climate Stress Test of the Hungarian Banking System By Laszlo Bokor
  28. The impact of derivatives collateralisation on liquidity risk: evidence from the investment fund sector By Jukonis, Audrius; Letizia, Elisa; Rousová, Linda
  29. Who participates in the credit market during the COVID-19 pandemic? By Evangelos Charalambakis; Federica Teppa; Athanasios Tsiortas
  30. A Theory of Dynamic Inflation Targets By Clayton, Christopher; Schaab, Andreas
  31. Inflation in Japan: Changes during the Pandemic and Issues for the Future By Shuichiro Ikeda; Haruhiko Inatsugu; Yui Kishaba; Takuji Kondo; Kenichi Sakura; Kosuke Takatomi; Takashi Nakazawa; Kotone Yamada
  32. Using classification techniques to accelerate client discovery: a case study for wealth management services By Edouard Ribes
  33. Liquidity matters when measuring bank output By Raphaël Chiappini; Bertrand Groslambert; Olivier Bruno
  34. Returns on Informal and Formal finance for Indian Informal firms: A Pseudo panel data analysis By POSTI, LOKESH; KHOLIYA, MAMTA; POSTI, AKHILESH KUMAR
  35. Easier said than done: why Italians pay in cash while preferring cashless By Alberto Di Iorio; Giorgia Rocco
  36. The Anatomy of Three Scandals: Conspiracies, Beauty Contests and Sabotage in OTC Markets By Alexis Stenfors; Lilian Muchimba
  37. CBDC as Imperfect Substitute to Bank Deposits: a Macroeconomic Perspective By Perazzi, Elena; Bacchetta, Philippe
  38. Inflation Risks in Israel By Michael Gurkov; Osnat Zohar
  39. Revisiting SME default predictors: The Omega Score By Edward I. Altman; Marco Balzano; Alessandro Giannozzi; Stjepan Srhoj
  40. Financial Development, Cycles and Income Inequality in a Model with Good and Bad Projects By Spiros Bougheas; Pasquale Commendatore; Laura Gardini; Ingrid Kubin
  41. The Financial Capability of the Youth in Greece By Vasiliki A. Tzora; Nikolaos D. Philippas; Georgios A. Panos
  42. Borrowing in Unsettled Times and Cash Holdings Afterwards By Masanori Orihara; Yoshiaki Ogura; Yue Cai
  43. Pandemic lending: Micro and macro effects of model-based regulation By Fiordelisi, Franco; Fusi, Giulia; Maddaloni, Angela; Marqués Ibáñez, David
  44. Potential benefits and key risks of fiat-referenced cryptoassets By Hugh Ding; Natasha Khan; Bena Lands; Cameron MacDonald; Laura Zhao
  45. Tunneling when Regulation is Lax: The Colombian Banking Crisis of the 1980s By Hernandez, Carlos Eduardo; Tovar, Jorge; Caballero/Argáez, Carlos
  46. Is the Slope of the Euro Area Phillips Curve Steeper than It Seems? Heterogeneity and Identification By Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
  47. How Abundant Are Reserves? Evidence from the Wholesale Payment System By Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin
  48. Non-banks contagion and the uneven mitigation of climate risk By Gourdel, Régis; Sydow, Matthias
  49. Optimal Robust Monetary Policy in a Small Open Economy By André Marine Charlotte; Medina Espidio Sebastián
  50. Environmental and Social Preferences and Investments in Crypto-Assets By Pavel Ciaian; Andrej Cupak; Pirmin Fessler; d’Artis Kancs
  51. Carbon taxes and the geography of fossil lending By Laeven, Luc; Popov, Alexander
  52. Banking market deregulation and mortality inequality By Hasan, Iftekhar; Krause, Thomas; Manfredonia, Stefano; Noth, Felix
  53. New Indicators of Credit Gap in Croatia: Improving the Calibration of the Countercyclical Capital Buffer By Tihana Škrinjarić; Maja Bukovšak
  54. Leaning against the global financial cycle By Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
  55. From Central Counter to Local Living: Pass-Through of Monetary Policy to Mortgage Lending Rates in Districts By Jiri Gregor; Jan Janku; Martin Melecky
  56. Can Decentralized Finance Provide More Protection for Crypto Investors? By Agostino Capponi; Nathan Kaplan; Asani Sarkar
  57. ESG Factors and Firms’ Credit Risk By Laura Bonacorsi; Vittoria Cerasi; Paola Galfrascoli; Matteo Manera
  58. Banks, Credit Reallocation, and Creative Destruction By Christian Keuschnigg; Michael Kogler; Johannes Matt

  1. By: Dybvig, Philip (Washington University)
    Abstract: Nobel lecture presentation slides
    Keywords: Banking; financial crisis
    JEL: E53 G21 G28
    Date: 2022–12–08
  2. By: Diamond, Douglas (University of Chicago)
    Abstract: Nobel Lecture lecture slides
    Keywords: Banking; Financial crises
    JEL: E53 G21 G28
    Date: 2022–12–08
  3. By: Barry Eichengreen; Orkun Saka
    Abstract: Using hand-collected data spanning more than a decade on European banks’ sovereign debt portfolios, we show that the trust of residents of a bank’s countries of operation in the residents of a potential target country of investment has a positive, statistically significant, and economically important association with its cross-border exposures. In identifying cultural stereotypes at the bank level, we show that corporate culture at bank headquarters is influenced by foreign subsidiaries for several reasons, including banks’ tendency to hire internally across borders for high-level managerial positions. We therefore leverage the geography of multinational bank branch networks to construct a bank-specific measure of culture that differs across banks headquartered in the same country, at the same point in time, with regard to the same target country. This allows us to compare how sovereign exposures are affected by cultural stereotypes while ruling out confounding factors at country and country-pair levels. The effect of stereotypes is persistent over time, stronger for less diversified banks, and weaker for target countries whose bonds appear more frequently in bank portfolios. Cultural stereotypes are particularly salient when governments are hit by sovereign debt crises.
