nep-ban New Economics Papers
on Banking
Issue of 2023‒02‒27
33 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Four mistakes in the use of measures of expected inflation By Ricardo Reis
  2. Capital Deaccumulation and the Large Persistent Effects of Financial Crises By Matthew Knowles
  3. Introducing the Bank of Canada’s Market Participants Survey By Annick Demers; Tamara Gomes; Stephane Gignac
  4. India's credit landscape in a post-pandemic world By Rajeswari Sengupta; Harsh Vardhan
  5. Stress Relief? Funding Structures and Resilience to the Covid Shock By Kristin Forbes; Christian Friedrich; Dennis Reinhardt
  6. A closer look at subnational government finances By Olsson, Hans; Catz, Julia
  7. Connected Lending of Last Resort By Mitchener, Kris James; Monnet, Eric
  8. From Bazooka to Backstop: The Political Economy of Standing Swap Facilities By Lea Steininger; Mathis L. Richtmann
  9. The highs and the lows: Bank failures in Sweden through inflation and deflation, 1914-1926 By Kenny, Sean; Ögren, Anders; Zhao, Liang
  10. Tax Planning by European Banks By Mona Barake
  11. Prediction of Customer Churn in Banking Industry By Sina Esmaeilpour Charandabi
  12. Optimal monetary policy with the risk-taking channel By Abbate, Angela; Thaler, Dominik
  14. Measuring the effects of bank remuneration rules: evidence from the UK By Sakalauskaite, Ieva; Harris, Qun
  15. Taming Overconfident CEOs Through Stricter Financial Regulation By Bernhard Kassner
  16. Zombie Lending, Labor Hoarding, and Local Industry Growth By Kin Wai Cheung; Masami Imai
  17. Information acquisition ahead of monetary policy announcements By Ehrmann, Michael; Hubert, Paul
  18. Bayesian Artificial Neural Networks for Frontier Efficiency Analysis By Mike Tsionas; Christopher F. Parmeter; Valentin Zelenyuk
  19. On (Current) Monetary Tightening and Inflation By Stefan Schiman-Vukan
  20. The Greek Economic Crisis and the Banks By Gikas Hardouvelis; Dimitri Vayanos
  21. Window dressing of regulatory metrics: evidence from repo markets By Bassi, Claudio; Behn, Markus; Grill, Michael; Waibel, Martin
  22. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  23. Understanding Monetary Policy:The Real Sector and Welfare By Marcella Lucchetta
  24. Debt Finance and Economic Activity in the Euro-Area: Evidence on Asymmetric and Maturity Effects By Kuntal K Das; Logan J Donald; Alfred V Guender
  25. Narrative Persuasion By Kai Barron; Tilman Fries
  26. Bank Market Power and Interest Rate Setting: Why Consolidated Banking Data Matte By Théo Nicolas.
  27. Can You Spot a Scam? Measuring and Improving Scam Identification Ability By Elif Kubilayⓡ; Eva Raiberⓡ; Lisa Spantigⓡ; Jana Cahlíkováⓡ; Lucy Kaariaⓡ; Lisa Spantig
  28. Macroprudential Regulation: A Risk Management Approach By Sweder van Wijnbergen; Daniël Dimitrov
  29. The Leading Role of Bank Supply Shock By Bonilla-Mejía, Leonardo; Villamizar-Villegas, Mauricio; Ruiz-Sánchez, María Alejandra
  30. Responsabilité, crises et globalisation : la sanction du marché By Laurent Bazin
  31. Real and nominal effects of monetary shocks under time-varying disagreement By Esady, Vania
  32. Central Bank Digital Currencies and Banking: Literature Review and New Questions By James Chapman; Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Francisco Rivadeneyra; Yu Zhu
  33. Financial Inclusion Measurement: Deepening the Evidence By Indradeep Ghosh; Susan Thomas

  1. By: Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: With the profusion of measures of expected inflation (from market prices and from surveys of households, firms, and professionals) it is a mistake to focus on a single one while ignoring the others. This paper discusses four common arguments for a single focus, and finds each of them to be lacking. In the process, it isolates characteristics of different measures that models that combine them should take into account.
