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on Banking |
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Issue of 2023‒04‒03
35 papers chosen by Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana |
| By: | Emmanuel Caiazzo (Università di Napoli Federico II); Alberto Zazzaro (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: | 2023–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:667&r=ban |
| By: | Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Sylwia ROSZKOWSKA (Uniwersytet Warszawski); Dorota SKALA (WNEiZ, University of Szczecin) |
| Abstract: | In this study, we provide evidence of the effects of macroprudential policy tightening on loan loss provisions (LLP) and income smoothing of European Economic Area (EEA) banks. Overall, we find that tightening actions of macroprudential policy reduce LLP, but the results depend on the period of analysis: the effect is positive in the pre-Basel III period (1996-2010), and it turns negative after 2010. Policy tightening increases (respectively decreases) income smoothing in the pre-Basel period (respectively Basel III period). We also find that our results depend on the category of macroprudential instruments. In particular, tools relating to LLP policy and taxes are associated with increased LLP and income smoothing in the pre-Basel III period. This outcome changes direction under the Basel III regulatory regime. We also show that the heterogeneity of the effects of the policy on LLP and income smoothing depends on the tool, on the type of the policy change (an activation of a new tool versus a recalibration of existing tools) and on market significance of a bank. |
| Keywords: | Loan loss provisions, macroprudential policy actions, income smoothing, policy tightening, EEA |
| JEL: | E44 E58 G21 G28 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2023-02&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 incorporation of climate related issues in fund management by deposit insurers. It provides a snapshot of current deposit insurer practices, identifies deposit insurers’ expectations, and explores possibilities for future developments. |
| Keywords: | deposit insurance, bank resolution, ESG |
| JEL: | G21 G33 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:awl:surbri:5&r=ban |
| By: | Koji Takahashi; Junnosuke Shino |
| Abstract: | This paper investigates the effect of the greenhouse gas (GHG) emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018. Previous findings suggest that climate risks priced in corporate bonds or syndicated loans are statistically significant but economically minor. This paper investigates bank lending behavior in terms of the loan amount, which we consider to have a more direct effect on firm investment decisions. This paper finds that banks significantly decrease loans to firms with higher GHG emissions. Moreover, this GHG emissions effect appears to have prevailed even before the signing of the Paris Agreement, which the existing literature considers as the starting point where GHG emissions are incorporated in the pricing of debt instruments as credit risk. Finally, banks with greater leverage and a lower return on assets are more likely to decrease loans to firms with high GHG emissions. |
| Keywords: | greenhouse gas, bank lending, leverage, loan-level data |
| JEL: | E51 G21 Q54 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1078&r=ban |
| By: | Ms. Margaux MacDonald; Antonis Kotidis; Dimitris Malliaropulos |
| Abstract: | Banks guarantee international trade through letters of credit. This paper analyzes what happens to trade when the critical role of banks as trade guarantors is compromised. Using the case of the Greek capital controls in 2015, the events around which led to a massive loss of confidence in the domestic banking system, we show that firms whose operations were more dependent on domestic banks suffered a steep decline in imports and, subsequently, exports. This operated through letters of credit, which during the capital controls period had to be backed by firms’ own cash collateral rather than the bank guarantee. As a result, cash-poor firms imported relatively less. Public intervention to guarantee transactions is shown to help mitigate some of the decline in imports. |
| Keywords: | Bank guarantee; letters of credit; imports; exports; capital control; trade guarantor; cash-poor firm; outflow control; log letters of credit; bank intermediation channel; Capital controls; Credit; Commercial banks; Capital outflows; Asia and Pacific |
| Date: | 2023–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/038&r=ban |
| By: | Giannoulakis, Stelios; Forletta, Marco; Gross, Marco; Tereanu, Eugen |