    JEL: F0 G0
    Date: 2022–12
  4. By: Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
    Abstract: We show that U-shaped monetary policy rate dynamics are strongly associated with financial crisis risk. This finding holds both in long-run cross-country macro data covering many crises and monetary policy cycles, and in detailed micro, administrative data covering the post-1995 period in Spain. In the macro data, we find that pre-crisis monetary policy follows a U shape, with policy rates first cut and then increased over the 7 years before the onset of the crisis. This U shape holds across a wide variety of crisis definitions, short-term rate measures, and becomes stronger after World War 2. Differently, even though inflation and real rates show some of these dynamics before a crisis, these results are much less robust. The patterns are also much weaker when it comes to long-term rates and non-crisis recessions. We show that monetary policy rate hikes (both raw, and instrumented using the trilemma IV of Jordà et al, 2020) increase crisis risk, but, different to previous studies, we show that this effect is driven by rate hikes which were preceded by a series of cuts. To understand why U-shaped monetary policy is linked to crises, we show that the initial loosening of policy is followed by high growth in credit and asset prices, putting the economy into a vulnerable financial "red zone''. After the subsequent monetary tightening these vulnerabilities materialize, leading to larger-than-usual declines in credit, asset prices, and real activity. To dig into the underlying mechanisms, we use administrative data on the universe of bank loans and defaults during the 1990s and 2000s boom-bust cycles in Spain. Consistently, we find that U-shaped monetary policy increases the probability of ex-post loan defaults, but effects are much stronger for ex-ante riskier firms and for banks with weaker balance sheets. Overall, our paper shows that monetary policy dynamics have important implications for financial stability.
    Keywords: monetary policy, financial stability, financial crises, credit, asset prices, banks, macro-finance
    JEL: E51 E52 E44 G01 G21 G12
    Date: 2022–12
  5. By: Daniel Carvalho (Banco de Portugal)
    Abstract: This paper provides two main contributions. First, it proposes a measure of intra-financial assets, i.e., financial assets within the financial sectors, and documents the rapid growth of these claims in European countries. Second, it looks at the relationship of total and intra-financial assets of banks and non-banks and credit provided to the non-financial sectors. Results show that while total assets of both banks and non-banks are strongly associated with loans to non-financial corporations and households, intra-financial assets of banks are associated with loans to non-financial corporations only and intra-financial assets of non-banks with loans to households.
    Keywords: Banksandnon-banksinterconnectedness, credit, finance-growthnexus
    JEL: F36 G10 G21 G23
    Date: 2022–12
  6. By: Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Bjoern Richter
    Abstract: We show that U-shaped monetary policy rate dynamics are strongly associated with financial crisis risk. This finding holds both in long-run cross-country macro data covering many crises and monetary policy cycles, and in detailed micro, administrative data covering the post-1995 period in Spain. In the macro data, we find that pre-crisis monetary policy follows a U shape, with policy rates first cut and then increased over the 7 years before the onset of the crisis. This U shape holds across a wide variety of crisis definitions, short-term rate measures, and becomes stronger after World War 2. Differently, even though inflation and real rates show some of these dynamics before a crisis, these results are much less robust. The patterns are also much weaker when it comes to long-term rates and non-crisis recessions. We show that monetary policy rate hikes (both raw, and instrumented using the trilemma IV of Jorda et al., 2020) increase crisis risk, but, different to previous studies, we show that this effect is driven by rate hikes which were preceded by a series of cuts. To understand why U-shaped monetary policy is linked to crises, we show that the initial loosening of policy is followed by high growth in credit and asset prices, putting the economy into a vulnerable financial "red zone". After the subsequent monetary tightening these vulnerabilities materialize, leading to larger-than-usual declines in credit, asset prices, and real activity. To dig into the underlying mechanisms, we use administrative data on the universe of bank loans and defaults during the 1990s and 2000s boom-bust cycles in Spain. Consistently, we find that U-shaped monetary policy increases the probability of ex-post loan defaults, but effects are much stronger for ex-ante riskier firms and for banks with weaker balance sheets. Overall, our paper shows that monetary policy dynamics have important implications for financial stability.
    Keywords: monetary policy; financial stability; financial crises; credit; asset prices; banks; macro-finance
    JEL: E51 E52 E44 G01 G21 G12
    Date: 2022–12
  7. By: Sarah Kaakai (LMM - Laboratoire Manceau de Mathématiques - UM - Le Mans Université); Anis Matoussi (LMM - Laboratoire Manceau de Mathématiques - UM - Le Mans Université); Achraf Tamtalini (LMM - Laboratoire Manceau de Mathématiques - UM - Le Mans Université)
    Abstract: Systemic risk measures were introduced to capture the global risk and the corresponding contagion effects that is generated by an interconnected system of financial institutions. To this purpose, two approaches were suggested. In the first one, systemic risk measures can be interpreted as the minimal amount of cash needed to secure a system after aggregating individual risks. In the second approach, systemic risk measures can be interpreted as the minimal amount of cash that secures a system by allocating capital to each single institution before aggregating individual risks. Although the theory behind these risk measures has been well investigated by several authors, the numerical part has been neglected so far. In this paper, we use stochastic algorithms schemes in estimating MSRM and prove that the resulting estimators are consistent and asymptotically normal. We also test numerically the performance of these algorithms on several examples.
    Keywords: Multivariate risk measures, shortfall risk, stochastic algorithms, stochastic root finding, risk allocations
    Date: 2022–11–25
  8. By: Martin Harding; Jesper Lindé; Mathias Trabandt
    Abstract: We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation post-COVID-19. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that central banks face a more severe trade-off between inflation and output stabilization when inflation is high.
    Keywords: Business fluctuations and cycles; Central bank research; Coronavirus disease (COVID-19); Economic models; Inflation and prices; Inflation: costs and benefits; Monetary policy; Monetary policy implementation
    JEL: E37 E44 E52
    Date: 2022–12
  9. By: Lee, Hanol; Wie, Dainn
    Abstract: Disruption of exchanges frequently happens in the cryptocurrency market, though their potential impacts are relatively under-investigated. This study employs a 20-hour service interruption on October 15th, 2022, at Upbit, the dominant cryptocurrency exchange in Korea, as an exogenous shock of service interruption on the cryptocurrency market. Event study estimation shows that the change in abnormal returns depends on how important the specific exchange is to those cryptocurrencies. Cryptocurrencies predominantly traded on Upbit showed sharp reactions to both service disruption and recovery, while major currencies such as Bitcoin and Ethereum presented limited reactions to service interruption only.
    Keywords: Cryptocurrency,abnormal return,Event study,Network service disruption
    JEL: G12 G14 G15 G23
    Date: 2022
  10. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of trend inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal trend inflation accounts for the bulk of inflation dynamics. As external validation, we show that the model predicts the post-pandemic increase in inflation. Unfunded fiscal shocks sustain the recovery and cause an increase in trend inflation that counteracts deflationary non-policy shocks.
    JEL: E30 E50 E62
    Date: 2022–12
  11. By: Djibril Faye (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France); Zaka Ratsimalahelo (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France)
    Abstract: In this paper, we examine the interest rate of microfinance institutions in a dynamic framework in order to consider the anticipation phenomenon. The fluctuations that affect the development of MFIs are often unpredictable and may be fast. The results show an interest rate increase over time, which is more significant within cooperatives and Non-Governmental Organizations (NGOs) compared to other MFIs categories. Our results clearly show that these MFI types suffer from more exogenous shocks.