    Keywords: Phillips curve, anchoring, monetary policy, central banking
    JEL: E31 E52
    Date: 2023–01
  2. By: Matthew Knowles (University of Cologne)
    Abstract: In a panel of OECD and emerging economies, I find that recessions are associated with larger initial drops in investment and more persistent drops in output if they occur simultaneously with banking crises. Furthermore, the banking crises that are followed by more persistent output slumps are associated with particularly large initial drops in investment. I show that these patterns can arise in a model where a financial shock temporarily increases the costs of external finance for investing entrepreneurs. This leads to a drop in investment and a very persistent slump in output and employment, provided wages are sufficiently rigid. Critical to the model is the distinction between different types of capital with different depreciation rates. Intangible capital and equipment have high depreciation rates, leading these stocks to drop substantially when investment falls after a financial shock. I find that this mechanism can account for almost a third of the persistent drop in output and employment in the US Great Recession (2007-2014).
    Keywords: Financial Shocks, Great Recession, Persistent Slumps, Intangible Capital.
    JEL: E22 E32 E44
    Date: 2023–02
  3. By: Annick Demers; Tamara Gomes; Stephane Gignac
    Abstract: The Market Participants Survey (MPS) gathers financial market participants’ expectations for key macroeconomic and financial variables and for monetary policy. This staff analytical note describes the MPS’s objectives and main features, its process and design, and how Bank of Canada staff use the results.
    Keywords: Financial markets; Monetary policy and uncertainty; Recent economic and financial developments
    JEL: C8 C83 E4 E44 E5 E52 E58 G1 G12 G14
    Date: 2023–01
  4. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan
    Abstract: In this paper we study the impact of the Covid-19 pandemic on the financial sector of the Indian economy, specifically on the banking sector, the non-banking finance companies (NBFCs) and the bond market, for the period March 2020 to March 2022. In order to set the context, we first summarise the conditions of the financial sector in the pre-pandemic period. We highlight the long-term structural trends and their underlying drivers that were conspicuous in this sector even before the pandemic. These issues have direct consequences for the manner in which the pandemic impacted the financial sector which is what we discuss next. Finally, we describe the way forward for the Indian credit landscape in terms of the major opportunities and challenges.
    Keywords: Banking sector, Credit ecosystem, Pandemic, Consumer credit, Bond market
    JEL: G21 G23 G28
    Date: 2022–12
  5. By: Kristin Forbes; Christian Friedrich; Dennis Reinhardt
    Abstract: This paper explores whether different funding structures—including the source, instrument, currency, and counterparty location of funding—affected the extent of financial stress experienced in various countries and sectors during the Covid-19 spread in early 2020. We measure financial stress using a new dataset on changes in credit default swap spreads for sovereigns, banks, and corporates. Then we use country-sector and country-sector-time panels to assess if these different funding structures mitigated—or amplified—the impact of this risk-off shock. A higher share of funding from non-bank financial institutions (NBFI) or in US dollars was correlated with significantly greater stress, while a higher share of funding in debt instruments (instead of loans) or cross-border (instead of domestic) did not significantly impact resilience. The results suggest that macroprudential regulations should broaden their current focus to take into account exposures to NBFI and dollar funding, giving less priority to regulations focused on residency (i.e., capital controls). After the sharp increase in financial stress in early 2020, policy responses targeting these structural vulnerabilities (i.e., US$ swap lines and policies focused on NBFIs) were more effective at mitigating stress related to these funding structures than policies supporting banks, even after controlling for macroeconomic policy responses.
