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on Banking |
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Issue of 2023‒03‒06
twenty-six papers chosen by Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana |
| By: | Emmanuel Caiazzo (University of Naples Federico II); Alberto Zazzaro (Department of Economics and Statistics, University of Naples Federico II, CSEF, and MoFiR) |
| Abstract: | This paper analyzes financial contagion in a banking system where banks are linked by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the most resilient structure is the complete interbank network in which each bank borrows evenly from all the others. However, when the bank most exposed to the defaulting bank is not the one whose portfolio is most similar to it, incomplete interbank networks are more resilient than complete. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation. |
| Keywords: | Banking crisis; financial contagion; interbank network; asset commonality |
| JEL: | G01 G21 G28 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:178&r=ban |
| By: | Harry R. Cooperman; Darrell Duffie; Stephan Luck; Zachry Z. Wang; Yilin Yang |
| Abstract: | Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be left on deposit at the same bank, which happened at some of the largest banks during the COVID recession. |
| JEL: | E4 E43 G00 G01 G02 G20 G21 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30907&r=ban |
| By: | Wenwen Yeh (Central Deposit Insurance Corporation) |
| Abstract: | The Central Deposit Insurance Corporation (CDIC) has introduced a reporting method for internet-only banks platform to conduct real-time monitoring and generate visualized analytical reports. The tool is based on an application programming interface (API). In alignment with the international Suptech development and acting in accordance with the policy of the Chinese Taipei Financial Supervisory Commission, CDIC established the Internet-only Banking Supervisory System (IBSS). This is an API-based platform, to which internet-only banks must file certain reports periodically and abnormal event notifications in real-time. This new monitoring and supervision fashion is in line with the IADI Core Principle 13 on 'Early Detection and Timely Intervention', which calls for a framework in which deposit insurers and financial authorities can detect potential threats in an early stage and intervene timely. The IBSS triggers an instant message alert to the CDIC and other financial safety net members upon an abnormal event to raise vigilance. In addition, the data collected through IBSS are made available to the relevant financial safety net members for use in supervision and risk monitoring. |
| Keywords: | deposit insurance, bank resolution |
| JEL: | G21 G33 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:awl:finbri:14&r=ban |
| By: | Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers) |
| Abstract: | Drawing on a survey amongst IADI Members, this IADI Survey Brief takes stock of the prevalence of ESG (“Environment, Social and Governance†) for deposit insurers. It provides a snap-shop of the current use of ESG policies by deposit insurers and identifies their expectations on future developments. We define ESG policies as formalised frameworks covering environmental, social or governmental issues and that go beyond existing legal obligations in a given jurisdiction. Such policies are voluntary in nature and are not legally enforceable. ESG has recently witnessed fast-growing importance on financial markets and has attracted the attention of a number in international financial institutions. At the same time, the concept of ESG is still novel and there may be ample scope for further developing measuring concepts. |
| Keywords: | deposit insurance, bank resolution |
| JEL: | G21 G33 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:awl:surbri:4&r=ban |
| By: | Charles W. Calomiris; Matthew S. Jaremski |
| Abstract: | To understand a price boom, it is helpful to take account of: (1) observable indicators of changes in ex ante risk tolerance, (2) what information exists and when, and (3) the incentives lenders face. This paper takes such an approach to the Florida land boom of the mid-1920s, the U.S.’ first housing boom in which buyers from around the nation participated. Estimates suggest that an astounding 20 million lots were offered for sale in Florida at that time. Our detailed narrative and empirical evidence suggest that the facts do not require the assumption of irrational behavior, but rather can be explained with all actors behaving with “bounded rationality.” We find that most Florida banks that failed were associated with the Manley-Anthony chain and did not exhibit increases in observable indicators of risk during the boom. Instead, their increases in risk mainly reflected hidden choices either to lend to bank insiders on a preferential basis or to fund other banks that were engaged in such risky and often fraudulent activities. Given bank regulators seem complicit in the risk-taking, even informed investors would have been left in the dark as to the amount of risk that was growing Florida. |
| JEL: | E30 G21 N22 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30914&r=ban |
| By: | Hyeongwoo Kim; Jisoo Son |
| Abstract: | Charge-offs signal important information about the riskiness of loan portfolios in the banking system, which can generate systemic risk towards deep recessions. We compiled the net charge-off rate (COR) data of the top 10 bank holding companies (BHCs) in the U.S. utilizing consolidated financial statements. We propose factor-augmented forecasting models for CORs by estimating latent common factors, including targeted factors, via an array of data dimensionality reduction methods for a large panel of macroeconomic predictors. Our models outperform the benchmark models especially well for business loan CORs, while enhancing predictive contents for consumer loans are harder at short horizons. Real activity factors enhance the out-of-sample predictability for business loan CORs even when financial sector factors are excluded. |