| Abstract: | This paper evaluates the resilience benefits of borrower-based macroprudential policies—such as LTV, DSTI, or DTI caps—for households and banks in the EU. To that end, we employ a further developed variant of the integrated micro-macro simulation model of Gross and Población (2017). Besides various methodological advances, joint policy caps are now also considered, and the resilience benefits are decomposed across income and wealth categories of borrowing households. Our findings suggest that (1) the resilience of households improves notably as a result of implementing individual and joint policy limits, with joint limits being more than additively effective; (2) borrower-based measures can visibly enhance the quality of bank mortgage portfolios over time, supporting bank solvency ratios; and (3) the policies’ resilience benefits are more pronounced for households located at the lower end of the income and wealth distributions. JEL Classification: C33, E58, G18 |
| Keywords: | Borrower-based macroprudential policy, household micro data and modeling, macro-financial linkages |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232795&r=ban |
| By: | Congressional Budget Office |
| Abstract: | This report describes the size and nature of the federal government’s credit and insurance portfolios. For this analysis, CBO developed three measures of credit and insurance activity—the covered amount, the net covered amount, and the allowance for losses. |
| JEL: | G10 G18 G21 G22 G28 H12 H81 J32 Q54 |
| Date: | 2023–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:58614&r=ban |
| By: | Simona Malovana; Jan Janku; Martin Hodula |
| Abstract: | We estimate the impact of macroprudential policy on income inequality for a panel of 105 countries over the 1990-2019 period. We document that macroprudential tightening can have both upward and downward effects on income distribution, with the direction of the effect depending on the type of instrument used and a broader set of macro-financial conditions. We identify and empirically verify two channels - the crisis mitigation and prevention channel and the credit redistribution channel. Through the first one, tighter regulation ahead of the crisis reduces income inequality and mitigates the redistributive effects of financial crises, reflecting the increased resilience of the financial sector. Through the second one, it contributes to greater inequality due to its negative effect on credit and house price growth. This has an important policy implication: the timely implementation of macroprudential regulation has preventive effects and can contribute to a more equal distribution of society's income. |
| Keywords: | Credit redistribution, crisis prevention, income inequality, local projections, macroprudential policy |
| JEL: | G01 G28 O15 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2023/3&r=ban |
| By: | Anson T. Y. Ho; Kim Huynh; David T. Jacho-Chávez; Geneviève Vallée |
| Abstract: | Global climate change is increasing the frequency and severity of natural disasters. We use detailed consumer credit data to investigate the impact of the 2016 Fort McMurray wildfire, the costliest wildfire disaster in Canadian history, on consumers’ financial stress. We focus on the arrears of insured mortgages because of their important implications for financial institutions and insurers’ business risk and relevant management practices. Our findings suggest that wildfires have caused more mortgage arrears in severely damaged areas, with both economic and statistical significance. For other areas with relatively minor damage, the increase in arrears is small and statistically insignificant. |
| Keywords: | Climate change; Credit and credit aggregates; Econometric and statistical methods; Financial stability |
| JEL: | C21 D12 G21 Q54 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-15&r=ban |
| By: | Schilling, Linda |
| Abstract: | Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as bailouts, Emergency Liquidity Assistance, and withdrawal fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective. |
| Keywords: | financial regulation, bank runs, global games, policy effectiveness, bank resolution, withdrawal fees, emergency liquidity assistance, lender of last resort policies, money market mutual fund gates, suspension of convertibility |
| JEL: | D81 D82 E61 G21 G28 G33 G38 |
| Date: | 2023–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:116612&r=ban |
| By: | Хакимжанов Сабит // Khakimzhanov Sabit (National Bank of Kazakhstan); Джусангалиева Камилла // Jussangaliyeva (National Bank of Kazakhstan) |