    Keywords: Coronavirus disease (COVID-19); Exchange rates; Financial institutions; Financial stability; Financial system regulation and policies; International topics
    JEL: E44 E65 F31 F36 F42 G18 G23 G38
    Date: 2023–01
  6. By: Olsson, Hans; Catz, Julia
    Abstract: To carry out the analysis required for monetary policy, the European Central Bank (ECB) and the European System of Central Banks (ESCB) need comprehensive and reliable government finance statistics. The focus of government finance statistics has traditionally been the government as a whole (consolidated), with a particular emphasis on central government. In recent years, however, the focus on subnational government finance statistics has increased, with stories of misreporting by a number of such governments hitting the news. Moreover, subnational governments are the layer of government to which people have the closest connection through their use of services that are either subsidised or directly provided by these bodies. These two aspects prompted the authors to take a closer look at the subnational government finance statistics of all European Union (EU) countries during the period 2000-19 (before, during and after the financial crisis). Data for the year 2020 are not included in this paper to prevent the analysis being skewed by the impact of government coronavirus measures. JEL Classification: H11, H2, H41, H7
    Keywords: debt, deficit, expenditure, financial crisis, government finance statistics, net financial worth, revenue, state and local government
    Date: 2023–02
  7. By: Mitchener, Kris James (Santa Clara University CASBS, CAGE, CEPR, CESifo and NBER); Monnet, Eric (Paris School of Economics EHESS and CEPR)
    Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
    Keywords: Lender of last resort, fiscal backing, central-bank solvency, central-bank design, banking crises, central bank independence, Banque de France, Great Depression JEL Classification: E44, E58, G01, G32, G33, G38, N14, N24
    Date: 2023
  8. By: Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Mathis L. Richtmann (Reuters & LSE)
    Abstract: The permanent international lender of last resort consists of a swap line network between six major central banks, centering around the US Federal Reserve. Arguably, this network is a solution to a long debated problem as it provides public emergency liquidity provision to the world's largest financial market, the Eurodollar market. Drawing on exclusive interviews with monetary technocrats as well as a textual analysis of Federal Open Market Committee meeting transcripts over the course of 14 years, we reconstruct how this facility came into being. Building on Kalyanpur (2017) and Braun (2015), we develop an interpretative framework of bricolage to set the formation into context: In times of crises, central bankers rely on retrospection, experimentation, and creative re-deployment to develop their tools. However, in non-crises times, those tools prevail which offer what we coin 'bureaucratic familiarity'.
    Keywords: Standing Swap Facilities, lender of last resort, International Monetary Policy, Central Bank Cooperation, Monetary Technocrats
    JEL: E52 E58 F5
    Date: 2023–02
  9. By: Kenny, Sean; Ögren, Anders; Zhao, Liang
    Abstract: This paper revisits the Swedish banking crisis (1919-26) that materialized as post war deflation replaced wartime inflation (1914-18). Inspired by Fisher's 'debt deflation theory', we employ survival analysis to 'predict' which banks would fail, given certain ex-ante bank characteristics. Our tests support the theory; maturity structures mattered most in a regime of falling prices, with vulnerable shorter-term customer loans and bank liabilities representing the most consistent cause of bank distress in the crisis. Similarly, stronger growth in i) leverage, ii) weaker collateral loans and iii) foreign borrowing during the boom were all associated with bank failure in post-war Sweden (1919-26).
    Keywords: banking crisis, survival analysis, early warning indicators, debt deflation, maturity mismatch, Sweden
    JEL: E58 G01 G21 G28 N24
    Date: 2023
  10. By: Mona Barake (EU Tax - EU Tax Observatory)
    Abstract: This paper explores profit shifting behaviour by European banks through a newly available data source. Financial institutions as of 2014 started disclosing their activity on a country-by-country level following the CRDIV EU Directive. The country-by-country reporting (CbCR) requires European banks to file their revenues, profits, number of employees and taxes paid in all countries where they operate including tax haven countries. In this paper, I construct the database for bank CbCR from the banks filings and annual reports. The database includes 51 European banks headquartered in 18 different European countries between 2014 and 2020. I use the database to study profit shifting arising from international tax differences between countries. I find that the banks' profits are sensitive to the tax rate suggesting that banks lower their tax burden through their affiliates. The size of banks seems to have an effect, the larger the bank group, the more it might engage in tax planning. Profit shifting is estimated by using the tax differential methodology. The findings show that profit shifting by the top European banks is around 4-3% percent of the total profits booked abroad. This implies tax revenue losses of up to 3-2%. The introduction of a global minimum tax of 15% would generate between 300 to 2 billion euros depending on the final rules implemented.
    Keywords: Profit shifting, Tax planning, Banks, Country-by-country reporting
    Date: 2023–01
  11. By: Sina Esmaeilpour Charandabi
    Abstract: With the growing competition in banking industry, banks are required to follow customer retention strategies while they are trying to increase their market share by acquiring new customers. This study compares the performance of six supervised classification techniques to suggest an efficient model to predict customer churn in banking industry, given 10 demographic and personal attributes from 10000 customers of European banks. The effect of feature selection, class imbalance, and outliers will be discussed for ANN and random forest as the two competing models. As shown, unlike random forest, ANN does not reveal any serious concern regarding overfitting and is also robust to noise. Therefore, ANN structure with five nodes in a single hidden layer is recognized as the best performing classifier.