| Keywords: | Net Charge-Off Rate; Bank Holding Companies; Principal Component Analysis; Partial Least Squares; Out-of-Sample Forecast |
| JEL: | C38 C53 C55 G01 G17 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2023-02&r=ban |
| By: | Mecatti, Irene; Tröger, Tobias |
| Abstract: | This paper analyses the demand-side prerequisites for the efficient application of the bail-in tool in bank resolution, scrutinises whether the European bank crisis management and deposit insurance (CMDI) framework is apt to establish them, and proposes amendments to remedy identified shortcomings. The first applications of the new European CMDI framework, particularly in Italy, have shown that a bail-in of debt holders is especially problematic if they are households or other types of retail investors. Such debt holders may be unable to bear losses, and the social implications of bailing them in may create incentives for decision makers to refrain from involving them in bank resolution. In turn, however, if investors can expect resolution authorities (RAs) to behave inconsistently over time and bail-out bank capital and debt holders despite earlier vows to involve them in bank rescues, the pricing and monitoring incentives that the crisis management framework seeks to invigorate would vanish. As a result, market discipline would be suboptimal and moral hazard would persist. Therefore, the policy objectives of the CMDI framework will only be achieved if critical bail-in capital is not held by retail investors without sufficient lossbearing capacity. Currently, neither the CMDI framework nor capital market regulation suffice to assure that this precondition is met. Therefore, some amendments are necessary. In particular, debt instruments that are most likely to absorb losses in resolution should have a high minimum denomination and banks should not be allowed to selfplace such securities. |
| JEL: | G01 G18 G21 G28 K22 K23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:379&r=ban |
| By: | Magdalena Petrovska (National Bank of the Republic of North Macedonia); Jasna Tonovska (Faculty of Economics – Ss. Cyril and Methodius University in Skopje); Miso Nikolov (IUTE Credit Macedonia); Рртан Сулејмани (National Bank of the Republic of North Macedonia) |
| Abstract: | This paper has adopted a Bayesian FAVAR approach to examine the monetary transmission mechanism in North Macedonia. The model is based on a broad data set that encompasses 140 monthly time series spanning between January 2010 and January 2019. In particular, the impact of policy on bank portfolio variables, and the impact of policy on economic activity variables have been evaluated. Our findings show that monetary tightening, causes a fall in output, inflation rate, employment, bank lending, the stock of government securities held by banks, and equity prices. On the other hand, it increases short-term money market rates, lending rates, deposits, and only in the immediate aftermath of the key policy rate rise, the share of non-performing loans in the loan portfolio. The study is expected to provide useful input to monetary policy implementation in North Macedonia. The study as well enriches the literature in this domain by discussing the challenges facing monetary authorities of small open economies with fixed exchange rate regimes in understanding how their policy instruments work through the economy. |
| Keywords: | Monetary transmission mechanism, FAVAR, Bayesian estimation, Monetary policy |
| JEL: | E52 E47 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2023-01&r=ban |
| By: | Christopher J. Waller |
| Date: | 2023–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:95631&r=ban |
| By: | Juan Acosta; Beatrice Cherrier (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique); François Claveau; Clément Fontan; Aurélien Goutsmedt; Francesco Sergi |
| Abstract: | This paper discusses the transformation of the content, role, and status of economic research at the Bank of England in the past 60 years. We show how four three factors (the policy functions and missions of the Bank, the attitude of its executives towards economics, and its organizational structure) shaped the evolution of in-house economic research at the Bank during three distinctive periods (1960-1991; 1992-2007; 2007-2014). Our account relies on a broad set of sources and methods (the Bank's publications, archives, interviews with current and former Bank's economists, bibliometric, prosopography, and topic modeling). |
| Keywords: | Bank of England, Monetary Policy, Central Banks |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03919394&r=ban |
| By: | Michelle W. Bowman |
| Date: | 2023–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:95632&r=ban |
| By: | Ferrari, Alessandro; Landi, Valerio Nispi |
| Abstract: | We use a DSGE model to study the effectiveness of green-asset purchases by the central bank (Green QE), along the transition to a carbon-free economy driven by an emission tax, abstracting from price stability considerations. We find that Green QE helps to further reduce emissions, especially in the early stage of the transition. We find that a crucial parameter to determine the effectiveness of Green QE is the elasticity of substitution between the brown and the green good: the higher the elasticity the stronger the impact of the policy on emissions. JEL Classification: E52, E58, Q54 |
| Keywords: | central bank, climate change, monetary policy, quantitative easing |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232779&r=ban |
| By: | Jack Fosten; Daniel Gutknecht; Marc-Oliver Pohle |