    Keywords: Interest rate, Microfinance, GMM-System, Dynamic panel, Fisher test statistic
    JEL: G2 G21 C1 E43 N20
    Date: 2022–12
  12. By: Martijn Boermans
    Abstract: Securities Holdings Statistics (SHS), compiled by the European System of Central Banks (ESCB) have spurred research over the past decade. SHS provide high-quality security-by-security data on portfolios. SHS benefit from very high coverage across euro area investors, relying on harmonized reporting and data preparation by the ECB since 2013-Q4. This paper provides a literature review of SHS research by surveying all published journal articles and working papers using granular SHS data. We demonstrate a rising popularity of SHS with 69 studies so far, advancing most prominently three research fields: (i) the banking and finance literature, mostly on interconnectedness and contagion, (ii) the international investment literature, and, (iii) monetary policy research on quantitative easing. Still, this review argues that SHS research is in its infancy, yet quickly growing. We highlight a surge of new studies, notably in sustainable finance. We provide a practitioner’s guide with code, cleaning procedures and common specifications illustrated with home currency bias regressions. Finally, this review discusses avenues of future research.
    Keywords: Securities holdings statistics; portfolio investment; literature review; Eurosystem data; home currency bias
    JEL: E52 E58 F14 F3 G11 G2 G51 Q56
    Date: 2022–12
  13. By: Zachary Feinstein; Andreas Sojmark
    Abstract: In this work we introduce an interbank network with stochastic dynamics in order to study the yield curve of bank debt under an endogenous network valuation adjustment. This entails a forward-backward approach in which the future probability of default is required to determine the present value of debt. As a consequence, the systemic model presented herein provides the network valuation adjustment to the term structure for free without additional steps required. We present this problem in two parts: (i) a single maturity setting that closely matches the traditional interbank network literature and (ii) a multiple maturity setting to consider the full term structure. Numerical case studies are presented throughout to demonstrate the financial implications of this systemic risk model.
    Date: 2022–11
  14. By: Andrea Bellucci (Università degli Studi dell’Insubria and MoFiR.); Alexander Borisov (University of Cincinnati and MoFiR.); Germana Giombini (University of Urbino Carlo Bo and MoFiR.); Alberto Zazzaro (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
  15. By: Andrew T. Levin; Brian L. Lu; William R. Nelson
    Abstract: We conduct a systematic analysis of the costs and benefits of large-scale securities purchases, using the Federal Reserve’s QE4 program as a concrete example. This program was initiated at the onset of the pandemic in March 2020 and continued for two years, leading to a doubling of the Fed’s securities holdings to about $8.5 trillion as of March 2022. QE4 was initially aimed at mitigating strains in markets for Treasuries and agency mortgage-backed securities but was subsequently aimed more broadly at supporting market functioning and providing monetary stimulus. Nonetheless, QE4 did not have any notable benefits in reducing term premiums. Moreover, since the securities purchases were financed by expanding the Fed’s short-term liabilities, QE4 amplified the interest rate risk associated with the publicly-held debt of the consolidated federal government. Our simulation analysis indicates that QE4 is likely to reduce the Federal Reserve’s remittances to the U.S. Treasury by about $760 billion over the next ten years.
    JEL: E42 E52 E58 E63
    Date: 2022–12
  16. By: Nuno Palma; Carolyn Sissoko
    Abstract: We present a detailed study of the Seven Years' War (1756–1763) using a new dataset based on the Bank of England minutes. We argue that the war and associated Bank of England actions led to a transformation of the financial system. Additionally, while there was short-term crowding out of private investment when interest rates rose due to the issue of war-related government debt, in the long-run there was crowding in: higher government spending led to an increase in private sector investment.
    Keywords: Bank of England; City of London; discount market; interest rates; crowding in; financial history
    JEL: N13 N23 N43
    Date: 2022–12
  17. By: Naef, Alain
    Abstract: How did the Bank of England manage sterling crises? This book steps into the shoes of the Bank's foreign exchange dealers to show how foreign exchange intervention worked in practice. The author reviews the history of sterling over half a century, using new archives, data and unseen photographs. This book traces the sterling crises from the end of the War to Black Wednesday in 1992. The resulting analysis shows that a secondary reserve currency such as sterling plays an important role in the stability of the international system. The author goes on to explore the lessons the Bretton Woods system on managed exchange rates has for contemporary policy makers in the context of Brexit. This is a crucial reference for scholars in economics and history examining past and current prospects for the international financial system.
    Date: 2022–12–02
  18. By: Marianna Brunetti (CEIS & DEF, University of Rome "Tor Vergata"); Rocco Ciciretti (CEIS & DEF, University of Rome "Tor Vergata"); Monica Gentile (CONSOB, Divisione Mercati e Consulenza Economica); Nadia Linciano (CONSOB, Divisione Mercati e Consulenza Economica); Paola Soccorso (CONSOB, Divisione Mercati e Consulenza Economica)
    Abstract: Employing structured financial planning to manage personal finances on is associ-ated with higher levels of financial well-being and increased ability to react to shocks. Therefore, it is important to understand the factors associated with the propensity to plan and what it is that promotes financial planning. Our empirical evidence for a sample of Italian households shows a poor inclination for financial planning. CONSOB Survey data on the financial investments made by of Italian household (or FIIH) are used to estimate a probit model which shows a positive association between financial planning and financial knowledge, and the relevance of personal traits such as financial anxiety and financial self-efficacy, financial control (control over savings, spending and indebtedness) and financial conditions. The findings provide useful insights for financial decision-makers in the con-text of financial education initiatives and client-intermediary relationship aimed at pro-moting appropriate attitudes and choices towards managing money
    Keywords: financial planning, budgeting, household finance, financial control, financial self-efficacy, financial literacy, financial knowledge
    JEL: D14 G51 G53 C21 C51
    Date: 2022–12–15
  19. By: Lorenzo Gobbi (Banca d'Italia)
    Abstract: The surge of digitization in the financial industry and in e-commerce has favoured the strong growth of Buy Now Pay Later (BNPL) operators, which traditionally grant short-term loans of a limited amount, allowing consumers to split the payment of a purchase into a variable number of interest-free instalments. After providing a general overview of the BNPL model and some statistics on market penetration, this paper describes the existing regulatory framework, in terms of both contracts and licences. It then considers the potential implications of rising inflation, and of the resulting increases in interest rates by various Central Banks, for the business models of BNPL operators, whose valuations have already decreased. Lastly, it discusses the need to protect consumers from inadvertently piling up excessive debt.