| Abstract: | Механизм предельных ставок фонда гарантирования депозитов был дополнен платой за системный риск, в основе которой заложен принцип налога Пигу. Дополнительный взнос за системный риск был внедрен для сдерживания чрезмерно агрессивной конкуренции по цене на рынке депозитов путем создания дополнительных явных финансовых издержек, которые могут компенсировать выгоду отдельных банков от увеличения доли депозитного рынка. Однако существующая неэластичность внедренного механизма, проявляющаяся в отсутствии стабильного давления на всем диапазоне ставок, диктует необходимость его реформирования. В данной статье авторы раскрывают детали внедренного механизма интернализации системного риска на рынке депозитов, причины, побудившие к его внедрению, оценку его успешности и пути дальнейшего реформирования. // The framework for cap rates of the deposit insurance fund was supplemented by a systemic risk fee based on the Pigouvian tax principle. An additional fee for systemic risk was introduced to curb overly aggressive price competition in the deposit market by creating incremental explicit financial costs that could offset the gain to individual banks from the increased deposit market share. However, the existing inelasticity of the implemented framework, which manifests itself in the absence of stable pressure over the entire range of rates, necessitates its reform. In this study, the authors give insight into the details of the implemented mechanism for the systemic risk internalization in the deposit market, the reasons that prompted its implementation, evaluation of its success and ways for a further reform. |
| Keywords: | налог Пигу, пекуниарные экстерналии, рынок депозитов, система гарантирования депозитов, страхование вкладов, системный риск, моральный риск, Казахстанский фонд гарантирования депозитов, плата за системный риск, Pigouvian tax, pecuniary externalities, deposit market, deposit insurance system, deposit insurance, systemic risk, moral hazard, Kazakhstan Deposit Insurance Fund, systemic risk fee |
| JEL: | E43 G21 G28 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:aob:wpaper:42&r=ban |
| By: | Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka |
| Abstract: | Macroprudential policies since the global financial crisis have been central to safeguarding financial stability. Despite the increasing use of multiple policy instruments, a detailed understanding of interactions among them is still needed to assess how instrument combinations can enhance the effectiveness of macroprudential action. This paper proposes a conceptual framework for informing the choice of combinations of macroprudential instruments, looking at the role of micro and macroeconomic transmission channels, interactions across policy objectives, the importance of country specificities and linkages with other macroeconomic or supervisory policies. It also reviews considerations related to circumvention, leakages, time of activation and communication of policies, all of which may affect the desirability of different combinations of macroprudential instruments. The paper also discusses a possible operational use of combinations of macroprudential instruments to address selected risks and provides a rich analysis of instrument interactions within the categories of borrower-based and, respectively, capital-based measures. The paper concludes that the combinations of capital and borrower-based instruments ensures a comprehensive coverage of different systemic risks and entail important synergies. JEL Classification: G21, G28 |
| Keywords: | banks, financial stability, macroprudential policy |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023310&r=ban |
| By: | Amberg, Niklas (Research Department, Central Bank of Sweden); Jacobson, Tor (Research Department, Central Bank of Sweden); Quadrini, Vincenzo (University of Southern California, Marshall School of Business); Rogantini Picco, Anna (Research Department, Central Bank of Sweden) |
| Abstract: | We use a comprehensive Swedish credit register to document that firms throughout the size distribution have access to fairly large and reasonably priced credit lines, but borrow relatively little from them. We rationalize this using a theoretical framework in which the expected cost of financial distress increases with current borrowing and lower credit-line utilization reflects tighter ‘dynamic’ credit constraints. Consistently with the predictions of the model, the data shows that there is a negative relation between firm-level uncertainty and credit-line utilization. We also find that firms increase borrowing in response to credit-limit increases, even when their current debt is far from the limit. |
| Keywords: | Credit constraints; banks; uncertainty; credit lines; precautionary behavior |
| JEL: | D22 E44 G21 G32 |
| Date: | 2023–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0422&r=ban |
| By: | Nicola Branzoli (Bank of Italy); Raffaele Gallo (Bank of Italy); Antonio Ilari (Bank of Italy); Dario Portioli (Bank of Italy) |
| Abstract: | This paper provides evidence that, by restoring market functioning, central banks' pandemic-related asset purchase programmes lowered payoff complementarities among investors in corporate bond funds, reinforcing asset managers' willingness to hold riskier assets to increase funds' returns. Controlling for potentially confounding factors, we show that funds more exposed to these interventions – i.e. those which immediately prior to the pandemic crisis held a high share of securities eligible for inclusion in purchase programmes – took on more credit and liquidity risks than less exposed ones. Risk-taking was stronger when more exposed funds under-performed their peers or held less liquid assets. We discuss the implications for the design of policy interventions in the aftermath of market stress and the regulation of the investment fund sector. |