    Date: 2023–01
  12. By: Abbate, Angela; Thaler, Dominik
    Abstract: Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7%lifetime consumption equivalent). JEL Classification: E44, E52
    Keywords: inertial policy rate, optimal monetary policy, risk-taking channel
    Date: 2023–02
  13. By: Skufi, Lorena; Papavangjeli, Meri
    Abstract: Inflation in Albania dropped below the central bank’s target of 3% in 2012 and has fluctuated below target until end-2021. In this article we investigate the evolution of inflation risks in Albania and its main drivers. We use quantile regressions to estimate the three-month-ahead density forecast of inflation, derived from a Phillips curve for a small open economy. This methodology provides a measure to quantify the uncertainty surrounding the main estimation. The in-sample results reveal significant time variation in the shape of the distribution of inflation and considerable nonlinearities in the effects of the explanatory variables, beyond the volatility. On average the inflation distribution results skewed on the positive side. We find that inflation react more to cyclical conditions and exchange rate movements in the right tail of the distribution.
    Keywords: inflation, quantile regression, changing dynamics
    JEL: E31 E37 E52 E58
    Date: 2022
  14. By: Sakalauskaite, Ieva (Bank of England); Harris, Qun (Bank of England)
    Abstract: In this paper, we study whether and how some of the remuneration rules introduced after the Global Financial Crisis affected bankers’ compensation using a unique regulatory dataset on remuneration in six major UK banks during 2014–19. We find that for bankers most affected by limits on their bonus to fixed pay ratios (the bonus cap), total pay growth did not decrease, but compensation shifted from bonuses to fixed remuneration. We also find some evidence which could indicate that requiring bankers’ bonuses to be deferred for longer periods was correlated with increases in total compensation and a lower proportion of bonuses being deferred.
    Keywords: Remuneration regulation; bonus cap; deferral; bank regulation
    JEL: G21 G28 G38 J33 L51
    Date: 2022–12–19
  15. By: Bernhard Kassner (LMU Munich)
    Abstract: A large body of literature finds that managerial overconfidence increases risk-taking by financial institutions. This paper shows that financial regulation can be effective at mitigating this type of risk. Exploiting regulatory changes introduced after the financial crisis as a natural experiment, I find that overconfidence-induced risk-taking decreases in financial institutions subject to stricter regulation. Following the easing of these regulations, overconfidence-induced risk-taking increases again. These findings confirm the effectiveness of financial regulation at correcting overconfident behavior, but also suggest that the impact fades away quickly once removed.
    Keywords: overconfidence; risk; regulation; financial sector;
    JEL: G28 G32 G38 G40
    Date: 2023–01–27
  16. By: Kin Wai Cheung (Department of Economics, University of California, Davis); Masami Imai (Department of Economics, Wesleyan University)
    Abstract: After the bursting of real estate bubbles in 1991, Japanese banks continued lending to the construction and real estate sectors to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy for these troubled sectors undermines allocative efficiency. Namely, banks’ support for the construction and real estate sectors encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992-1996, we document empirical facts consistent with this hypothesis. On average, lowskilled industries experienced disproportionately slower output and employment growth and more sluggish growth in the number of new establishments in prefectures where the share of bank loans to local construction/real estate sectors increased more after construction boom ended.
    Date: 2023–01
  17. By: Ehrmann, Michael; Hubert, Paul
    Abstract: How do financial markets acquire information about upcoming monetary policy decisions, beyond their reaction to central bank signals? This paper hypothesises that sharing information among investors can improve expectations, especially in the presence of disagreement or uncertainty about the economy. To test this hypothesis, the paper studies monetary policy-related content on Twitter during the “quiet period” before European Central Bank announcements, when policymakers refrain from public statements related to monetary policy. Conditional on large disagreement about the economic outlook, higher Twitter traffic is associated with smaller monetary policy surprises, suggesting that exchanging private signals among investors can help improve expectations. JEL Classification: D83, E52, E58, G14
    Keywords: Central bank communication, information processing, market expectations, quiet period, Twitter
    Date: 2023–02
  18. By: Mike Tsionas (Montpellier Business School Université de Montpellier, Montpellier Research in Management and Lancaster University Management School); Christopher F. Parmeter (Miami Herbert Business School, University of Miami, Miami FL); Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia)
    Abstract: Artificial neural networks have offered their share of econometric insights, given their power to model complex relationships. One area where they have not been readily deployed is the estimation of frontiers. The literature on frontier estimation has seen its share of research comparing and contrasting data envelopment analysis (DEA) and stochastic frontier analysis (SFA), the two workhorse estimators. These studies rely on both Monte Carlo experiments and actual data sets to examine a range of performance issues which can be used to elucidate insights on the benefits or weaknesses of one method over the other. As can be imagined, neither method is universally better than the other. The present paper proposes an alternative approach that is quite exible in terms of functional form and distributional assumptions and it amalgamates the benefits of both DEA and SFA. Specifically, we bridge these two popular approaches via Bayesian artificial neural networks while accounting for possible endogeneity of inputs. We examine the performance of this new machine learning approach using Monte Carlo experiments which is found to be very good, comparable to, or often better than, the current standards in the literature. To illustrate the new techniques, we provide an application of this approach to a data set of large US banks.