    Keywords: Buy Now Pay Later (BNPL), Fintech, Digital credit
    JEL: G23 G51
    Date: 2022–11
  20. By: Nützenadel, Alexander
    Abstract: What impact do past experiences have on the expectation formation of banks? This article analyses the risk management of Germany's largest bank during the 1970 and 1980s. In this period, financial deregulation and globalization increased the likelihood of credit defaults and forced banks to implement new strategies of risk assessment. The Herstatt failure of 1974 triggered a series of new regulations, partly based on initiatives of the banks themselves. After the sovereign debt crisis of the 1980s, banks introduced a comprehensive strategy of country-risk assessment. They systematically professionalized their information resources and integrated risk and liability management. Economic forecasting was often based on historical data used for the classification and diversification of risks. However, learning from past experiences had limitations, as recent events were often overrated. This had the effect that the banks' country risk assessment focused mainly on developing countries while the industrial world was not included in the schemes. This might explain why many banks have continually underestimated the financial risks present in developed countries since the 1990s.
    Keywords: Risk management,financial markets,banks,expectations,historical experience
    JEL: F65 G15 G17 G32 N2
    Date: 2022
  21. By: Michael D. Bordo; William Roberds
    Abstract: We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs.
    JEL: E42 E58 N10
    Date: 2022–12
  22. By: Jing Cynthia Wu; Yinxi Xie
    Abstract: We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments, the policy rate together with QE or fiscal transfers, can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.
    JEL: E5 E62 E63
    Date: 2022–12
  23. By: Altavilla, Carlo; Fernandes, Cecilia Melo; Ongena, Steven; Scopelliti, Alessandro
    Abstract: We assess the impact on bank bond holdings of regulatory changes in the requirements for bail-inable liabilities designed to facilitate an orderly resolution process, while reducing taxpayers-funded bailouts. Analyzing confidential data on securities holdings by banks, we document that the introduction of the minimum requirements for eligible liabilities (MREL) induced banks to increase their holdings of eligible bank bonds, especially if issued by other banks. The requirement for own funds and eligible liabilities (TLAC) instead raised the incentives for non-issuing banks to invest in eligible subordinated debt issued by global systemically important banks. Finally, we find evidence of increased within-country bank interconnectedness and concentration risks in the banking sector that might potentially introduce frictions in bail-in implementations. JEL Classification: G01, G21, G28
    Keywords: bail-inable debt, bank bonds, MREL, regulatory changes, TLAC
    Date: 2022–12
  24. By: Tomoko AIZAWA-Tanemura (College of Commerce, Nihon University); Shin-Ichi Nishiyama (Graduate School of Economics, Kobe University)
    Abstract: This paper uses the interpretation of the monetary transmission channel model in Japan under low interest rates to clarify the factors that determine the net interest margin (NIM). An analysis using Loan-level data from the Tohoku region from 2012 to 2015 shows that the Capital-to-Asset Ratio of a firm is an important factor in determining NIM. Even if we consider that firms and banks have suffered Nuclear Damage, Bad reputation Damage, and Supplier Damage due to the Great East Japan Earthquake as control variables, the channel through the agency cost of the borrower is effective. Even if we put the policy response of Rents and leases Subsidy, Interest or guarantee fee Subsidy, Interest reductions, and Group Subsidy into the estimation formula as a control variable, the channel through the agency cost of the borrower is effective. On the other hand, the existence of a channel through banks' agency costs, funding costs of capital and borrowing, and liquidity costs cannot be shown to be stable. In other words, financial institutions can earn high NIMs when they lend to firms that have relatively small net worth and depend on banks for funding. Financial institutions in Japan's Tohoku region that wish to profit from lending need to face the agency problem between borrower firms and lender banks.
    Keywords: Net Interest Margin, Capital-to-Asset Ratio, Balance Sheet Channel, Loan-level Data
    JEL: E43 E51 E52 G21
    Date: 2022–11
  25. By: Rao, Jahnavi
    Abstract: Financial inclusion has historically played a large part in the Indian state’s plans for the country’s financial system. However, large sections of the Indian population still lack access to the banking system and formal credit. Existing literature on the issue tends to use a quantitative lens and focus on the rural sections of the country. Therefore, the innovation of this paper lies in the fact that it uses a qualitative approach to the problem and, using Bangalore as a case study, finds that the Othering of the urban poor is a major contributing factor to their exclusion from the formal, public credit system.
    Date: 2022–12
  26. By: Sangjae Lee (Korea Deposit Insurance Corporation); Jeongeun Park (Korea Deposit Insurance Corporation)
    Abstract: Korea's fintech market is expanding with the rise in non-face-to-face financial transactions triggered by the development of mobile banking along with the COVID-19 pandemic. This Brief discusses the risk of misdirected money transfers and recent legislative changes in Korea mandating the Korea Deposit Insurance Corporation (KDIC) to assist in recovering such misdirected payments. Within the new scheme for supporting the recovery of misdirected payments, KDIC will have the powers to upon request by the payment sender, subrogate into its claim and in lieu of the latter attempt to collect the money through a payment order issued by the court. Upon recovery of the misdirected payment, the KDIC will pay out the amount to the sender after deducting relevant expenses incurred in making notifications and managing the Scheme.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–11
  27. By: Laszlo Bokor (Magyar Nemzeti Bank (the Central Bank of Hungary))
    Abstract: This paper presents the pilot top-down climate stress test of the Hungarian banking system over the 2020-2050 horizon. The focus is on a core indicator of financial soundness, the ratio of non-performing loans. Three scenarios are considered with different grades of compliance with the Paris Agreement. Results show that, by 2050, the sectoral excess ratios of non-compliance are scattering from 0 to 19 percentage points.
    Keywords: climate stress test, banking system, non-performing loans, sectoral granularity
    JEL: C51 C53 G21 Q54
    Date: 2022
  28. By: Jukonis, Audrius; Letizia, Elisa; Rousová, Linda
    Abstract: Stricter derivative margin requirements have increased the demand for liquid collateral but euro area investment funds which use derivatives extensively have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, we assess whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives under a range of stress scenarios. The estimates suggest that between 13% and 33% of euro area funds with sizeable derivatives exposures may not have sufficient liquidity buffers to meet the calls. As a result, they are likely to redeem MMF shares, procyclically sell assets and draw on credit lines, thus amplifying the market dynamics under such stress scenarios. Our findings highlight the importance of further work to assess the potential role of macroprudential policies for non-banks, particularly regarding liquidity risk in funds. JEL Classification: C60, G23, G13, G17
    Keywords: big data, EMIR data, market stress, non-bank financial intermediaries, variation margin
    Date: 2022–12
  29. By: Evangelos Charalambakis; Federica Teppa; Athanasios Tsiortas
    Abstract: This paper provides new evidence on what determines the probability of the consumer’s decision to apply for credit as well as the probability of the consumer credit being accepted by financial institutions during the COVID-19 pandemic. The empirical analysis is based on microdata collected between April 2020 and January 2022 as part of the ECB Consumer Expectations Survey, a new online survey panel of Euro area consumers. We find that age, financial literacy, unemployment and degree of urbanization significantly affect both the application and the acceptance of credit, albeit in the opposite direction. We also document that the probability for credit application increases whereas the probability of credit approval decreases during the COVID-19 outbreak. Finally, we find that there is heterogeneity in the type of credit, particularly between secured and unsecured loans.