| Keywords: | corporate bond funds, market stress, asset purchase programmes, risk-taking |
| JEL: | E50 G01 G11 G23 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1404_23&r=ban |
| By: | Sophia Chen; Nina Biljanovska |
| Abstract: | We explore the differential effects of lender-based macroprudential policies on new mortgage borrowing for households of different income using a comprehensive dataset that links macroprudential policy actions with household survey data for European Union countries. The main results suggest that higher-income households on average experience a larger reduction in mortgage loan size than lower-income households when regulation targeting total lenders’ assets tightens. In contrast, lower-income households on average experience a larger reduction in mortgage loan size than higher-income households when regulation targeting lenders’ capital requirements tightens. We also provide evidence of the different channels through which the differential effects operate. |
| Keywords: | Household borrowing; macroprudential policy; income distribution |
| Date: | 2023–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/043&r=ban |
| By: | Martín Harding; Jesper Lindé; Mathias Trabandt |
| Abstract: | We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-COVID period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high. |
| Keywords: | inflation dynamics, inflation risk, monetary policy, linearized model, nonlinear model, real rigidities. |
| JEL: | E30 E31 E32 E37 E44 E52 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1077&r=ban |
| By: | Nicola Branzoli (Bank of Italy); Edoardo Rainone (Bank of Italy); Ilaria Supino (Bank of Italy) |
| Abstract: | Policy evaluation based on the estimation of dynamic stochastic general equilibrium models with aggregate macroeconomic time series rests on the assumption that a representative agent can be identified, whose behavioural parameters are independent of the policy rules. Building on earlier work by Geweke, the main goal of this paper is to show that the representative agent is in general not structural, in the sense that its estimated behavioural parameters are not policyindependent. The paper identifies two different sources of nonstructurality. The latter is shown to be a fairly general feature of optimizing representative agent rational expectations models estimated on macroeconomic data. |
| Keywords: | bank credit, information technology, firms, COVID-19 pandemic |
| JEL: | G21 G22 G23 G24 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1406_23&r=ban |
| By: | David Vidal-Tom\'as; Antonio Briola; Tomaso Aste |
| Abstract: | This investigation analyses the factors leading to the collapse of the FTX digital currency exchange. We identify the collapse of Terra-Luna as the trigger event causing a significant decrease in liquidity to the crypto exchange which heavily relied on leveraging and misusing its native token, FTT. Additionally, we analyze the interdependencies of 199 cryptocurrencies at hourly intervals and find that the collapse was accelerated by Binance tweets, originating a systemic reaction in the market. Finally, we highlight the growing trend of centralization within the crypto space and emphasize the importance of genuinely decentralized finance for a transparent, future digital economy. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.11371&r=ban |
| By: | Elie Bouri (School of Business, Lebanese American University, Beirut, Lebanon); David Gabauer (Software Competence Center Hagenberg, Hagenberg, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Harald Kinateder (School of Business, Economics and Information Systems, University of Passau, Germany) |
| Abstract: | In this paper, we examine the spillover across the monthly inflation rates (measured by the CPI) covering the USA, Canada, UK, Germany, France, Netherlands, Belgium, Italy, Spain, Portugal, and Greece. Using data covering the period from May 1963 to November 2022 within a time-varying spillover approach, we show that the total spillover index across the inflation rates spiked during the war in Ukraine period, exceeding its previous peak shown during the 1970s energy crisis. Notably, we apply a quantile-on-quantile regression and reveal that the total spillover index is positively associated with the level of global geopolitical risk (GPR) index. Levels of GPR are positively influencing high levels of the inflation spillover index, whereas the GPR Acts index is positively associated with all levels of inflation spillover index. Given that rising levels of inflation are posing risks to the financial system and economic growth, these findings should matter to the central banks and policymakers in advanced economies. They suggest that the policy response should go beyond conventional monetary tools by considering the political actions necessary to solve the Russia-Ukraine war and ease the global geopolitical tensions. |
