nep-ban New Economics Papers
on Banking
Issue of 2023‒01‒30
thirty papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Geographical and Cultural Proximity in Retail Banking By Santiago Carbo-Valverde; Héctor Pérez Saiz; Hongyu Xiao
  2. Do Actions Speak Louder than Words? A Foreign Exchange Intervention Analysis By Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
  3. Leaning-against-the-wind Intervention and the “carry-trade” View of the Cost of Reserves By Eduardo Levy Yeyati; Juan Francisco Gómez
  4. Dividend Signaling and Bank Payouts in the Great Financial Crisis By Ragnar E. Juelsrud; Plamen T. Nenov
  5. Financial Crisis and Long-Run Labor Demand: Evidence from the Swedish Banking Crisis in the Early 90s By Julien Grenet; Hans Grönqvist; Daniel Jahnson
  6. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  7. Monetary Policy When the Central Bank Shapes Financial-Market Sentiment By Anil K Kashyap; Jeremy C. Stein
  8. Assessing the Relative Progressivity of the Biden Administration’s Federal Student Loan Forgiveness Proposal By Jacob Goss; Daniel Mangrum; Joelle Scally
  9. Does FinTech Promote Entrepreneurship? Evidence from China By Alraqeb Zeynep; Knaack Peter; Macaire Camille
  10. Summaries of Central Bank Policy Deliberations: A Canadian Context By Monica Jain; Walter Muiruri; Jonathan Witmer; Sharon Kozicki; Jeremy Harrison
  11. Inequality-Constrained Monetary Policy in a Financialized Economy By Luca Eduardo Fierro; Federico Giri; Alberto Russo
  12. The Quantitative Finance Aspects of Automated Market Markers in DeFi By Stefan Loesch
  13. Credit access and relational contracts: An experiment testing informational and contractual frictions for Pakistani farmers By M. Ali Choudhary; Anil K. Jain
  14. Central bank asset purchases: Insights from quantitative easing auctions of government bonds By Laséen, Stefan
  15. Heterogeneous labor market response to monetary policy: small versus large firms By Aarti Singh; Jacek Suda; Anastasia Zervou
  16. Simulating Intraday Transactions in the Canadian Retail Batch System By Nellie Zhang
  17. Smarter than humans? Validating how OpenAI's ChatGPT model explains crowdfunding, alternative finance and community finance By Wenzlaff, Karsten; Spaeth, Sebastian
  18. The 2021–22 Merchant Acceptance Survey Pilot Study By Angelika Welte; Joy Wu
  20. Narrative persuasion By Barron, Kai; Fries, Tilman
  21. Uncertain Policy Regimes and Government Spending Effects By Ruoyun Mao; Wenyi Shen; Shu-Chun S. Yang
  22. Central Bank Digital Currencies: A Review of Operating Models and Design Issues By Bert Van Roosebeke; Ryan Defina
  23. The Effects of Monetary Policy: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  24. Mandatory Retention Rules and Bank Risk By Yuteng Cheng
  25. Stress-ridden finance and growth losses: does financial development break the link? By Matias Ossandon Busch; Ricardo Montañez
  26. Post-COVID Inflation Dynamics: Higher for Longer By Randal Verbrugge; Saeed Zaman
  27. ESG disclosure: regulatory framework and challenges for Italian banks By Tommaso Loizzo; Federico Schimperna
  28. Fiscal Multipliers with Sovereign Risk and Fragile Banks By Matthieu Darracq Paries; Georg Muller; Niki Papadopoulou
  29. Determinants of Financial Literacy and Behavioral Bias among Adolescents By Marco Aschenwald; Armando Holzknecht; Michael Kirchler; Michael Razen
  30. Do Agricultural Debt Moratoriums Help or Hurt? The Heterogenous Impacts on Rural Households in Thailand By Lathaporn Ratanavararak; Sommarat Chantarat

  1. By: Santiago Carbo-Valverde; Héctor Pérez Saiz; Hongyu Xiao
    Abstract: This paper measures how both geographical and cultural proximity of bank branches affect household credit choice and pricing. We examine both types of proximity jointly to separately identify the importance of soft information versus alternative mechanisms. Using a detailed household-level database for Canada, we find that both geographical and cultural proximity increase consumer credit by reducing the cost of obtaining soft information. Furthermore, soft information obtained via the two types of proximity can be either substitutes for or complements to each other, with complementarity being more likely for products that require high levels of ex-ante screening. Overall, our results suggest that ongoing branch consolidation, happening in many countries, may lead to lower financial inclusion, especially in culturally diverse neighbourhoods.