    Keywords: Consumer debt; Liquidity constraints; COVID-19 pandemic; Consumer Expectations Survey
    JEL: C23 D12 D14 G51
    Date: 2022–12
  30. By: Clayton, Christopher; Schaab, Andreas
    Abstract: Should central banks’ inflation targets remain set in stone? We study a dynamic mechanism design problem between a government (principal) and a central bank (agent). The central bank has persistent private information about structural shocks. Firms learn the state from the central bank’s reports and form inflation expectations accordingly. A dynamic inflation target implements the full-information commitment allocation: the central bank is delegated the authority to adjust its own target as long as it does so one period in advance. Both the level and flexibility of the dynamic inflation target respond to persistent shocks. Target flexibility is set to correct the time consistency problem, while the target level provides the correct incentives for target adjustments. An informational divine coincidence arises: the central bank’s incentives to misreport its persistent private information to manipulate firm and government beliefs exactly offset each other under the mechanism. We apply our theory to study lower bound spells, a declining natural interest rate, and a flattening Phillips curve. We leverage our framework to study longer-horizon time consistency problems and speak to practical policy questions of inflation target design.
    Keywords: inflation targeting; persistent private information; dynamic mechanism design; monetary policy; time consistency; dynamic inflation targets; informational divine coincidence
    JEL: E52 D82
    Date: 2022–12–12
  31. By: Shuichiro Ikeda (Bank of Japan); Haruhiko Inatsugu (Bank of Japan); Yui Kishaba (Bank of Japan); Takuji Kondo (Bank of Japan); Kenichi Sakura (Bank of Japan); Kosuke Takatomi (Bank of Japan); Takashi Nakazawa (Bank of Japan); Kotone Yamada (Bank of Japan)
    Abstract: As the impact of COVID-19 pandemic eased and economic activity resumed, prices have risen sharply in the U.S. and Europe, partly due to the impact of rising commodity prices. Although not to the same extent as the U.S. and Europe, in Japan inflation rates have also been rising, especially for goods prices. In order to further develop the discussion on the nature of these recent price developments in Japan and their outlook, this paper (1) summarizes the characteristics of inflation dynamics in Japan before the spread of COVID-19, mainly using the framework of the Phillips curve, (2) confirms the recent changes and characteristics of price developments, and (3) summarizes the issues for the future. Based on the fact-finding of this paper, we conclude it is important to accumulate analyses on the stickiness of service prices, nominal wage rigidity, and uncertainty in inflation expectations, which are characteristic of Japan, in order to further deepen the discussion on these recent price developments.
    Keywords: Phillips curve; Cost push; Price rigidity; Inflation expectations; Wages
    JEL: E30 E31 J30
  32. By: Edouard Ribes (CERNA i3 - Centre d'économie industrielle i3 - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Background context. The retail side of the finance industry is currently undergoing a deep transformation associated to the rise of automation technologies. Wealth management services, which are traditionally associated to the retail distribution of financial investments products, are no stranger to this phenomena. Specific knowledge gap the work aims to fill. The retail distribution of financial instruments is currently normalized for regulatory purposes but yet remains costly. Documented examples of the use of automation technologies to improve its performance (outside of the classical example of robo-advisors) remain sparse. Methods used in the study. This work shows how machine learning techniques under the form of classification algorithms can be of use to automate some activities (i.e. client expectations analysis) associated to one of the core steps behind the distribution of financial products, namely client discovery. Key findings. Once calibrated to a proprietary data-set owned by one of the leading french productivity tools providers specialized on the wealth management segment, standard classification algorithms (such as random forests or support vector machines) are able to accurately predict the majority of households financial expectations (ROC either above 80% or 90%) when fed with standard wealth information available in most of the database of financial products distributors. Implications. This study thus shows that classifications tools could be easily embedded in digital journey of distributors to improve the access to financial expertise and accelerate the sales of financial products.
    Keywords: Wealth Management Brokerage Machine learning Classification, Technological Change, Wealth Management, Brokerage, Machine learning, Classification
    Date: 2022–12–07
  33. By: Raphaël Chiappini (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Bertrand Groslambert; Olivier Bruno
    Abstract: We develop a new method for calculating bank output that addresses the flaws of the current approach of the System of National Accounts. We implement a simple model-free method that removes the "pure" credit risk premium from the production of banks while keeping the liquidity provision as part of the total bank output. Using both local projections and autoregressive distributed lag models, we show that our method produces bank output estimates that are consistent with the evolution of the economic activity and that remain always positive including during periods of financial stress. This method satisfies the four conditions set by the Inter-Secretariat Working Group on National Accounts. Furthermore, our method reveals that the banking output of the eurozone is overestimated by approximately 40 percent over the period 2003-2017.
    Keywords: Bank output, Liquidity premium, Risk premium, ARDL, Local projections
    Date: 2022–12–13
    Abstract: The study investigates the differential impact of various sources of finance on informal firm performance. In the informal sector, where access to finance is limited, we investigate how productivity varies with different sources of finance. Given the data limitations, a pseudo-panel data design was used by combining the three only available, independent cross-sectional surveys conducted by the National Sample Survey Office between 1999-2000 and 2015-16. Using formal and informal credit as two different sources of finance and total factor productivity (TFP) as the primary measure of firm performance, we find a positive relationship among them across all major industries; however, the impact of formal finance was higher than informal credit. Our results stand robust against alternative performance measures. Additionally, to address endogeneity concerns, dynamic panel data analysis was adopted. Obtained findings convey essential policy implications for intensification of financial inclusion and financial literacy.
    Keywords: Informal Sector, Finance, Credit, Total Factor Productivity, Pseudo Panel, India
    JEL: D2 L21 L25 M2 O14
    Date: 2022–12–07
  35. By: Alberto Di Iorio (Bank of Italy); Giorgia Rocco (Bank of Italy)
    Abstract: In this study we use data from the 2019 Study on the Payment Attitudes of Consumers in the Euro area (SPACE) to analyse the main drivers of payment choices at the point of sale (POS) in Italy. We find that transaction-related features are the most important drivers of payment choice at the POS, while individual consumer preferences play a minor role. We also document that consumers often pay in cash, even though they would prefer to use a different payment instrument, due to a lack of acceptance of alternative instruments by merchants, especially for low-value transactions. Finally, consumers’ digital skills are found to be a relevant factor in payment habits since they affect preferences and reduce the likelihood of cash usage, especially for those groups that tend to use it more, such as women and residents in the South.