| Keywords: | Inflation spillovers; geopolitical risk; TVP-VAR; dynamic connectedness |
| JEL: | C32 C5 G15 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202304&r=ban |
| By: | Julián Caballero; Blaise Gadanecz |
| Abstract: | This paper studies the experience of emerging markets with explicit interest rate guidance during 2020-2021. Despite some heterogeneity, interest rate guidance generally provided additional monetary stimulus, as reflected in lower medium-termyields and lower termspreads. The magnitude of the reduction in 10-year yields ranged between five and twenty basis points, and these effects are found when the policy rate was at its historical minima. Outcome-based guidance appears to have had the largest effects. In the immediate aftermath of the guidance, we do not observe a systematic negative market reaction of the kind that would be associated with a loss of central bank credibility or with concerns about fiscal dominance, such as a de-anchoring of inflation expectations, currency depreciation pressures, or increased sovereign credit risk. |
| Keywords: | monetary policy; forward guidance; central bank communication; emerging markets |
| JEL: | E52 E58 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1080&r=ban |
| By: | Marijn A. Bolhuis; Shushanik Hakobyan; Zo Andriantomanga |
| Abstract: | The Covid-19 pandemic has led to a large disruption of global supply chains. This paper studies the implications of supply chain disruptions for inflation and monetary policy in sub-Saharan Africa. Increases in supply chain pressures have had a sizeable impact on headline, food, and tradable inflation for a panel of 29 sub-Saharan African countries from 2000 to 2022. Our findings suggest that central banks can stabilize inflation and output more efficiently by monitoring global supply chains and adjusting the monetary policy stance before the disruptions have fully passed through into all inflation components. The gains from monitoring supply chain disruptions are particularly large for open economies which tend to experience outsized second-round effects on the prices of non-tradable goods and services. |
| Keywords: | Inflation; global supply chains; sub-Saharan Africa; shipping costs; monetary policy; core inflation; food prices; oil price |
| Date: | 2023–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/039&r=ban |
| By: | Francesco Grigoli; Damiano Sandri |
| Abstract: | We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals. |
| Keywords: | public debt, inflation expectations, monetary finance, fiscal dominance |
| JEL: | E31 E52 E58 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1082&r=ban |
| By: | Manuela M. Dantas; Kenneth J. Merkley; Felipe B. G. Silva |
| Abstract: | We propose four channels through which government guarantees affect banks' incentives to smooth income. Empirically, we exploit two complementary settings that represent plausible exogenous changes in government guarantees: the increase in implicit guarantees following the creation of the Eurozone and the removal of explicit guarantees granted to the Landesbanken. We show that increases (decreases) in government guarantees are associated with significant decreases (increases) in banks' income smoothing. Taken together, our results largely corroborate the predominance of a tail-risk channel, wherein government guarantees reduce banks' tail risk, thereby reducing managers' incentives to engage in income smoothing. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.03661&r=ban |
| By: | Thomas Standfuss; Georg Hirte; Frank Fichert; Hartmut Fricke |
| Abstract: | Air traffic control is considered to be a bottleneck in European air traffic management. As a result, the performance of the air navigation service providers is critically examined and also used for benchmarking. Using quantitative methods, we investigate which endogenous and exogenous factors affect the performance of air traffic control units on different levels. The methodological discussion is complemented by an empirical analysis. Results may be used to derive recommendations for operators, airspace users, and policymakers. We find that efficiency depends significantly on traffic patterns and the decisions of airspace users, but changes in the airspace structure could also make a significant contribution to performance improvements. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.09986&r=ban |
| By: | Martin Vesely |