    Keywords: Credit and credit aggregates; Financial institutions; Financial services
    JEL: D82 D83 G20 G21 R22 Z10 Z13
    Date: 2023–01
  2. By: Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
    Abstract: We revisit an old question but with a new identification strategy, namely the difference in exchange rate effects between announced (“vocal”) and secret (“dirty”) foreign exchange intervention. Using a Regression Discontinuity Design, we exploit a rule-based intervention mechanism enacted by the Central Bank of Colombia that, under observable and deterministic conditions, triggered either the issuance of FX options or the ability to exercise them. We take the former (issuance) as central bank announcements under a sharp setting, since the rule and information that triggered the issuance of options was public, and we take the latter (exercise) as secret trades under a fuzzy setting, since traders could have chosen (but were not required) to exercise their options in the following days after issuance. Our results indicate that, unconditionally, both announcements and secret trades carry similar effects. However, the effects of announcements are considerably amplified conditional on: (i) higher central bank credibility, (ii) less frequent announcements, and (iii) episodes of higher FX volatility. **** RESUMEN: Revisitamos una antigua pregunta, pero con una nueva estrategia de identificación, concretamente, la diferencia entre los efectos de las intervenciones cambiarias anunciadas (“vocales”) y secretas (“sucias”). Para esto estudiamos un mecanismo de intervención basado en reglas del Banco de la República que, bajo condiciones observables y deterministas, activó la emisión de opciones (call y put) o la capacidad de ejercerlas. Interpretamos la primera (emisión) como anuncios del Banco bajo un diseño de regresión discontinua sharp, ya que la regla y la información cambiaria que la activó eran públicas, e interpretamos los ejercicios de las opciones como operaciones secretas bajo un diseño de regresión discontinua fuzzy, ya que los agentes del mercado podían haber elegido (pero no estaban obligados) a ejercerlas en los días siguientes a su emisión. Nuestros resultados indican que, de forma no condicional, tanto los anuncios como la intervención secreta tienen efectos similares. Sin embargo, el impacto de los anuncios se amplifica cuando se condicionan a: (i) una alta credibilidad del banco central, (ii) anuncios menos frecuentes y (iii) episodios de mayor volatilidad cambiaria.
    Keywords: Foreign Exchange Intervention effectiveness, Regression Discontinuity Design, Announced Intervention, Secret Intervention, Intervención cambiaria, Regresión discontinua, Intervención con anuncios, Intervención secreta
    JEL: E58 F31 C22
    Date: 2023–01
  3. By: Eduardo Levy Yeyati; Juan Francisco Gómez
    Abstract: For a sample of emerging economies, we estimate the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor) but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).
    Keywords: Exchange rates, foreign exchange intervention, international reserves, self-insurance
    Date: 2022–10
  4. By: Ragnar E. Juelsrud; Plamen T. Nenov
    Abstract: We study the dividend payouts of U.S. banks during the 2008 financial crisis. Using a difference-in-differences methodology, we shows that banks with higher share of short-term liabilities to total liabilities, which were thus more exposed to the rollover crisis that took place in 2008, increased their dividend payouts relative to less exposed banks. This relative increase in dividend payouts is concentrated in relatively cash-rich banks. The dividend payout increase was associated with a short-run increase in stock valuations. We argue that this front-loading of dividends of more exposed banks is consistent with a theory of dividend payouts, in which the payout policy has a (short-run) stabilizing role on the bank’s liquidity position by signaling information to short-term lenders about the bank’s available liquidity.
