nep-ban New Economics Papers
on Banking
Issue of 2023‒04‒17
33 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Supervisory policy stimulus: evidence from the euro area dividend recommendation By Dautović, Ernest; Gambacorta, Leonardo; Reghezza, Alessio
  2. Nonbank lenders as global shock absorbers: evidence from US monetary policy spillovers By Elliott, David; Meisenzah, Ralf R; Peydró, José-Luis
  3. Useful, usable, and used? Buffer usability during the Covid-19 crisis By Mathur, Aakriti; Naylor, Matthew; Rajan, Aniruddha
  4. Monetary policy strategies for the euro area: optimal rules in the presence of the ELB By Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
  5. The demand for long-term mortgage contracts and the role of collateral By Liu, Lu
  6. Firm Heterogeneity and the Transmission of Central Bank Credit Policy By Konrad Kuhmann
  7. Big tech credit and monetary policy transmission: micro-level evidence from China By Yiping Huang; Xiang Li; Han Qiu; Changhua Yu
  8. Money velocity, digital currency, and inflation dynamics By Danny Hermawan; Denny Lie; Aryo Sasongko; Richard I. Yusan
  9. Predictive Optimized Model on Money Markets Instruments With Capital Market and Bank Rates Ratio By Bilal Hungund; Shilpa Rastogi
  10. The valuation haircuts applied to eligible marketable assets for ECB credit operations By Adler, Martin; Camba-Méndez, Gonzalo; Džaja, Tomislav; Manzanares, Andrés; Metra, Matteo; Vocalelli, Giorgio
  11. Guaranteeing trade in a severe crisis: cash collateral over bank guarantees By Antonis Kotidis; Margaux MacDonald; Dimitris Malliaropulos
  12. The Financial Macro-econometric Model (FMM, 2022 Version) By Nobuhiro Abe; Kyosuke Chikamatsu; Kenji Kanai; Yusuke Kawasumi; Ko Munakata; Koki Nakayama; Tatsushi Okuda; Yutaro Takano
  13. Modeling Determinants of Private Banks Profitability in Ethiopia By mohammed, habib
  14. The Impact of Feature Selection and Transformation on Machine Learning Methods in Determining the Credit Scoring By Oguz Koc; Omur Ugur; A. Sevtap Kestel
  15. Board of Directors’ Networks, Gender, and Firm Performance in a Male-Dominated Industry: Evidence from U.S. Banking By Owen, Ann; Temesvary, Judit; Wei, Andrew
  16. The EU’s Open Strategic Autonomy from a central banking perspective. Challenges to the monetary policy landscape from a changing geopolitical environment. By Ioannou, Demosthenes; Pérez, Javier J.; Balteanu, Irina; Kataryniuk, Ivan; Geeroms, Hans; Vansteenkiste, Isabel; Weber, Pierre-François; Attinasi, Maria Grazia; Buysse, Kristel; Campos, Rodolfo; Clancy, Daragh; Essers, Dennis; Faccia, Donata; Freier, Maximilian; Gerinovics, Rinalds; Khalil, Makram; Kosterink, Patrick; Mancini, Michele; Manrique, Marta; McQuade, Peter; Molitor, Philippe; Pulst, Daniela; Timini, Jacopo; Van Schaik, Ilona; Valenta, Vilém; Vergara Caffarelli, Filippo; Viani, Francesca; Viilmann, Natalja; Almeida, Ana M.; Alonso, Daniel; Bencivelli, Lorenzo; Borgogno, Oscar; Borrallo, Fructuoso; Cuadro-Sáez, Lucía; Di Stefano, Enrica; Esser, Andreas; García-Lecuona, María; Habib, Maurizio; Jeudy, Bruno-Philippe; Lájer, Andrés; Le Gallo, Florian; Martonosi, Ádám; Millaruelo, Antonio; Miola, Andrea; Négrin, Pauline; Zangrandi, Michele Savini; Strobel, Felix; Tylko-Tylczynska, Kalina Paula
  17. Analysing the response of U.S. financial market to the Federal Open Market Committee statements and minutes based on computational linguistic approaches By Xuefan, Pan
  18. At the Right Time:Eliminating Mismatch between Cash Flow and Credit Flow in Microcredit By Hisaki KONO; Abu SHONCHOY; Kazushi TAKAHASHI
  19. Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets By Viral V. Acharya; Rahul S. Chauhan; Raghuram Rajan; Sascha Steffen
  20. The paradox of debt and Minsky cycle: Nonlinear effects of debt and capital, and variety of capitalism By Yuki Tada