| Abstract: | Portfolio optimization is an inseparable part of strategic asset allocation at the Czech National Bank. Quantum computing is a new technology offering algorithms for that problem. The capabilities and limitations of quantum computers with regard to portfolio optimization should therefore be investigated. In this paper, we focus on applications of quantum algorithms to dynamic portfolio optimization based on the Markowitz model. In particular, we compare algorithms for universal gate-based quantum computers (the QAOA, the VQE and Grover adaptive search), single-purpose quantum annealers, the classical exact branch and bound solver and classical heuristic algorithms (simulated annealing and genetic optimization). To run the quantum algorithms we use the IBM Quantum\textsuperscript{TM} gate-based quantum computer. We also employ the quantum annealer offered by D-Wave. We demonstrate portfolio optimization on finding the optimal currency composition of the CNB's FX reserves. A secondary goal of the paper is to provide staff of central banks and other financial market regulators with literature on quantum optimization algorithms, because financial firms are active in finding possible applications of quantum computing. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.01909&r=ban |
| By: | Arno Botha; Esmerelda Oberholzer; Janette Larney; Riaan de Jongh |
| Abstract: | The IFRS 9 accounting standard requires the prediction of credit deterioration in financial instruments, i.e., significant increases in credit risk (SICR). However, the definition of such a SICR-event is inherently ambiguous, given its reliance on comparing two subsequent estimates of default risk against some arbitrary threshold. We examine the shortcomings of this approach and propose an alternative framework for generating SICR-definitions, based on three parameters: delinquency, stickiness, and the outcome period. Having varied these parameters, we obtain 27 unique SICR-definitions and fit logistic regression models accordingly using rich South African mortgage data; itself containing various macroeconomic and obligor-specific input variables. This new SICR-modelling approach is demonstrated by analysing the resulting portfolio-level SICR-rates (of each SICR-definition) on their stability over time and their responsiveness to economic downturns. At the account-level, we compare both the accuracy and flexibility of the SICR-predictions across all SICR-definitions, and discover several interesting trends during this process. These trends form a rudimentary expert system for selecting the three parameters optimally, as demonstrated in our recommendations for defining SICR-events. In summary, our work can guide the formulation, testing, and modelling of any SICR-definition, thereby promoting the timeous recognition of credit losses; the main imperative of IFRS 9. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.03080&r=ban |
| By: | AGUIMA AIME BERNARD LOMPO (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne) |
| Abstract: | This study examines the effect of financial development on tax revenue mobilization in developing countries. Our empirical analysis uses the aggregate financial index that comprises the banking system's depth (size and activity), access, and efficiency of financial institutions and financial markets. Using panel data from developing countries over the period 1995-2017, our findings suggest that more developed financial sectors positively and significantly influence the government's ability to raise tax revenue. More interestingly, we find that this favorable effect is sensitive to developing countries characteristics, namely the level of economic development, the degree of financial openness and the stance of fiscal policies. When we more precisely look at the effects of disaggregated financial development components on tax revenues mobilization, we find that the estimated coefficients on the sub-components of financial development are statistically significant, except for the financial market's efficiency. The results denote that tax revenue in developing countries depends on financial institutions and financial markets. |
| Keywords: | Financial development, Non-resource tax revenue, Domestic tax revenue, Developing countries |
| Date: | 2023–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03980743&r=ban |
| By: | Martina Colombo; Matteo Cuda |
| Abstract: | The 17 Sustainable Development Goals (SDGs or Goals) were introduced by the United Nations as a blueprint to achieve a better and more sustainable future for all. Financial systems play a key role in this transition by providing funding for economic activities and reorienting capital flows towards a more sustainable economy and many private sector players have been adopting the SDGs as a guide for their sustainability programmes. In this context, Public Development Banks and Institutions (PDBIs) - entities initiated by governments at regional, national and multinational level to proactively pursue public policy objectives – may have specific mandates to provide and/or help mobilise financial support for additional investments with social and environmental objectives that the market fails to finance. Therefore, these players are by their nature called to action and to contribute to the SDGs. This paper offers a first attempt to track the sustainability performance of PDBIs in Europe where, for several reasons, we are witnessing an enhanced public intervention in the economy, and PDBIs’ contribution to the alignment of EU Member States to the SDGs. By making use of the Institutional Theory, the results of this analysis show an overview of the state of play on SDGs’ implementation among PDBIs in Europe; findings have theoretical and practical implications both for PDBIs in defining their strategy to carry out these goals, and for European policymakers that assess the process and aim to promote achievement of the SDGs across Europe. Findings of this study show that PDBIs in Europe are well aligned with the European policymakers’ goals and aim to contribute to the EU climate objectives. |