    Keywords: payout policies, dividend signaling, rollover crises, bank runs, liquidity crises
    JEL: G01 G21 G35
    Date: 2022–11–09
  5. By: Julien Grenet (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Hans Grönqvist (Uppsala University, IFAU - Institute for Evaluation of Labour Market and Education Policy); Daniel Jahnson (Uppsala University)
    Abstract: The Swedish banking crisis in the early 90s counts as one of the five most severe financial crises in history. We examine how firms more exposed to this event adjusted employment in the longrun and the mechanisms involved. Our analysis draws on matched employer-employee data containing the financial statements for a large sample of firms. Our difference-indifferences estimates show that firms with a greater pre-crisis debt burden experienced more difficulties in accessing external capital during the crisis compared to firms with lower baseline debts. This is consistent with the most exposed firms becoming financially constrained. More exposed firms exhibit stronger downward employment adjustments than less exposed firms, and the reductions are mainly concentrated among low-skilled workers. Employment in more exposed firms started to recover four years after the crisis and had fully recuperated about a decade later. These firms also temporarily saw a larger drop in both productivity and investment. We do not find a significant effect on the wage bill, and the estimates are precise enough to rule out even moderate effect sizes.
    Keywords: Financial Crisis, Matched Employer-Employee Data, Macroeconomic Shocks, Labor Demand
    Date: 2023–01
  6. By: Sangyup Choi (Yonsei University); Kimoon Jeong (Yonsei University); Jiseob Kim (Yonsei University)
    Abstract: What accounts for contrasting economic paths between core and periphery countries in the euro area? Unlike many studies focusing on fiscal problems, we highlight the interplay of bank mortgage lending standards and imbalances created by the common monetary policy framework. To illustrate the mechanism, we derive a country-specific monetary policy stance gap and estimate the panel VAR model of core and periphery countries, respectively. While the widening monetary policy stance gap—the accommodative stance of the ECB given individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by sharply different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different paths in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, where macroprudential policies on mortgage credit are tightened and bank lending margin decreases, increase their cross-border lending to periphery countries, which could fuel excessive risk-taking in periphery countries.
    Keywords: Euro area; Mortgage credit; Monetary policy stance gap; Bank lending survey; Macroprudential policy; Cross-border banking flows; Panel VARs.
    JEL: E21 E32 E44 F52 G21
    Date: 2023–01
  7. By: Anil K Kashyap; Jeremy C. Stein
    Abstract: Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.
    JEL: E44 E52 E58
    Date: 2022–12
  8. By: Jacob Goss; Daniel Mangrum; Joelle Scally
    Abstract: We quantify the total stock of balances eligible for the 2022 federal student loan forgiveness policy and explore which groups benefit most. Roughly $441 billion in balances are eligible for forgiveness, which would leave almost 40 percent of federal borrowers with no remaining balance. The borrowers who benefit most, as measured by the ratio of forgiven balances to balances held, are younger, have lower credit scores, and live in lower-income neighborhoods. Compared to other salient fiscal policies, the forgiveness policy distributes less benefit to lower income ZIP codes than the Earned Income Tax Credit, but more benefit to lower income ZIP codes than the 2019 Child Tax Credit and the 2019 education tax credits for higher education. Lastly, we note a recent uptick in credit card and auto loan delinquency for student loan borrowers that may portend more widespread payment difficulties for borrowers if payments resume without relief.
    Keywords: student loans; debt forgiveness; COVID-19; consumer finance
    JEL: H22 H31 H52 I22
    Date: 2023–01–01
  9. By: Alraqeb Zeynep; Knaack Peter; Macaire Camille
    Abstract: The rise of financial technology (FinTech) in China over the past decade has changed the traditional financial landscape in the country. We provide evidence on the role of digital financial services in promoting self-employment. We construct an indicator of relative FinTech adoption at the provincial-level in China. We show that the digitalization of financial services at an aggregated level is associated with a higher share of self-employed individuals in the total population. In rural areas, coverage breadth of digitalized financial services drives the positive impact on the share of self-employment, while in urban areas, digitalized insurance services appear to be more influential. We also show that the shift to self-employment is not at the expense of employment in private firms in the country. <p> L'essor des technologies financières (FinTech) en Chine au cours de la dernière décennie a modifié le paysage financier traditionnel du pays. Nous étudions la relation entre l’adoption de ces services et la part de l’entreprenariat dans la population totale. Nous construisons un indicateur de l'adoption relative des FinTech au niveau provincial dans le pays, et montrons que la numérisation des services financiers est associée à une part plus élevée d’autoentrepreneurs dans la population totale. Dans les zones rurales, l'étendue de la couverture des services financiers numérisés est à l'origine de cet impact positif, tandis que dans les zones urbaines, les services d'assurance numérisés semblent avoir plus d'influence. Nous montrons également que le passage à l'emploi indépendant ne se fait pas au détriment de l'emploi au sein des entreprises privées dans le pays.