  21. Is COVID-19 reflected in AnaCredit dataset? A big data - machine learning approach for analysing behavioural patterns using loan level granular information By Anastasios Petropoulos; Evangelos Stavroulakis; Panagiotis Lazaris; Vasilis Siakoulis; Nikolaos Vlachogiannakis
  22. Regional favoritism in access to credit: Just believe it By Osei-Tutu, Francis; Weill, Laurent
  23. The relationship between inequality and bank credit in Australia By van Netten, Jamie
  24. Lone (loan) wolf pack risk By Gao, Mingze; Hasan, Iftekhar; Qiu, Buhui; Wu, Eliza
  25. Helicopter Drops and Liquidity Traps By Manuel Amador; Javier Bianchi
  26. Negative rates, monetary policy transmission and cross-border lending via international financial centres By Andreeva, Desislava; Coman, Andra; Everett, Mary; Froemel, Maren; Ho, Kelvin; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Wong, Andrew; Wong, Eric; Żochowski, Dawid
  27. Cost of Implementation of Basel III reforms in Bangladesh -- A Panel data analysis By Dipti Rani Hazra; Md. Shah Naoaj; Mohammed Mahinur Alam; Abdul Kader
  28. A Review of the Bank of Canada’s Market Operations related to COVID-19 By Grahame Johnson
  29. Access to Credit after Emerging from Corporate Bankruptcy By Chloé Zapha; Banque de France
  30. Asymmetric effects of conventional and unconventional monetary policy when rates are low By Laine, Olli-Matti; Pihlajamaa, Matias
  31. The cyclicality of bank credit losses and capital ratios under expected loss model By Fatouh, Mahmoud; Giansante, Simone
  32. Liquidity support and distress resilience in bank-affiliated mutual funds By Bagattini, Giulio; Fecht, Falko; Maddaloni, Angela
  33. Unstable Prosperity:How Globalization Made the World Economy More Volatile By Enrique G. Mendoza; Vincenzo Quadrini

  1. By: Dautović, Ernest; Gambacorta, Leonardo; Reghezza, Alessio
    Abstract: At the onset of the Covid-19 outbreak, central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks’ capacity to absorb losses. In this paper we estimate the impact of the ECB’s dividend recommendation on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting procyclical behaviour. The effects on lending are larger for small and medium enterprises and for firms operating in Covid-19 vulnerable sectors. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and ”zombie” firms. JEL Classification: E5, E51, G18, G21
    Keywords: Covid-19, credit supply, dividend restrictions, European Central Bank, supervisory policy
    Date: 2023–03
  2. By: Elliott, David (Bank of England); Meisenzah, Ralf R (Federal Reserve Bank of Chicago); Peydró, José-Luis (Imperial College London, ICREA-Universitat Pompeu Fabra-CREI-Barcelona GSE, and CEPR)
    Abstract: We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. For identification, we exploit loan‑level data from the global syndicated lending market and US monetary policy surprises. We find that when US monetary policy tightens, nonbanks increase dollar credit supply to non‑US corporate borrowers, relative to banks. This partially mitigates the total reduction in dollar lending. The substitution is stronger for emerging market borrowers, riskier borrowers, and borrowers in countries subject to stronger capital inflow restrictions. Results suggest that our findings are not driven by borrower‑lender matching, zombie lending, or destabilising lending. Moreover, the credit substitution has real effects, as firms with existing relationships with nonbank lenders increase total debt, investment, and employment relative to firms without such relationships. Our findings suggest that having more diversified funding providers (nonbanks in addition to banks) reduces the volatility in capital flows and economic activity associated with the global financial cycle.