    Keywords: Machine Learning; Simulation; Flexible Functional Forms; Bayesian Artificial Neural Networks; Banking; Efficiency Analysis.
    Date: 2023–01
  19. By: Stefan Schiman-Vukan
    Abstract: In response to rising inflation, monetary policy in many countries around the world has recently been tightened, often sharply. This Research Brief shows that central banks have reacted with remarkable similarity, and that, contrary to what current policy rates might suggest, tightening in the USA and the euro area has so far been of roughly the same magnitude. It is also shown that the disinflationary effects of monetary tightening are not yet clearly evident. This is true both for the world's major currencies as well as for European currencies. The report then draws on new empirical evidence which shows that the ECB's interest rate policy from 1999 to 2019 had the desired effect on inflation, but that this effect unfolded only gradually. Thus, the price-dampening effects of the current tightening cycle have yet to materialise. The more monetary policy is tightened now, the more disinflation will be amplified as non-monetary price shocks unwind. It therefore seems appropriate to wait for the effects of the monetary policy measures taken so far before tightening further.
    Date: 2023–02–07
  20. By: Gikas Hardouvelis; Dimitri Vayanos
    Abstract: In this paper we review the Greek economic crisis focusing on the banking system. Bank- sovereign linkages were strong during the crisis: banksÕ liquidity problems before the sovereign crisis spilled over to the real economy, and more importantly the sovereignÕs default rendered all Greek banks insolvent because of their positions in government bonds. The Greek banking system was put back on its feet through a series of recapitalizations, following which industry concentration became the highest in Europe. Banks were slow to reduce non-performing loans (NPLs), which peaked at 48.9% of gross loans, because of their limited capital buffers. Government guarantees for securitizations were finally the key for NPLs to decline close to European averages. BanksÕ capital buffers have improved through internal profitability but remain below European averages. Lending to the real economy is low but recovering, and banksÕ exposure to the sovereign is again increasing.
    Keywords: Greece, Banking system, sovereign, liquidity, NPLs
    Date: 2023–01
  21. By: Bassi, Claudio; Behn, Markus; Grill, Michael; Waibel, Martin
    Abstract: This paper investigates both the magnitude and the drivers of bank window dressing behaviour in euro-denominated repo markets. Using a confidential transaction-level data set, our analysis illustrates that banks engineer an economically sizeable contraction in their repo transactions around regulatory reporting dates. We establish a causal link between these reductions and banks’ incentives to window dress and document the role of the leverage ratio and the G-SIB framework as the most relevant drivers of window dressing behaviour. Our findings suggest that regulatory action is warranted to limit banks’ ability to window dress. JEL Classification: C23, G14, G18, G21, G28
    Keywords: banking regulation, G-SIBs, leverage ratio, repo markets, window dressing
    Date: 2023–02
  22. By: Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic stabilization properties, with particular reference to the exchange rate pass-through, of price level targeting (PLT), average inflation targeting (AIT) and inflation targeting (IT) strategies when the effective lower bound on the monetary policy rate can be binding. The results of simulating the canonical open-economy New Keynesian model -- in which the assumption of local currency pricing holds and which is calibrated without loss of generality to the euro area -- are as follows. First, make-up strategies (PLT and AIT) stabilize inflation better than IT, by favoring a smaller appreciation (larger depreciation) of the nominal exchange rate in the event of disinflationary demand (supply) shocks. Second, and in connection with this, the exchange rate pass-through to import prices is more limited under make-up strategies than under IT, as the former stabilize the inflation rate of imports to a greater extent. Third, the results are robust to alternative values of import price stickiness and elasticity of substitution between domestic and imported goods. Fourth, the stabilization properties of make-up strategies are qualitatively preserved under partially backward-looking inflation expectations, although the relative gains of make-up strategies with respect to IT are smaller than under model-consistent inflation expectations.