    Keywords: payment habits, consumer choice, payment preferences, cash, payment cards, survey data, diary data
    JEL: D12 E58 G02
    Date: 2022–11
  36. By: Alexis Stenfors (University of Portsmouth); Lilian Muchimba (University of Portsmouth)
    Abstract: Until the Great Recession, the largely unregulated over-the-counter (OTC) markets had received little attention from compliance officers, regulators, and lawmakers. Perhaps more important than the lack of regulatory framework as such, the markets were widely perceived to be sufficiently large, liquid, efficient and competitive to withstand manipulative and collusive attempts by traders and banks. However, the status quo was radically altered in 2012, when it was revealed that major international banks had systematically manipulated the world’s most widely used interest rate benchmark. The ‘LIBOR scandal’ was quickly followed by a ‘Forex scandal’ and the discovery of grave misconduct in a range of other OTC benchmarks and markets. At the time of writing, government bonds traded on electronic trading platforms are under particular scrutiny. This paper draws on the concepts of conspiracies (Smith 1776), beauty contests (Keynes 1936) and sabotage (Veblen 1921) to reflect on why it took so long for the scandals to be discovered.
    Keywords: banks, beauty contest, conspiracies, financial regulation, LIBOR, manipulation, OTC markets, sabotage
    JEL: E43 F31 G14 G15 G18
    Date: 2022–12–15
  37. By: Perazzi, Elena; Bacchetta, Philippe
    Abstract: The impact of Central Bank Digital Currency (CBDC) is analyzed in a closed-economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.
    Keywords: CBDC, Welfare, Substitutability
    JEL: E5
    Date: 2022–12–08
  38. By: Michael Gurkov (Bank of Israel); Osnat Zohar (Bank of Israel)
    Abstract: We examine how inflation risks in Israel evolved over time. We find that until 2013, inflation uncertainty was stable, and risks were moderately skewed downwards. However, since 2014, uncertainty decreased, and downside risks to inflation became much more dominant. The model attributes these developments to the decline in the inflation environment, as it is captured by realized inflation and long-term expectations, and to changes in oil prices. However, we cannot rule out that the monetary rate approaching the effective lower bound also contributed to these changes.
    Keywords: inflation at risk, density forecasts, quantile regressions, effective lower bound.
    JEL: E31 E37 E58
    Date: 2022–12
  39. By: Edward I. Altman; Marco Balzano; Alessandro Giannozzi; Stjepan Srhoj
    Abstract: SME default prediction is a long-standing issue in the finance and management literature. Proper estimates of the SME risk of failure can support policymakers in implementing restructuring policies, rating agencies and credit analytics firms in assessing creditworthiness, public and private investors in allocating funds, entrepreneurs in accessing funds, and managers in developing effective strategies. Drawing on the extant management literature, we argue that introducing management- and employee-related variables into SME prediction models can improve their predictive power. To test our hypotheses, we use a unique sample of SMEs and propose a novel and more accurate predictor of SME default, the Omega Score, developed by the Least Absolute Shortage and Shrinkage Operator (LASSO). Results were further confirmed through other machine-learning techniques. Beyond traditional financial ratios and payment behavior variables, our findings show that the incorporation of change in management, employee turnover, and mean employee tenure significantly improve the model’s predictive accuracy.
    Keywords: Default prediction modeling; small and medium-sized enterprises; machine learning techniques; LASSO; logit regression
    Date: 2022
  40. By: Spiros Bougheas; Pasquale Commendatore; Laura Gardini; Ingrid Kubin
    Abstract: We introduce a banking sector and heterogeneous agents in the Matsuyama et al. (2016) dynamic over-lapping generations neoclassical model with good and bad projects. The model captures the benefits and costs of an advanced banking system which can facilitate economic development when allocates resources to productive activities but can also hamper progress when invests in projects that do not contribute to capital formation. When the economy achieves higher stages of development it becomes prone to cycles. We show how the disparity of incomes across agents depends on changes in both the prices of the factors of production and the reallocation of agents across occupations.
    Keywords: Banks, business cycles, Economic Development, Financial Innovation, Income Inequality
    JEL: E32 E44 G21
    Date: 2022–12
  41. By: Vasiliki A. Tzora; Nikolaos D. Philippas; Georgios A. Panos
    Abstract: We conduct the first nationally representative measurement of the financial capability of 15year-old students in Greece. We find discrepancies between the core, the islands, and the periphery of the country. Female students score lower in terms of all knowledge, behaviour, and attitudes. Students in experimental schools, the better performing ones, and those with more educated parents are more financially capable, reflecting the absence of a dedicated personal-finance curriculum. Awareness of household finances is positively related to financial capability. Local economic conditions matter, with students in regions affected more by the crisis exhibiting lower financial capability.
    Keywords: Financial capability; Students; Greece; Local environment
    JEL: A20 D14 G53 I21
    Date: 2022–12
  42. By: Masanori Orihara (University of Tsukuba); Yoshiaki Ogura (Waseda University); Yue Cai (Gakushuin University)
    Abstract: We find firms which successfully obtained a bank loan in a crisis reduced their cash holdings post-crisis, using Japanese data from the 2008 financial crisis. Firms received loans primarily from non-main banks. This substitution between borrowing and cash holdings applies to firms with an executive who had served as a CEO or financial officer in the crisis. This resulted in a substantial reduction in borrowing costs after the crisis. These findings are consistent with theories of relationship banking that managerial confidence in the availability of non-main bank loans reduces their precautionary cash holdings both to address a liquidity shortage and to mitigate a hold-up by their main bank. We also find that, in the post-crisis period, firms that obtained bank loans during the crisis spent more (over time and in comparison to other firms) on equity investments in their affiliates as well as on R&D among firms with pre-crisis R&D expenses.
    Keywords: Financial Crisis; Cash Holdings; Relationship Banking; Hold-up Problem; Bank Consolidation
    JEL: G21 G31 G32
    Date: 2022–11
  43. By: Fiordelisi, Franco; Fusi, Giulia; Maddaloni, Angela; Marqués Ibáñez, David
    Abstract: When the Covid-19 crisis struck, banks using internal-rating based (IRB) models quickly recognized the increase in risk and reduced lending more than banks using a standardized approach. This effect is not driven by borrowers' quality or by banks in countries with credit booms before the pandemic. The higher risk sensitivity of IRB models does not always result in lower credit provision when risk intensifies. Certain features of the IRB models - the use of a downturn Loss Given Default parameter - can increase banks' resilience and preserve their intermediation capacity also during downturns. Affected borrowers were not able to fully insulate and decreased corporate investments.