    Keywords: Nonbank lending; international monetary policy spillovers; global financial cycle; banks; US dollar funding for non-US firms
    JEL: E50 F34 F42 G21 G23
    Date: 2023–01–13
  3. By: Mathur, Aakriti (Bank of England); Naylor, Matthew (Bank of England and University of Oxford); Rajan, Aniruddha (Bank of England)
    Abstract: Macroprudential policies have been shown to be beneficial during booms but there is limited evidence on how well they operate during periods of stress. Using a difference‑in‑differences empirical strategy we test whether regulatory capital buffers, a key component of the Basel III reforms, helped to support lending provision by UK banks through Covid‑19. To identify credit supply effects, we exploit data on the universe of UK mortgages, which were outside the scope of government guaranteed lending schemes. We find that more constrained banks defended their capital surpluses to a greater extent during the pandemic, and did so by maintaining higher loan rates, lower loan values, and tighter terms on riskier lending. In contrast, banks receiving greater capital relief from the cut to the UK countercyclical capital buffer during the pandemic maintained more stable capital ratios, lending provision and risk‑taking capacity. Our results suggest regulatory buffers may be less usable than intended, but buffer releases can dampen these unintended consequences.
    Keywords: Banks; capital regulation; lending; macroprudential policy; Covid-19
    JEL: E58 G21 G28 G51
    Date: 2023–01–13
  4. By: Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
    Abstract: We study alternative monetary policy strategies in the presence of the lower bound on nominal interest rates and a low equilibrium real rate using an estimated DSGE model for the euro area. We find that simple feedback rules that implement inflation targeting result in a binding lower bound one-fourth of the time as well as inflation and output exhibiting large downward biases and heightened volatility. Rule-based asset purchases that are activated once the policy rate reaches the lower bound are not able to fully offset the destabilizing effects of the lower bound if we assume plausible limits on the size of purchases. Makeup strategies, especially average inflation targeting with a long averaging window, perform better than inflation targeting. However, differences in performance across strategies become small if the response coefficients of the feedback rules are optimized. In addition, we find that the benefits of makeup strategies tend to vanish if agents exhibit a degree of inattention to central bank policies as estimated in the data. JEL Classification: E31, E32, E37, E52, E58, E61, E71
    Keywords: asset purchases, effective lower bound, forward guidance, makeup strategies, monetary policy, optimal policy
    Date: 2023–03
  5. By: Liu, Lu (The Wharton School, University of Pennsylvania)
    Abstract: Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price appreciation. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts.
    Keywords: Mortgage choice; house prices; credit risk; interest rate risk; household risk management; household finance.
    JEL: D15 E43 G21 G22 G50 G52
    Date: 2023–01–06
  6. By: Konrad Kuhmann
    Abstract: I study the role of firm heterogeneity for the transmission of unconventional monetary policy in the form of “credit policy†à la Gertler and Karadi (2011). To this end, I lay out a Two-Agent New-Keynesian model with financially constrained and unconstrained firms and a financial intermediary with an endogenous leverage constraint. I find that, when firms are heterogeneous, aggregate investment is substantially less responsive to credit policy compared to an identical firm setting. Moreover, when debt markets are segmented, credit policy directed exclusively at financially unconstrained firms is most effective. My paper provides a tractable framework to illustrate mechanisms through which firm heterogeneity affects the transmission of credit policy. According to my findings, the presence of firm heterogeneity can be expected to make credit policy less effective than predicted by a representative agent framework.
    Keywords: Credit Policy, Firm Heterogeneity, Investment, Financial Frictions
    JEL: E50 E52 E58
    Date: 2023–03–23
  7. By: Yiping Huang; Xiang Li; Han Qiu; Changhua Yu
    Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech credit amplifies monetary policy transmission mainly through the extensive margin. Specifically, the BigTech bank is more likely to grant credit to new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank's advantages in information, monitoring, and risk management are the potential mechanisms. In addition, the usage of BigTech credit is associated with a stronger response of firms' sales in response to monetary policy.