    Keywords: effective lower bound, exchange rate pass-through, local currency pricing, make-up strategies, monetary policy
    JEL: E31 E52 F31 F41
    Date: 2023–02
  23. By: Marcella Lucchetta (Department of Economics, University Of Venice CÃ Foscari)
    Abstract: This paper shows theoretically the linkages among monetary policy rate, the real sector demand for loans with supply shocks, aggregate risks, and social welfare. We prove that a) when the loans’ demand is elastic bank competition and the policy rate decrease risks and increase the amount of lending to firms b) these effects are reinforced as the number of banks in the banking market raises. We provide theoretical support to the empirical findings that a competitive environment, or an elastic demand for investments, renders the monetary policy more effective and increases welfare (Aghion et al 2019), on the contrary, uncompetitive structures obtain opposite effects (Wang et all 2022). The policy implications are that the welfare maximizing policy rate can be lower it could be lower than set by the Central Bank when there is high inflation (Rogoff, 2017). c) As in this economic phase of perfect diversification difficulties because of aggregate risks, the policy rate is more effective in welfare increasing if the banking sector is competitive.
    Keywords: Monetary policy, bank competition, risk-taking and banking market structure, investment demand elasticity, aggregate risk and social welfare.
    JEL: G2 D4 D61
    Date: 2023
  24. By: Kuntal K Das; Logan J Donald; Alfred V Guender
    Abstract: This paper presents a model of alternative sources of credit – bank vs. bond finance - to examine the credit substitution hypothesis. Our framework produces testable hypotheses about the behaviour of price- and quantity-based information variables. Examining data from ten Euro-area countries, we find that a credit spread outperforms a finance mix as a predictor of economic activity in both time series and pooled data regressions. There are clear signs of asymmetric and maturity effects in the data. Positive changes in the credit spread predict decreases in economic activity while negative changes bear no informative content. The asymmetric effect is exceptionally strong in pooled data and is present in short-term, long-term, and total credit spreads. In country-specific time-series regressions the asymmetric signalling property is strongest for the long-term credit spread. By contrast, we find no substantive evidence that changes in a quantity-based finance mix have robust predictive power.
    Keywords: Credit spread, finance mix, predictive ability, asymmetric effects, maturity split
    JEL: E3 E4 G1
    Date: 2023–02
  25. By: Kai Barron; Tilman Fries
    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, behavioural finance
    JEL: D83 G40 G50 C90
    Date: 2023
  26. By: Théo Nicolas.
    Abstract: The literature on the effects of bank market power on access to credit has produced many results that are sometimes contradictory. Yet, all of these studies are based on unconsolidated data that ignore the national market power of banking groups. This results in an underestimation bias that this paper proposes to correct. Using a panel of more than 55, 000 French firms covering the period 2006–2017, I consider a set of structural and non-structural measures of bank market power both at the unconsolidated and consolidated levels. My results strongly support the market power hypothesis which emphasizes the virtues of competition on interest rate setting. I find that bank market power increases the interest rate charged, but only when using my consolidated measures. This effect is stronger for small and risky firms and is concentrated on long-term loans. My findings highlight the need to take into account the capital linkages of subsidiaries within the same banking group in order to fully assess the implications of bank market power. Yet, the vices of greater bank market power need to be put into perspective with its costs and benefits on financial stability, which goes beyond the cost of this paper <p> La littérature sur l’effet du pouvoir de marché des banques sur l'accès au crédit des entreprises a abouti à des résultats parfois contradictoires. Toutefois, cet article montre que les mesures traditionnelles du pouvoir de marché des banques sont toutes problématiques car elles s’appuient sur des données non consolidées et ignorent par la même le pouvoir de marché national des groupes bancaires. Il en résulte une sous-estimation que je propose de corriger. En utilisant un panel de plus de 55 000 entreprises françaises couvrant la période 2006-2017, je considère un ensemble de mesures structurelles et non structurelles du pouvoir de marché des banques à la fois au niveau non consolidé et consolidé. Mes résultats corroborent l’hypothèse du pouvoir de marché bancaire qui met en avant les vertus de la concurrence sur la fixation des taux d'intérêt. Alors que les mesures non consolidées du pouvoir de marché des banques n'affectent pas le coût du crédit, je constate que les mesures consolidées augmentent le taux d'intérêt pratiqué. Cet effet est plus fort pour les petites entreprises et les entreprises risquées et se concentre sur les prêts à long terme. Ces résultats soulignent la nécessité de prendre en compte les liens capitalistiques des filiales issues d’un même groupe bancaire pour évaluer pleinement les implications du pouvoir de marché des banques. Les avantages d'un plus grand pouvoir de marché des banques doivent toutefois être mis en perspective avec les coûts et les avantages pour la stabilité financière, ce qui dépasse le cadre de cette recherche.