| Abstract: | Quantile forecasts made across multiple horizons have become an important output of many financial institutions, central banks and international organisations. This paper proposes misspecification tests for such quantile forecasts that assess optimality over a set of multiple forecast horizons and/or quantiles. The tests build on multiple Mincer-Zarnowitz quantile regressions cast in a moment equality framework. Our main test is for the null hypothesis of autocalibration, a concept which assesses optimality with respect to the information contained in the forecasts themselves. We provide an extension that allows to test for optimality with respect to larger information sets and a multivariate extension. Importantly, our tests do not just inform about general violations of optimality, but may also provide useful insights into specific forms of sub-optimality. A simulation study investigates the finite sample performance of our tests, and two empirical applications to financial returns and U.S. macroeconomic series illustrate that our tests can yield interesting insights into quantile forecast sub-optimality and its causes. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.02747&r=ban |
| By: | Christophe Blot (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po) |
| Abstract: | The rise of inflation has sparked tightening measures by the ECB. The paper discusses the causes of this rise and the factors that impinge on the effectiveness of ECB policy at curbing inflation. Drawing on own assessment of the respective trends in these factors, we recommend a careful approach to monetary policy. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 26 September 2022. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03954545&r=ban |
| By: | Richtmann, Mathis L.; Steininger, Lea |
| 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 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:35833590&r=ban |
| By: | Giovanna Nicodano; Luca Regis |
| Abstract: | We study the sensitivity of optimal leverage to the level of the risk-free interest rate. Our trade-off model implies a heterogeneous response depending on the presence of a sponsor backing company debt. A highly-leveraged, backed company optimally increases debt when interest rates fall, while a company without a sponsor reduces it despite having lower initial leverage. This heterogeneity implies divergent bankruptcy probability and recovery-upondefault, in the same interest rate scenarios, for the two company types. We also show that a lower risk-free rate reduces the sponsor’s incentive to issue debt. |
| Keywords: | capital structure, tax-bankruptcy trade-off, default, LBO, subsidiaries, securitization, restructurings, risk transfer |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:692&r=ban |
| By: | Gianluca Benigno; Carlo Rosa |
| Abstract: | Cryptocurrencies’ market capitalization has grown rapidly in recent years. This blog post analyzes the role of macro factors as possible drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on Bitcoin since its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, Bitcoin has not responded significantly to U.S. macro and monetary policy news. This disconnect is puzzling, as unexpected changes in discount rates should, in principle, affect the price of Bitcoin. |
| Keywords: | cryptocurrency; Bitcoin; macro news; bubbles |
| JEL: | E2 E52 |
| Date: | 2023–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95609&r=ban |
| By: | Zenno, Yoshihiro; Aruga, Kentaka |
| Abstract: | We conducted a survey on institutional investors in Beijing and Shenzhen to analyze the factors affecting green bond (GB) investing in China, such as credit rating, GB issuer, fund use, liquidity, redemption term, certification label, and type of currency. We then compared the results for Beijing and Shenzhen, including factors that affected greenium and the two cities’ willingness to pay (WTP). Using a double-bounded dichotomous choice contingent valuation method, we find that higher credit ratings tend to increase Beijing investors’ WTP and that the use of GB proceeds affects Shenzhen investors’ WTP. We also find that investors place importance on the type of currency, length of redemption term, and liquidity when investing in GB, while the certification label does not have an impact on WTP. The WTP for GB was higher among Shenzhen investors than among Beijing investors. The government, financial regulators, and issuers looking to enhance the design of GBs and grow their market share in China would all benefit from the study's findings. |
| Keywords: | green bonds, greenium, willingness to pay, credit rating, China, Renminbi |
| JEL: | D0 F64 G1 |
| Date: | 2023–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:116203&r=ban |
| By: | Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po) |
| Abstract: | This paper derives the optimal money injection at the Zero Lower Bound (ZLB), in a tractable model where households hold heterogeneous money holdings due to explicit financial frictions, such as limited participation and temporary binding credit constraints. This framework is motivated by recent empirical findings. A deleveraging shock generates deflationary pressure and a fall in the real interest rate, pushing the economy to the ZLB. The main result is that open-market operations can stabilize the economy at the ZLB whereas lump-sum money transfers cannot. Moreover, an optimal money injection does not avoid the economy being at the ZLB. |
| Keywords: | liquidity trap, zero lower bound, heterogeneous agents, optimal policy |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-03922385&r=ban |
| By: | Carlos Giraldo (Latin American Reserve Fund.); Iader Giraldo (Latin American Reserve Fund.); Jose E. Gomez-Gonzalez (Lehman College, City University of New York.); Jorge M. Uribe (Universitat Oberta de Catalunya.) |