    Keywords: financial technology, monetary policy transmission, bank lending
    JEL: G21 E52 G23
    Date: 2023–03
  8. By: Danny Hermawan; Denny Lie; Aryo Sasongko; Richard I. Yusan
    Abstract: This paper empirically investigates the impact of transaction cost-induced variations in the velocity of money on inflation dynamics, based on a structural New Keynesian Phillips curve (NKPC) with an explicit money velocity term. The money velocity effect arises from the role of money, both in physical and digital forms, in reducing the aggregate transaction costs and facilitating purchases of goods and services. We find a non-trivial aggregate impact in the context of the Indonesian economy: our benchmark estimates suggest that a 10% decrease in money velocity, which might be facilitated by a new digital currency (e.g. CBDC) issuance, would reduce the inflation rate by 0:6-1:7%, all else equal. Using the estimates and within a small-scale New Keynesian DSGE model, we analyze the potential implications of a CBDC issuance on aggregate fluctuations. A CBDC issuance that conservatively lowers the velocity of money by 5% is predicted to permanently raise the GDP level by 0:8% and lower the inflation rate by 0:8%. Both nominal and real interest rates are also permanently lower. Our findings imply that central banks could potentially use CBDCs as an additional stabilization policy tool by influencing the velocity.
    Keywords: inflation dynamics; transaction cost; velocity of money; digital money; digital currency; central bank digital currency (CBDC); aggregate fluctuations;
    Date: 2023–03
  9. By: Bilal Hungund; Shilpa Rastogi
    Abstract: The money market and the capital market of the Indian financial markets have a symbiotic relationship in the development of the Indian economy. The nature and the characteristics of the markets differ to a large extent as the money market ensures liquidity in the system through the monetary policy by the regulators; capital markets propel and act as the engine driver for the economy in the long term. Therefore, the final throughput of the economy is the aggregation of the output of both the markets. Does that imply that the development of both markets is parallel in nature or is any one superior to the other or are they competitors? To understand the influence of one over the other the research was undertaken through a correlation matrix and time series model. A predictive model was further constructed for predicting the volume of money market instrument on the basis of fourteen days historical.
    Date: 2023–03
  10. By: Adler, Martin; Camba-Méndez, Gonzalo; Džaja, Tomislav; Manzanares, Andrés; Metra, Matteo; Vocalelli, Giorgio
    Abstract: In implementing its monetary policy, the ECB conducts collateralised credit operations with banks. The bulk of the financial risks involved in these collateralised credit operations are mitigated primarily by the valuation haircuts imposed on the mobilised collateral. Since the establishment of the euro in January 1999, valuation haircuts have been formulated mainly on the basis of risk management considerations and have been systematically calibrated with a very low level of risk tolerance. However, their implied risk tolerance may sometimes be used as a monetary policy stance lever, as clearly illustrated when the ECB decided to reduce haircuts to improve funding conditions for the real economy during the outset of the coronavirus (COVID-19) pandemic. In addition, the ECB ensures that financial market developments warranting general methodological changes are incorporated into the calibration of valuation haircuts adequately and in good time. In a particularly challenging economic environment, the ECB has also recently committed to ensuring that climate change risks are considered when calibrating the valuation haircuts applied to corporate bonds. Against this background, the purpose of this paper is to provide an overview and explanation of the main guiding rules, as well as explaining some of the statistical methods currently employed by the ECB when formulating valuation haircuts. Keywords: monetary policy implementation, risk control framework of credit operations, valuation haircuts JEL Classification: D02, E58, G32, Q54
    Keywords: monetary policy implementation, risk control framework of credit operations, valuation haircuts
    Date: 2023–03
  11. By: Antonis Kotidis (Board of Governors of the Federal Reserve System); Margaux MacDonald (International Monetary Fund); Dimitris Malliaropulos (Bank of Greece and University of Piraeus)
    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
    JEL: F14 F23 F34 G21
    Date: 2023–03
  12. By: Nobuhiro Abe (Bank of Japan); Kyosuke Chikamatsu (Bank of Japan); Kenji Kanai (Bank of Japan); Yusuke Kawasumi (Bank of Japan); Ko Munakata (Bank of Japan); Koki Nakayama (Bank of Japan); Tatsushi Okuda (International Monetary Fund); Yutaro Takano (Bank of Japan)
    Abstract: The Financial Macro-econometric Model (FMM) is the model that the Bank of Japan (BOJ) employs in its macro stress testing to examine the risk resilience of Japan's financial system in a comprehensive and quantitative manner. The BOJ semiannually publishes the results of its analyses based on this model in the Financial System Report. The FMM is also used in the simultaneous stress testing based on common scenarios conducted periodically with the Financial Services Agency of Japan. Key characteristics of the FMM are that it (1) explicitly captures feedback loops between the domestic banking sector and the real economy, and (2) makes it possible to calculate the variables of interest (e.g. amount of loans and capital adequacy ratios of Japanese banks), not only at the sector level but also at the individual bank level. Since its development in 2011, the FMM has been continuously improved to reflect new developments in economic and financial conditions and to better incorporate the transmission mechanisms of financial shocks into the macro stress testing. This paper provides an outline of the basic macro stress testing framework and the FMM, and then describes the structure of the model as of September 2022 in detail.