    Keywords: Cost of Credit, Bank Competition, Bank Concentration, Relationship Lending.; coût du crédit, compétition bancaire, concentration bancaire, relation bancaire
    JEL: E43 E51 G01 G21
    Date: 2023
  27. By: Elif Kubilayⓡ; Eva Raiberⓡ; Lisa Spantigⓡ; Jana Cahlíkováⓡ; Lucy Kaariaⓡ; Lisa Spantig
    Abstract: The recent expansion of digital financial products leads to severe consumer protection issues such as fraud and scams. As these potentially decrease trust in digital services, especially in developing countries, avoiding victimization has become an important policy objective. In an online experiment, we first investigate how well individuals in Kenya identify phone scams using a novel measure of scam identification ability. We then test the effectiveness of scam education, a commonly used approach by banks and institutions for fraud and scam prevention. We find that common tips on how to spot scams do not significantly improve individuals’ scam identification ability, i.e., the distinction of scams from genuine messages. This null effect is driven by an increase in correctly identified scams and a decrease in correctly identified genuine messages. We interpret this as an increase in caution. In addition, we find suggestive evidence that genuine messages which contain scam-like features are more likely to be misclassified, highlighting the importance of a careful design of official communication.
    Keywords: consumer protection, consumer fraud, digital financial services, scam susceptibility, scam education, Kenya
    JEL: D14 D18 G53 O12
    Date: 2023
  28. By: Sweder van Wijnbergen (University of Amsterdam); Daniël Dimitrov (University of Amsterdam)
    Abstract: We address the problem of regulating the size of banks’ macroprudential capital buffers by using market-based estimates of systemic risk and by developing a modeling mechanism through which capital buffers can be allocated efficiently across systemic banks. First, a Distance-to-Default type measure relates a bank’s default risk to its capital requirements. Second, a correlation structure in the default dependencies between banks is estimated from co-movements in the single-name CDS spreads of the underlying banks. Third, risk minimization and equalization approaches are adopted to allocate the capital requirements in line with a policy balancing the social costs and benefits of higher capital requirements. The model is applied to the European banking sector.
    Keywords: systemic risk, regulation, implied market measures, financial institutions, CDS rates
    JEL: G01 G20 G18 G38
    Date: 2023–01–20
  29. By: Bonilla-Mejía, Leonardo; Villamizar-Villegas, Mauricio; Ruiz-Sánchez, María Alejandra
    Abstract: This paper studies the impact of the Covid-19 pandemic on corporate credit in Colombia. We first exploit the geographic and temporal variation in the disease spread to estimate the effect of local exposure to the virus on credit. Our estimates indicate that neither local exposure to the virus, nor the sector-specific mobility restrictions had an impact on credit. We then assess the role of bank supply shocks. We create a measure of bank exposure, reflecting the geographic heterogeneity in pandemic vulnerability and deposits, and estimate its effect on credit. Results indicate that bank-supply shocks account for a credit contraction of approximately 5.2%. To further disentangle the role of bank supply shock, we control for the interaction between firm and time fixed-effects and restrict the sample to municipalities that were relatively spared from the pandemic, finding similar results. Most of the bank supply effects are driven by firms that are small, young, and have relatively low liquidity.