    Keywords: Fintech, Financial Inclusion, Digitalization, China, Entrepreneurship; Fintech, inclusion financière, digitalisation, Chine, entreprenariat
    JEL: G23 J21 O33
    Date: 2022
  10. By: Monica Jain; Walter Muiruri; Jonathan Witmer; Sharon Kozicki; Jeremy Harrison
    Abstract: This paper provides the context, rationale and key considerations that informed the Bank of Canada’s decision to publish a summary of monetary policy deliberations. It includes an analysis of how other central banks disclose minutes and summaries of their monetary policy deliberations. Most other central banks surveyed publish some sort of summary of deliberations. The Bank of Canada’s existing communications already include aspects of these summaries. However, the Bank does not normally provide some information that they contain, such as: a review of the policy choices that were discussed, a diversity of viewpoints on the economic outlook and policy choices, the perspectives of individual members, Publishing a summary of deliberations could enhance transparency, accountability and credibility and also reinforce the Bank’s independence. However, these benefits must be balanced against the potential for constraints on internal debate or the sending of mixed messages about the Bank’s outlook and decisions. The Bank of Canada Act empowers the Governor to make decisions, but in practice, decisions are made by consensus among members of the Bank’s Governing Council. This decision-making by consensus could have implications for what could or should be included in a summary. In the Canadian context, assuming the Bank will provide additional information, we also discuss some advantages and disadvantages of providing a summary of deliberations as a separate communication product or as an enhancement to current communications products. The material in the paper originally served as background information for internal discussions at the Bank of Canada around publishing a summary of policy deliberations. Following those discussions, the International Monetary Fund (IMF) published a review of the Bank of Canada’s transparency, concluding that the Bank “… sets a high benchmark for transparency” (IMF 2022). In that review, the IMF provided a recommendation on how the Bank could further improve its transparency by providing more information on its monetary policy deliberations. In response to the IMF review and internal discussions at the Bank, the Bank has publicly committed to providing a summary of its policy deliberations beginning in February 2023.
    Keywords: Monetary policy communications
    JEL: D83 E58
    Date: 2023–01
  11. By: Luca Eduardo Fierro (Institute of Economics, Scuola Superiore Sant’Anna Pisa, Italy); Federico Giri (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy); Alberto Russo (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: We study how income inequality affects monetary policy through the inequalityhousehold debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household’s debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.
    Keywords: Inequality, Financial Fragility, Monetary Policy, Agent-Based Model.
    JEL: E21 E25 E31 E52 G51
    Date: 2023
  12. By: Stefan Loesch
    Abstract: Automated Market Makers (AMMs) are a class of smart contracts on Ethereum and other blockchains that "make markets" autonomously. In other words, AMMs stand ready to trade with other market participants that interact with them, at the conditions determined by the AMM. In this this paper, which relies on the existing and growing corpus of literature available, we review and present the key mathematical and quantitative finance aspects that underpin their operations, including the interesting relationship between AMMs and derivatives pricing and hedging.
    Date: 2022–12
  13. By: M. Ali Choudhary; Anil K. Jain
    Abstract: fdp/credit-access-and-relational-contrac ts.htm
    Keywords: enforcement; credit markets; contracts; screening; banks; asymmetric information
    JEL: O16 C93 G21
    Date: 2022–12
  14. By: Laséen, Stefan (Research Department, Central Bank of Sweden)
    Abstract: How willing are individual primary dealers to alter their offered yields in central bank quantitative easing auctions of government bonds in order to sell an additional share of the outstanding amount of a bond to the central bank? This question is of great importance for a central bank’s potential to affect yields during quantitative easing purchase operations and the one I address in this paper. In order to do so I study a unique, and confidential, dataset consisting of all pairs of offered yields and quantities from individual dealers participating in the Riksbank’s (central bank of Sweden) quantitative easing auctions from 2015 to 2021. I find, on average, that an offer by individual dealers to sell an additional one percent of the outstanding amount of a bond is associated with between 0.6 to 7.5 basis points lower yields. However, offers depend in a non-linear way on offered amounts. Offers are less elastic (steeper) for offered quantities below 10 per cent and above 20 per cent of outstanding amounts of bonds. The finding of a non-linear slope is new in the literature and is only possible to uncover with access to the whole distribution and significant size of the offered amounts at each auction. Moreover, I find that marginal yields (yields where supply equals demand) at the auctions are highly, and persistently, correlated with changes in market yields for an extended period after the auction suggesting that purchase operations have a more persistent impact on market yields than what has previously been found.