| Abstract: | The extant literature has examined the impact of United States’ uncertainty shocks on developed and large emerging market economies. However, this research has not accounted for global cycles in production, credit, and prices, which can influence the estimates of the effects of US uncertainty on the rest of the world. The effects of uncertainty in highly indebted emerging open economies, which depend heavily on US financial and real conditions, have not been studied. We analyze the effects of uncertainty shocks on 14 Latin American countries (LACs) of various sizes and various levels of dependence on US financial and real flows. Latin America is a highly indebted and heterogeneous region that is sensitive to US economic and financial conditions, particularly uncertainty, in its various dimensions: real, financial, and policy related (including monetary policy). Our results show that the effects of real and financial uncertainty are more significant and long lasting than the effects of economic and monetary policy uncertainty, as measured by the use of uncertainty-related key words. All forms of uncertainty have a larger and more persistent impact on the gross domestic product of countries than the impact on credit and prices. In general, uncertainty in the US depresses economic activity in Latin America, although there is significant heterogeneity in the effects, which warrants detailed analysis of individual countries when considering policy implementation and portfolio diversification. |
| Keywords: | Macroeconomic uncertainty, Financial uncertainty, Policy uncertainty, Global business cycles, Latin America. JEL classification: D80, E44, F21, F44, G15, O54. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202302&r=ban |
| By: | Pohl, Christian; Schüler, Gregor; Schiereck, Dirk |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:136325&r=ban |
| By: | Michael S. Barr |
| Date: | 2023–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:95625&r=ban |
| By: | Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Alexander A. Popov (Monetary Policy Research Division, European Central Bank) |
| Abstract: | We study how monetary policy affects local market competition in a union of countries experiencing different economic conditions: the euro area. We find that when monetary conditions tighten (loosen), from the point of view of an individual economy, market concentration increases (declines). This effect is more pronounced when interest rates have been low-for-long, and it is stronger in sectors that are relatively more sensitive to changes in financing conditions. The underlying mechanism is a decline (increase) in short-term debt and investment by smaller and medium-size firms, relative to large firms, following monetary policy tightening (easing). |
| Keywords: | Eurozone, Monetary Union, Monetary Policy, Low Interest Rates, Competition |
| JEL: | E2 G1 G12 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp333&r=ban |
| By: | Lee, Heungmin |
| Abstract: | In recent years, pretrained language models (PLMs) have emerged as a powerful tool for natural language processing (NLP) tasks. In this paper, we examine the potential of these models in the finance sector and the challenges they face in this domain. We also discuss the interpretability of these models and the ethical considerations associated with their deployment in finance. Our analysis shows that pretrained language models have the potential to revolutionize the way financial data is analyzed and processed. However, it is important to address the challenges and ethical considerations associated with their deployment to ensure that they are used in a responsible and accountable manner. Future research will focus on developing models that can handle the volatility of financial data, mitigate bias in the training data, and provide interpretable predictions. Overall, we believe that the future of AI in finance will be shaped by the continued development and deployment of pretrained language models. |
| Date: | 2023–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:5s3nw&r=ban |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Lunan Jiang (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | In this paper, we assess the impact of the Medium-term Lending Facility (MLF), an instrument recently introduced by the People's Bank of China (PBoC), on treasury and corporate bond yields. This instrument and, more specifically, the transmission of its use through treasury bond yields to corporate bond yields plays a major role in the more market-based policy the PBoC envisions for the future. Using a semi-parametric local projection framework, we show that the mechanism is already fairly effective, allowing the PBoC to manipulate the entire yield curve. |
| Keywords: | Monetary policy; yield curves; MLF; Chinese bond market |
| JEL: | E52 G12 E44 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202301&r=ban |
| By: | Guglielmo Maria Caporale; Alex Plastun |
| Abstract: | This paper examines the main drawbacks of technical analysis. Although this is widely used by practitioners, from an academic perspective it can only be seen as a form of “voodoo finance”. In particular, it runs into the following pitfalls: Subjectivity; Doubtful assumptions; Unjustified algorithms; Low profitability; Data snooping; Statistically insignificant results; Unrealistic simplifications. The key conclusion is that it is high time that (self-fulfilling) technical analysis be replaced by more sophisticated time-series forecasting methods and models such as fractional integration, R/S analysis and autoregressive specifications . |
| Keywords: | technical analysis, data snooping, financial markets, price forecasting, trading |
| JEL: | C63 D84 E37 G12 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10213&r=ban |