    Keywords: Credit; Covid-19 Pandemic; Bank liquidity
    JEL: G01 G21
    Date: 2023–02
  30. By: Laurent Bazin (CLERSÉ - Centre Lillois d’Études et de Recherches Sociologiques et Économiques - UMR 8019 - Université de Lille - CNRS - Centre National de la Recherche Scientifique, CESSMA UMRD 245 - Centre d'études en sciences sociales sur les mondes africains, américains et asiatiques - IRD - Institut de Recherche pour le Développement - Inalco - Institut National des Langues et Civilisations Orientales - UPCité - Université Paris Cité)
    Abstract: Responsibility (or accountability) is a key notion of the contemporary discourse on development. It is a basis of the neoliberal ideology that dominates the world economics since the structural adjustment plans in the 1980s, in particular in the conception of both the global norm of ‘governance' and the United Nations Millennium Development Goals. This article undertakes to demonstrate that the notions of responsibility and acountability are the other side of a mode of domination based on market as a technique of power : a system in which the financial markets exercise the power of sanction. Finally, responsibility appears as the operator of a triple transfer of riches, risks and morality.
    Abstract: La notion de responsabilité est un terme clé du lexique contemporain sur le développement. Elle est inscrite au cœur des diverses notions qui le composent, en particulier dans l'élaboration de la norme de gouvernance et des politiques mondiales de lutte contre la pauvreté qui ont marqué la première décennie du XXIe siècle. Cet article s'efforce de montrer que si la responsabilisation semble le mot d'ordre du discours néolibéral actuel, c'est que la responsabilité est l'envers de la domination par les marchés financiers, qui exercent le pouvoir de sanction. La responsabilité est l'opérateur d'un triple transfert de richesses, de risques et de moralité.
    Keywords: Responsibility, accountability, governance, empowerment, poverty, financialisation, globalisation, World Bank, responsabilité, imputabilité, gouvernance, pauvreté, financiarisation, Banque mondiale
    Date: 2022
  31. By: Esady, Vania (Bank of England)
    Abstract: How do varying degrees of information frictions affect the transmission mechanism of monetary policy? Using non‑linear methods, I empirically find that during heightened disagreement, monetary policy has a smaller effect on inflation, yet more influence over output. As a proxy for information frictions, I use real GDP nowcast disagreement across professional forecasters. Significant nowcast disagreement indicates when it is difficult to observe the current economic state, or a period of high information rigidities. I develop a tractable theoretical model that shows rationally inattentive price‑setters produce this result. Improved central bank communication that reduces disagreement among economic agents can mitigate output losses when implementing disinflationary monetary policies.
    Keywords: Time-varying disagreement; monetary policy; state-dependent local projections; rational inattention
    JEL: D83 E32 E52 E58
    Date: 2022–12–16
  32. By: James Chapman; Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Francisco Rivadeneyra; Yu Zhu
    Abstract: We review the nascent but fast-growing literature on central bank digital currencies (CBDCs), focusing on their potential impacts on private banks. We evaluate these impacts in three areas of traditional banking: payments, lending and liquidity and maturity transformation. For each area, we discuss the lessons learned and identify gaps in the research yet to be fully explored. We also take a broader look at CBDCs and highlight two promising directions for future research. One is to study CBDCs through the lens of industrial organization, exploring issues such as platform competition and business models. The second is the crypto space and its new developments such as stablecoins and decentralized finance.
    Keywords: Central bank research; Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E50 E58 G00 L00
    Date: 2023–02
  33. By: Indradeep Ghosh (Dvara Research); Susan Thomas (xKDR Forum)
    Abstract: The widely accepted view that finance is important to improve the lives of individuals has led to a tenacious policy support for financial inclusion. The term itself has evolved with time, and along with it, the approaches to measure financial inclusion. This paper in the 17th edition of the Inclusive Finance India Report ( describes the evolution of financial inclusion in India and the various strategies used to quantify so far. The paper presents new thinking on measuring financial inclusion, including the latest Findex measure from the World Bank and the holistic input-output-outcome approach by Dvara Research and XKDR Forum. While both approaches depend upon household surveys, the paper identifies gaps between the measurement focus of the Findex, which continues to focus on bank accounts and payment systems, and the Dvara-XKDR approach which incorporates a greater coverage of what the household holds as financial instruments, how they are used and the perceived well-being of households that are more financially included. The evidence presented suggests that the input-output-outcome can be more useful to both policy makers and financial service providers in identifying households that are financially less included.
    JEL: D1 G2 G5
    Date: 2023–01

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