    Keywords: Monetary Policy; Asset Purchases; Quantitative Easing; Sovereign Yields; Asset Purchase Auctions.
    JEL: D44 E52 E58 E63
    Date: 2023–01–01
  15. By: Aarti Singh (School of Economics, University of Sydney); Jacek Suda (Narodowy Bank Polski); Anastasia Zervou (Department of Economics, the University of Texas at Austin)
    Abstract: We study the heterogeneous effects of monetary policy on the labor market of large and small firms in the United States. We uncover the following facts: (i) Expansionary monetary policy boosts employment and hiring growth in small firms more than in large firms; however, a monetary contraction shrinks small firms’ employment and hiring growth less than in large firms. As a result, monetary policy has a countervailing effect on the employment concentration in large firms. (ii) There is an asymmetry in the effects of monetary contractions versus expansions with respect to firms’ employment and hiring growth. Not accounting for such asymmetry leads to the fallacious conclusion that small firms respond more than large firms to monetary policy shocks. This asymmetry also reveals that contractionary monetary policy shocks have immediate effects on the labor market while the effects of expansionary shocks are slower to manifest.(iii) The response of employment is weaker than that of hiring, highlighting the importance of using labor market flows. (iv) The growth of earnings of new hires decreases similarly across large and small firms in contractions but reacts more for small firms in expansions. We use a heterogeneous firms model with a working capital constraint, an upward-sloping marginal cost curve, and a financial accelerator effect. We augment this model with the wage effect summarized in fact (iv) and demonstrate how the additional wage effect can explain the differential response of the hiring and employment growth of small and large firms of fact (i).
    Keywords: Heterogeneous firms, financing constraints, labor market, monetary policy
    JEL: D22 E24 E52 J23 L25
    Date: 2023
  16. By: Nellie Zhang
    Abstract: This paper proposes a unique approach to simulate intraday transactions in the Canadian retail payments batch system. Such transactions are currently unobtainable. The simulation procedure, though demonstrated in the realm of payments systems, has tremendous potential for helping with data-deficient problems where only high-level aggregate information is available. The approach uses the concept of integer composition in combinatorics to break down the daily total value and volume (available) into individual data points (unavailable) throughout the day. The algorithm also introduces a technique to incorporate any intraday timing pattern (known or hypothetical) to make simulated data closer to reality. Simulation results show that the probability distribution of individual payment values is remarkably stable through repeated random sampling. This suggests a high degree of accuracy and viability of this simulation method. In addition, the densities of simulated intraday transactions are found to be invariably skewed to the left of the mean payment value, which reflects the nature of retail payments systems.
    Keywords: Financial Markets; Payment clearing and settlement systems
    JEL: C C63 E42 E58
    Date: 2023–01
  17. By: Wenzlaff, Karsten; Spaeth, Sebastian
    Abstract: The ChatGPT model of OpenAI allows users to ask questions, which are answered through an artificial intelligence trained through supervised, reinforced machine-learning. The answers depend on the input which the algorithm receives from the users, as well as from the content it has been given. The paper explores how answers to definitions about crowdfunding, alternative finance and community finance deviate or correspond to answers given by real human-beings in academic scholarship. Crowdfunding, alternative finance and community finance are chosen because academic literature does not provide consistent definitions on each of these terms, but some definitions are accepted by more scholars. By addressing the research gap concerning the accuracy of answers generated by an artificial intelligence, the paper contributes to the growing literature of implications of textual artificial intelligence on academia.