| JEL: | G23 M14 O19 Q58 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:179&r=ban |
| By: | Jiahua Xu; Daniel Perez; Yebo Feng; Benjamin Livshits |
| Abstract: | Decentralized finance (DeFi) has seen a tremendous increase in interest in the past years with many types of protocols, such as lending protocols or automated market-makers (AMMs) These protocols are typically controlled using off-chain governance, where token holders can vote to modify different parameters of the protocol. Up till now, however, choosing these parameters has been a manual process, typically done by the core team behind the protocol. In this work, we model a DeFi environment and propose a semi-automatic parameter adjustment approach with deep Q-network (DQN) reinforcement learning. Our system automatically generates intuitive governance proposals to adjust these parameters with data-driven justifications. Our evaluation results demonstrate that a learning-based on-chain governance procedure is more reactive, objective, and efficient than the existing manual approach. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.09551&r=ban |
| By: | Niccol\`o Bardoscia; Alessandro Nodari |
| Abstract: | In traditional finance, the Black & Scholes model has guided almost 50 years of derivatives pricing, defining a standard to model any volatility-based product. With the rise of Decentralized Finance (DeFi) and constant product Automated Market Makers (AMMs), Liquidity Providers (LPs) are playing an increasingly important role in markets functioning, but, as the recent bear market highlighted, they are exposed to important risks such as Impermanent Loss (IL). In this paper, we tailor the formulas introduced by Black & Scholes to DeFi, proposing a method to calculate the greeks of an LP. We also introduce Impermanent Gain, a product that LPs can use to hedge their position and traders can use to bet on a rise in volatility and benefit from large market moves. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.11942&r=ban |
| By: | Marouane Daoui |
| Abstract: | This article conducts a literature review on the topic of monetary policy in developing countries and focuses on the effectiveness of monetary policy in promoting economic growth and the relationship between monetary policy and economic growth. The literature review finds that the activities of central banks in developing countries are often overlooked by economic models, but recent studies have shown that there are many factors that can affect the effectiveness of monetary policy in these countries. These factors include the profitability of central banks and monetary unions, the independence of central banks in their operations, and lags, rigidities, and disequilibrium analysis. The literature review also finds that studies on the topic have produced mixed results, with some studies finding that monetary policy has a limited or non-existent impact on economic growth and others finding that it plays a crucial role. The article aims to provide a comprehensive understanding of the current state of research in this field and to identify areas for future study. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.03162&r=ban |
| By: | Bilbao-Goyoaga, Eugenia (The London School of Economics) |
| Abstract: | This paper examines how minimum income schemes (MISs) affect households’ financial wellbeing and whether this effect differs across objective material conditions and households’ perceptions. Two reasons motivate this study. First, while the Covid-19 pandemic, the ecological transition and the cost-of-living crisis have all prompted a renewed interest in MISs, no consensus exists on how effective these schemes are in improving households’ financial wellbeing. Second, when evaluating MISs, the literature focuses on objective measures of financial wellbeing, namely monetary poverty. Yet, peoples’ perceptions of their own situation can be instrumental in affecting their health, productivity and decision-making and can reveal important information about adaptation mechanisms or spillovers to non-recipients. This paper examines the case study of Spain, a country that introduced a new MIS in 2020. The study uses Eurostat survey data for the 2010-2022 period in a Synthetic Control Method analysis. The results show that, while