    Keywords: Model-based regulation, Banks, Supervision, Lending, Covid-19
    JEL: G21 G28
    Date: 2022
  44. By: Hugh Ding; Natasha Khan; Bena Lands; Cameron MacDonald; Laura Zhao
    Abstract: Cryptoassets that reference a national currency (commonly known as stablecoins) aim to peg their value to the reference currency and typically use a reserve of traditional financial assets to maintain the peg. The market value of these fiat-referenced cryptoassets has grown more than thirtyfold between early 2020 and mid-2022. We explore some of their potential benefits and key risks.
    Keywords: Digital currencies and fintech; Financial institutions; Financial markets; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: E4 G2 G28 O3
    Date: 2022–12
  45. By: Hernandez, Carlos Eduardo; Tovar, Jorge; Caballero/Argáez, Carlos
    Abstract: The resilience of firms to industry-wide shocks has positive externalities in industries with systemic risk, such as banking. We study the resilience of banks to macroeconomic slowdowns in a context of lax microprudential regulations: Colombia during the 1980s. Multiple banks performed poorly during the crisis due to practices that tunneled resources from depositors to shareholders and board members. Such practices —related lending for company acquisitions, loan concentration, and accounting fraud— were enabled by power concentration and links with political power among local banks. In contrast, foreign-owned banks performed relatively well during the crisis due to three factors: (i) foreign-owned banks imported governance institutions and lending procedures from their headquarters, (ii) foreign-owned banks were not part of local business groups with concentrated ownership, and (iii) foreign-owned banks were ex-ante less likely to receive a bailout from the government. These factors continued to be relevant into the 1980s, even though the Colombian government had forced foreign banks to become minority stakeholders of their subsidiaries in 1975.
    Keywords: Banking, Tunneling, Related Lending, Financial Crises, Foreign Banks
    JEL: G21 G28 G30 G33 N26
    Date: 2022–12–06
  46. By: Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
    Abstract: Heterogeneity in Phillips Curve slopes among members of a monetary union can lead to downward biases to estimates of the union-wide slope in reduced form regressions. The intuition is that in a monetary union with heterogeneous regional Phillips Curve slopes, the central bank, aiming at stabilizing demand shocks, will react stronger to shocks in regions with steep slopes compared to shocks in regions with flat slopes. Using a simple New-Keynesian model of a monetary union that omitting controls for this heterogeneity, we show that reduced form estimates of the union-wide slope suffer from a substantial bias towards zero. Empirically, we show that controlling for slope heterogeneity in Euro Area data increases reduced form estimates of the slope in the period since 2009.
    Keywords: Phillips curve, heterogeneity, monetary meeting
    JEL: E24 E31 E58
    Date: 2022
  47. 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.
    JEL: E42 E44 E52 E58 G22
    Date: 2022–12
  48. By: Gourdel, Régis; Sydow, Matthias
    Abstract: This paper develops a framework for the short-term modelling of market risk and shock propagation in the investment funds sector, including bi-layer contagion effects through funds’ cross-holdings and overlapping exposures. Our work tackles in particular climate risk, with a first-of-its-kind dual view of transition and physical climate risk exposures at the fund level. So far, while fund managers communicate more aggressively on their awareness of climate risk, it is still poorly assessed. Our analysis shows that the topology of the fund network matters and that both contagion channels are important in its study. A stress test on the basis of granular short-term transition shocks suggests that the differentiated integration of sustainability information by funds has made network amplification less likely, although first-round losses can be material. On the other hand, there is room for fund managers and regulators to consider physical risk better and mitigate the second round effects it induces, as they are less efficiently absorbed by investment funds. Improving transparency and setting relevant industry standards in this context would help mitigate short-term financial stability risks. JEL Classification: C62, G23, G17, Q54
    Keywords: climate finance, investment funds, stress testing, systemic risk
    Date: 2022–12
  49. By: André Marine Charlotte; Medina Espidio Sebastián
    Abstract: We study an optimal robust monetary policy for a small open economy. The robust control approach assumes that economic agents cannot assign probabilities to a set of plausible models and rather focuses on the worst possible misspecification from a benchmark model. Our findings suggest that, first, conducting a global robust optimal monetary policy is limited as deviations from the benchmark model lead to multiple equilibria. Second, when the central bank considers uncertainty only in the IS Curve or in the UIP, the space of unique solutions is expanded. In fact, the central bank reacts more aggressively to demand and real exchange rate shocks when it is robust to misspecifications in the IS curve only. Finally, our results suggest that the global robust optimal monetary policy is limited due to inflation persistency and the low exchange rate pass-through. The importance of anchoring inflation expectations is highlighted.
    Keywords: Robust control;optimal monetary policy;model uncertainty;small open economy
    JEL: C62 D83 D84 E52 E58
    Date: 2022–12
  50. By: Pavel Ciaian (European Commission - JRC); Andrej Cupak (National Bank of Slovakia and University of Economics in Bratislava); Pirmin Fessler (Oesterreichische Nationalbank, Economic Microdata Lab); d’Artis Kancs (European Commission - JRC)
    Abstract: Individuals invest in Environmental-Social-Governance (ESG)-assets not only because of (higher) expected returns but also driven by ethical and social considerations. Less is known about ESG-conscious investor subjective beliefs about crypto-assets and how these compare to traditional assets. Controversies surrounding the ESG footprint of certain crypto-asset classes – mainly on grounds of their energy-intensive crypto mining – offer a potentially informative object of inquiry. Leveraging a unique representative household finance survey for the Austrian population, we examine whether investors’ environmental and social preferences can explain cross- sectional differences in individual portfolio exposure to crypto-assets. We find a strong association between investors’ environmental and social preferences and the crypto-investment exposure but no significant relationship for the benchmarks of traditional asset classes such as bonds and shares.