    Keywords: Crowdfunding, Alternative Finance, Community Finance, Machine Learning, Artificial Intelligence
    Date: 2022
  18. By: Angelika Welte; Joy Wu
    Abstract: In recent years, the rise in digital payment innovations such as contactless cards and Interac eTransfer has spurred a discussion about the future of cash at the point of sale. The COVID-19 pandemic has also contributed to this discussion: While consumers reported that some merchants started to refuse cash early on in the pandemic, such reported refusals dropped as the pandemic progressed. The Bank of Canada’s most recent Merchant Acceptance Survey (MAS) took place in 2018, prompting a need for updated data to study merchant cash acceptance, payment trends and conditions for the potential issuance of a central bank digital currency (Lane 2020, 2021a). Against this background, the Bank conducted the 2021–22 MAS Pilot Study to monitor payment methods accepted by small and medium-sized businesses (SMBs). Survey data was collected from merchants in two batches, in late 2021 and early 2022. Our results show that 97% of SMBs in Canada accepted cash in 2021–22 and only 3% have plans to stop accepting cash. For cards and digital payments, merchant acceptance has increased since 2018. Additionally, the acceptance of different payment methods varies by the size of the merchant, industry and region.
    Keywords: Payment clearing and settlement systems
    JEL: C8 D22 E4 L2
    Date: 2023–01
  19. By: Arief, A. Anggie Zabrina
    Abstract: Bank health is assessed as the ability of a bank to carry out normal banking operations and be able to fulfill all of its obligations properly, in accordance with applicable regulations. With regard to the health of Islamic banks, the Islamic Financial Authority (OJK) is the agency authorized to supervise bank health in Indonesia. A healthy bank is a bank that can carry out its functions properly, such as being able to maintain public trust, being able to carry out the intermediary function, being able to help smooth payment traffic, and being able to carry out monetary policy. There are several ways to measure the soundness of a bank, one of which is using the CAMEL (Capital, Asset Quality, Management, Earning and Liquidity) method.
    Date: 2022–12–25
  20. By: Barron, Kai; Fries, Tilman
    Abstract: Modern life offers nearly unbridled access to information; it is the harnessing of this information to guide decision-making that presents a challenge. We study how one individual may try to shape the way another person interprets objective information by proposing a causal explanation (or narrative) that makes sense of this objective information. Using an experiment, we examine the use of narratives as a persuasive tool in the context of financial advice where advisors may hold incentives that differ from those of the individuals they are advising. Our results reveal several insights about the underlying mechanisms that govern narrative persuasion. First, we show that advisors construct self-interested narratives and make them persuasive by tailoring them to fit the objective information. Second, we demonstrate that advisors are able to shift investors' beliefs about the future performance of a company. Third, we identify the types of narratives that investors find convincing, namely those that fit the objective information well. Finally, we evaluate the efficacy of several potential policy interventions aimed at protecting investors. We find that narrative persuasion is difficult to protect against.
    Keywords: Narratives, beliefs, financial advice, conflicts of interest, behavioral finance
    JEL: D83 G40 G50 C90
    Date: 2023
  21. By: Ruoyun Mao (Grinnell College); Wenyi Shen (Oklahoma State University); Shu-Chun S. Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Money financing returns to policy debate as governments around the world adopted massive fiscal measures during the pandemic. Using a fully nonlinear New Keynesian model with endogenous policy regime switching, we show thata moderate inflation- driven switching probability to a debt-financing regime reduces money-financed spending multipliers. When interacted with high government debt, money-financed spending multipliers fall below one, similar to the size of debt-financed spending multipliers. This result holds at the zero lower bound, with long-term government debt, and under a wide range of key parameter values. Policy regime uncertainty, on the other hand, has little effect on debt-financed spending multipliers.