the policy had no significant effect on objective financial wellbeing measures (i.e. the poverty rate, the poverty gap and mean income) for its first year and a half of existence, it did considerably improve subjective financial wellbeing after two years and a half, as it helped households feel less pessimistic about the evolution of their finances during the Covid-19 and cost-of-living crises. The paper discusses several mechanisms explaining this differentiated impact of the policy, such as its lagged rollout, the improvements made to the benefit from 2022 as well as anticipation, placebo and positive spillover effects of the MIS. The findings highlight the importance for practitioners to consider subjective measures when assessing income support schemes. |
| Date: | 2023–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:wv7xt&r=ban |
| By: | Henri Froese; Martin Hoefer; Lisa Wilhelmi |
| Abstract: | A debt swap is an elementary edge swap in a directed, weighted graph, where two edges with the same weight swap their targets. Debt swaps are a natural and appealing operation in financial networks, in which nodes are banks and edges represent debt contracts. They can improve the clearing payments and the stability of these networks. However, their algorithmic properties are not well-understood. We analyze the computational complexity of debt swapping in networks with ranking-based clearing. Our main interest lies in semi-positive swaps, in which no creditor strictly suffers and at least one strictly profits. These swaps lead to a Pareto-improvement in the entire network. We consider network optimization via sequences of $v$-improving debt swaps from which a given bank $v$ strictly profits. We show that every sequence of semi-positive $v$-improving swaps has polynomial length. In contrast, for arbitrary $v$-improving swaps, the problem of reaching a network configuration that allows no further swaps is PLS-complete. We identify cases in which short sequences of semi-positive swaps exist even without the $v$-improving property. In addition, we study reachability problems, i.e., deciding if a sequence of swaps exists between given initial and final networks. We identify a polynomial-time algorithm for arbitrary swaps, show NP-hardness for semi-positive swaps and even PSPACE-completeness for $v$-improving swaps or swaps that only maintain a lower bound on the assets of a given bank $v$. A variety of our results can be extended to arbitrary monotone clearing. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2302.11250&r=ban |
| By: | Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland) |
| Abstract: | We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and Kimball (1995)-type aggregators of individual differentiated goods and labor in a model with staggered price- and wage-setting. Under nonzero trend inflation, the non-CES aggregator of goods and staggered price-setting give rise to a variable real marginal cost of goods aggregation, which becomes a driver of inflation. This marginal cost consists of an aggregate of the goods' relative prices, which depends on past inflation, thereby generating intrinsic inertia in inflation. Likewise, the non-CES aggregator of labor and staggered wage-setting lead to intrinsic inertia in wage inflation, which enhances the persistence of price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to monetary policy shocks. We also demonstrate that lower trend inflation reduces inflation persistence and that a credible disinflation leads to a gradual decline in inflation and a fall in output. |
| Keywords: | Trend inflation; Non-CES aggregator; Credible disinflation |
| JEL: | E31 E52 |
| Date: | 2023–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp23e03&r=ban |
| By: | Eskander, Shaikh M.S.U.; Steele, Paul |
| Abstract: | This paper investigates household’s private expenditures to cope with the harmful losses of climate change and disasters. Using household-level survey data from Bangladesh, this paper finds that disaster-affected rural Bangladeshi households allocate between $499 and $1076 in disaster-related expenditures. Such expenditures are always greater than their relevant precautionary savings, implying that those households may debt-finance their defensive measures. Households with greater precautionary savings spend more: a 100% increase in precautionary savings can increase disaster expenditures by 5%. Moreover, there are considerable regional heterogeneities in household’s disaster expenditures. Increased public sector allocations in addition to carefully designed affordable market-based financing instruments can potentially ease the pressure on disaster-affected households in their fight against the harms of climate change and disaster. |
| Keywords: | Bangladesh; climate change; climate finance; disaster; disaster expenditures; disaster risk; expenditures; precautionary savings |
| JEL: | Q01 Q51 |
| Date: | 2023–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118337&r=ban |