    Keywords: Crypto-assets, investment portfolio, financial behaviour, financial literacy, environmental and social preferences
    JEL: D14 G11 G41
    Date: 2022–11
  51. By: Laeven, Luc; Popov, Alexander
    Abstract: Using data on syndicated loans, we find that the introduction of a carbon tax is associated with an increase in domestic banks’ lending to coal, oil, and gas companies in foreign countries. This effect is particularly pronounced for banks with large prior fossil-lending exposures, suggesting a role for bank specialization. Lending to private companies in foreign markets increases relatively more, which points to an intensification of banks’ incentives to avoid public scrutiny. We also find that banks reallocate a relatively larger share of their fossil loan portfolio to countries with less strict environ-mental regulation and bank supervision. JEL Classification: F3, G15, G21, H23, Q5
    Keywords: carbon taxes, climate change, cross-border lending
    Date: 2022–12
  52. By: Hasan, Iftekhar; Krause, Thomas; Manfredonia, Stefano; Noth, Felix
    Abstract: This paper shows that local banking market conditions affect mortality rates in the United States. Exploiting the staggered relaxation of branching restrictions in the 1990s across states, we find that banking deregulation decreases local mortality rates. This effect is driven by a decrease in the mortality rate of black residents, implying a decrease in the black-white mortality gap. We further analyze the role of mortgage markets as a transmitter between banking deregulation and mortality and show that households' easier access to finance explains mortality dynamics. We do not find any evidence that our results can be explained by improved labor outcomes.
    Keywords: Banking Deregulation, Mortality, Racial Inequality
    JEL: G21 I14 I15
    Date: 2022
  53. By: Tihana Škrinjarić (Hrvatska narodna banka, Hrvatska); Maja Bukovšak (Hrvatska narodna banka, Hrvatska)
    Abstract: The countercyclical capital buffer (CCyB) is a key macroprudential policy instrument, whose purpose is to create additional capital in the periods of increasing cyclical risks in order to provide banks with enough space for continued smooth lending during a crisis. In the pre-crisis period, the CCyB’s purpose can be to indirectly mitigate excessive lending. The calibration of the CCyB starts with the estimation of a credit gap based on statistical filters contrasting the long-term credit activity with the economic activity in order to assess the extent to which current dynamics deviates from the equilibrium. Due to a series of problems that occur in practice, this research examines options for improving credit gap estimation, assessed using the criterion of quality of crisis signalling in a historical sample and expert judgement. The main findings of the research suggest that credit and GDP series should be filtered separately, assuming that the credit cycle lasts longer than the business cycle and that the lack of knowledge about the exact duration of the credit cycle can be remedied by estimating a range of possible credit gaps. The new indicators proposed in the research were found to send earlier signals of the occurrence of crisis and are more stable than the previously used national specific indicators. All this allows for an earlier and more gradual build-up of countercyclical capital buffers, which would be less subject to change.
    Keywords: credit gap, statistical filters, macroprudential policy, systemic risk, countercyclical capital buffer.
    JEL: C18 E32 E58 G01 G2
    Date: 2022–12–22
  54. By: Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
    Abstract: We study the role and the interaction of the quality of institutions and of counter-cyclical policies in leaning against the Global Financial Cycle (GFC) in Emerging Economies (EMEs). We show that heteroegeneity in institutional strength is a key determinant of the different effects of the GFC on EME domestic financial conditions. Institutional strength also shapes the response in terms of counter-cyclical policies to sudden changes in global financial conditions as well as the effectiveness of such policies. We illustrate in a simple stylised model that countries may in fact decide to undertake ex ante costly structural reforms that reduce their vulnerability to the GFC or react ex post to the financial s hock. However, we also find that the Covid-19 episode seems to deviate somewhat from the general pattern of EME reaction to shifts in the GFC. JEL Classification: F32, F38, E52, G28
    Keywords: capital controls, emerging markets, foreign-exchange intervention, Global Financial Cycle, institutions., macro-prudential policies, monetary policy
    Date: 2022–12
  55. By: Jiri Gregor; Jan Janku; Martin Melecky
    Abstract: This paper studies the pass-through from the market benchmark rate (proxied by the 5-year swap rate) to interest rates on all newly issued residential mortgage loans in the Czech Republic-an EU country. It tests for and explains the potential spatial heterogeneity in the pass-through to local mortgage rates highlighted by the literature for the US (Scharfstein & Sunderam, 2016). This spatial pass-through has not been studied in the context of the EU with its specific mortgage loan market structure. Using unique data on residential mortgages in the Czech Republic over 2016-2021, we show that the pass-through varies notably across districts and is significantly driven by local mortgage market concentration (bank market power) and the unemployment rate. We find a lower aggregate pass-through than previous studies (about 0.5). The most important pricing factors for residential mortgage loans appear to be the loan-to-value ratio, the net income of the borrower, the loan maturity, and the length of the fixed-rate period.
    Keywords: Banking market concentration, districts and regions, heterogeneity, interest rate pass-through, mortgage lending rates
    JEL: E43 G21 G51 R32
    Date: 2022–11
  56. By: Agostino Capponi; Nathan Kaplan; Asani Sarkar
    Abstract: Several centralized crypto entities failed in 2022, resulting in the cascading failure of other crypto firms and raising questions about the protection of crypto investors. While the total amount invested in the crypto sector remains small in the United States, more than 10 percent of all Americans are invested in cryptocurrencies. In this post, we examine whether migrating crypto activities from centralized platforms to decentralized finance (DeFi) protocols might afford investors better protection, especially in the absence of regulatory changes. We argue that while DeFi provides some benefits for investors, it also introduces new risks and so more work is needed to make it a viable option for mainstream investors.
    Keywords: Crypto; cryptocurrencies; decentralized finance; DeFi; regulations; financial intermediation; fire sale
    JEL: G1 G2
    Date: 2022–12–21
  57. By: Laura Bonacorsi (Department of Social and Political Sciences, Bocconi University); Vittoria Cerasi (Italian Court of Auditors and CefES & O-Fire, University of Milano-Bicocca); Paola Galfrascoli (Department of Economics, Management and Statistics and CefES & O-Fire, University of Milano-Bicocca); Matteo Manera (Department of Economics, Management and Statistics, University of Milano-Bicocca and Fondazione Eni Enrico Mattei)
    Abstract: We study the relationship between the risk of default and Environmental, Social and Governance (ESG) factors using Supervised Machine Learning (SML) techniques on a cross-section of European listed companies. Our proxy for credit risk is the z-score originally proposed by Altman (1968). We consider an extensive number of ESG raw factors sourced from the rating provider MSCI as potential explanatory variables. In a first stage we show, using different SML methods such as LASSO and Random Forest, that a selection of ESG factors, in addition to the usual accounting ratios, helps explaining a firm’s probability of default. In a second stage, we measure the impact of the selected variables on the risk of default. Our approach provides a novel perspective to understand which environmental, social responsibility and governance characteristics may reinforce the credit score of individual companies.
    Keywords: Credit risk, Z-scores, ESG factors, Machine learning
    JEL: C5 D4 G3
    Date: 2022–11
  58. By: Christian Keuschnigg; Michael Kogler; Johannes Matt
    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 O40
    Date: 2022

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.