    Keywords: government spending effects, fiscal multipliers, regime-switching policy, monetary and fiscal policy interaction, nonlinear New Keynesian models
    JEL: E32 E52 E62 E63 H30
    Date: 2022–09
  22. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: The topic of Central Bank Digital Currencies (CBDC) is highly relevant to deposit insurers. As an increasing number of central banks further their research and planning efforts in CBDC, IADI members are encouraged to intensify their understanding of the potential impact of the introduction of a CBDC in their own as well as in other jurisdictions. To assess the potential impact of a CBDC, sound understanding of operating models and design features is crucial. These will affect factors of key interest to deposit insurers. This extends to the division of labour between central and commercial banks and the degree of privacy attached to CBDC usage. The paper offers a review of key issues relevant to deposit insurers regarding operating models and design features for CBDC, and links these to early global policy standards. Whilst not recommending a particular CBDC design, deposit insurers are encouraged to make their own determination based on developing a deeper understanding of the principles presented. This paper acts as a follow up to a previous IADI Fintech Brief which highlighted some key motivations for CBDCs by central banks.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–12
  23. By: Christopher Roth (University of Cologne, ECONtribute); Mirko Wiederholt (LMU Munich and Sciences Po, CESifo, CEPR); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, Danish Finance Institute)
    Abstract: We study the effects of monetary policy on aggregate consumption combining a heterogeneous agent model with measured expectations under different policy counterfactuals. We express the consumption of non-hand-to-mouth households as a function of expectations only and elicit all expectations appearing in the consumption functions for alternative policy scenarios with tailored surveys. Feeding these individual-level expectations into the model illustrates that a modest forward guidance statement in March 2021 would have reduced aggregate consumption by 0.14 percent on impact and an interest rate hike of 40 basis points in March 2022 would have reduced aggregate consumption by 0.30 percent on impact.
    Keywords: Monetary Policy, Expectation Formation, Aggregate Consumption
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2023–01
  24. By: Yuteng Cheng
    Abstract: This paper studies, theoretically and empirically, the unintended consequences of mandatory retention rules in securitization. The Dodd-Frank Act and the EU Securitisation Regulation both impose a 5% mandatory retention requirement to motivate screening and monitoring. I first propose a novel model showing that while retention strengthens monitoring, it may also encourage banks to shift risk. I then provide empirical evidence supporting this unintended consequence: in the US data, banks shifted toward riskier portfolios after the implementation of the retention rules embedded in Dodd-Frank. Furthermore, the model offers clear, testable predictions about policy and corresponding consequences. In the US data, stricter retention rules caused banks to monitor and shift risk simultaneously. According to the model prediction, such a simultaneous increase occurs only when the retention level is above optimal, which suggests that the current rate of 5% in the US is too high.
    Keywords: Financial institutions; Financial system regulation and policies; Credit risk management
    JEL: G21 G28
    Date: 2023–01
  25. By: Matias Ossandon Busch (CEMLA); Ricardo Montañez (CEMLA)
    Abstract: Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterizing the probability density of expected GDP growth conditional on financial stress indicators in a panel of 28 countries. Our robust results unveil a non-linear nexus between financial stress and expected GDP growth, depending on countries' degree of financial development. While both domestic and global financial factors affect expected growth, the effect of global stress factors is moderated by financial development. This result highlights a previously unexplored channel trough which financial development can break the link between financial (in)stability and GDP growth.
    Keywords: economic growth, financial stability, financial development, capital flows, growth at risk.
    JEL: G01 G15 O43 O16
    Date: 2023–01
  26. By: Randal Verbrugge; Saeed Zaman
    Abstract: In the December 2022 Summary of Economic Projections (SEP), the median projection for four-quarter core PCE inflation in the fourth quarter of 2025 is 2.1 percent. This same SEP has unemployment rising by nine-tenths, to 4.6 percent, by the end of 2023. We assess the plausibility of this projection using a specific nonlinear model that embeds an empirically successful nonlinear Phillips curve specification into a structural model, identifying it via an underutilized data-dependent method. We model core PCE inflation using three components that align with those noted by Chair Powell in his December 14, 2022, press conference: housing, core goods, and core-services-less-housing. Our model projects that conditional on the SEP unemployment rate path and a rapid deceleration of core goods prices, core PCE inflation moderates to only 2.75 percent by the end of 2025: inflation will be higher for longer. A deep recession would be necessary to achieve the SEP’s projected inflation path. A simple reduced-form welfare analysis, which abstracts from any danger of inflation expectations becoming unanchored, suggests that such a recession would not be optimal.
    Keywords: Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis
    JEL: E31 E32 E52 C32
    Date: 2023–01–13
  27. By: Tommaso Loizzo (Bank of Italy); Federico Schimperna (Bank of Italy)
    Abstract: In line with developments at the global level, the attention of financial regulators on ESG factors, particularly on environmental and climate-related risks, has significantly increased over recent years. In this context, disclosure of relevant climate-related information plays a key role, for both financial and non-financial stakeholders. The EU regulatory framework on disclosure is rather advanced when compared with other jurisdictions and will be almost ready for implementation in the next few months. The Bank of Italy, in line with the ECB and other national supervisors, has started a number of initiatives aimed at actively contributing to major international projects, strengthening the dialogue with the national industry and assessing the progress made by supervised entities. The paper: i) summarises the main regulatory requirements for ESG disclosure; ii) investigates the areas of commonalities at the EU level between the Pillar 3 disclosure requirements and those envisaged by the standards under development by the EFRAG; iii) takes stock of the main supervisory initiatives undertaken so far and presents some preliminary thoughts on the major challenges ahead to be faced by Italian banks.
    Keywords: ESG, sustainability, climate change, disclosure, CSRD, banks, Pillar 3, ESRS
    JEL: G21 K20 M41
    Date: 2022–12
  28. By: Matthieu Darracq Paries (European Central Bank); Georg Muller (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: We quantify the size of fiscal multipliers in an economy with sovereign and bank default risk. We build a DSGE model with financial frictions for the euro area in which the interplay of corporate, bank and sovereign solvency risk a?ects the transmission of government spending. Sovereign bonds carry a credit risk premium that depends on government indebtedness. The banking system is fragile through its direct and indirect exposure to sovereign risk and limited loss absorption capacity. Calibrating the model on sovereign and bank riskiness reminiscent of the euro area sovereign debt crisis period, we show that adverse financial channels may signifcantly depress the fiscal multiplier. The trade-o? for the fiscal authority, between the macroeconomic stabilization objective and solvency risks, continues to be relevant in the euro area. We also evaluate the scope for monetary and macro-prudential policy to mitigate the financial setbacks and help restore the e?ectiveness of fiscal stimulus.
    Keywords: DSGE models, fiscal stabilization, sovereign risk, sovereign-bank nexus
    JEL: E44 E52 E62
    Date: 2022–12
  29. By: Marco Aschenwald; Armando Holzknecht; Michael Kirchler; Michael Razen
    Abstract: Building on cross-sectional data for Austrian high school students from fifth to twelfth grade, we investigate the correlations between socio-economic background variables and a comprehensive set of variables related to financial decision-making (i.e., financial knowledge, behavioral consistency, economic preferences, field behavior, and perception of financial matters). We confirm the findings of previous literature that the male gender is positively associated with financial knowledge and risk-taking and that there is a strong and beneficial correlation between math grades and healthy financial behavior (e.g., saving). Moreover, we find that students’ behavioral consistency is positively correlated with measures of financial attitude (e.g., self-assessed future financial well-being and financial education received from parents). Finally, our results indicate that financial education, as perceived by the students, is primarily provided by parents.
    Keywords: financial literacy, behavioral biases, economic preferences, field behavior, perception, experiment, adolescents
    Date: 2023–01
  30. By: Lathaporn Ratanavararak; Sommarat Chantarat
    Abstract: Majority of Thai agricultural households have been at risk of trapping in persistent debt problems, which could in turn impede their development prospects. Over the past decade, debt moratoriums have been one of the most extensive policies aiming to help Thai agricultural households – resulting in 44.1% of households being in debt moratoriums for more than 4 years. This paper estimates the impacts of agricultural debt moratoriums on households’ debt, saving and agricultural investment dynamics using a unique panel data of 1 million representative households nationwide. We found that while the debt moratoriums could decrease delinquency propensity in the short run, they significantly resulted in higher debt accumulation, especially among those with larger debt and those with higher program intensity. The moratoriums had no significant impact on saving, while could increase agricultural investment especially among those with smaller debt. The findings imply that design of Thailand’s popular debt moratoriums should be revisited, especially they should be more targeted and limited to short-term relief.
    Keywords: Farmer debt; Debt moratorium; Debt relief; Debt accumulation; Agriculture; Thailand
    JEL: G28 G51 Q12 Q14 O16
    Date: 2022–12

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