    Keywords: Banks' stability; Macro stress test; Capital buffer regulation
    JEL: E10 E32 E44 E47 G10 G21 G28
    Date: 2023–03–30
  13. By: mohammed, habib
    Abstract: Profitability of financial institutions play a vital role in determining the effectiveness and efficiency of the financial system globally and it is dominated by the banking industry. These banks generates profits that results panel data that requires panel model to analyze and explore determinant factors associated with its profitability. The aim of this article to model determinants of private banks profitability in Ethiopia during 2012–2021 considering its dynamic nature. Return on assets, return on equity, and net interest margin were used as profitability indicators and analyzed using dynamic panel model estimation methods based on system generalized moment estimation techniques. The exploratory data analysis result showed the profitability; return on asset was seems stable while return on equity was decreased and net interest margin was increased with decreasing rate. The model specification result showed one-step system generalized moment method estimation was an appropriate estimation technique as model estimation result directs lagged profitability, capital adequacy, asset quality and branch of banks have positive significant effect on private banks profitability. Similarly inflation rate and economic growth rate have positively determine private banks profitability on macroeconomic side. Despite to this results liquidity was significant negative bank specific determinant of private banks profitability in Ethiopia. The study result recommends consideration on capital adequacy, asset quality, liquidity, branch of banks for the private banks profitability. In addition, this study will call upcoming research to include other financial determinants suggests such as credit risk and non-performing loan with improving the estimation method of panel autoregressive distributed lag models for modeling private banks profitability in Ethiopia.
    Keywords: Dynamic Panel Model, Ethiopia, Generalized Moment Method, Panel Data, Private Banks, Profitability
    JEL: C10
    Date: 2023–03–16
  14. By: Oguz Koc; Omur Ugur; A. Sevtap Kestel
    Abstract: Banks utilize credit scoring as an important indicator of financial strength and eligibility for credit. Scoring models aim to assign statistical odds or probabilities for predicting if there is a risk of nonpayment in relation to many other factors which may be involved in. This paper aims to illustrate the beneficial use of the eight machine learning (ML) methods (Support Vector Machine, Gaussian Naive Bayes, Decision Trees, Random Forest, XGBoost, K-Nearest Neighbors, Multi-layer Perceptron Neural Networks) and Logistic Regression in finding the default risk as well as the features contributing to it. An extensive comparison is made in three aspects: (i) which ML models with and without its own wrapper feature selection performs the best; (ii) how feature selection combined with appropriate data scaling method influences the performance; (iii) which of the most successful combination (algorithm, feature selection, and scaling) delivers the best validation indicators such as accuracy rate, Type I and II errors and AUC. An open-access credit scoring default risk data sets on German and Australian cases are taken into account, for which we determine the best method, scaling, and features contributing to default risk best and compare our findings with the literature ones in related. We illustrate the positive contribution of the selection method and scaling on the performance indicators compared to the existing literature.
    Date: 2023–03
  15. By: Owen, Ann; Temesvary, Judit; Wei, Andrew
    Abstract: Leadership roles in banking remain dominated by men; only about one in six bank board members is female. Connections among board members can improve firm performance, but women on boards are much less connected than men. In this paper, we study how gender relates to the role of connections: how do connected female versus male board members affect banks’ performance? Using IV techniques to account for the endogeneity of connections, we find that (1) better connected female (but not male) board members improve bank profitability and reduce earnings management; (2) connections of women on important board committees also improve performance – especially when the share of women on the board is relatively high (above the median).
    Keywords: bank boards; professional networks; gender diversity; instrumental variables
    JEL: G21 G34 J16
    Date: 2023–03
  16. By: Ioannou, Demosthenes; Pérez, Javier J.; Balteanu, Irina; Kataryniuk, Ivan; Geeroms, Hans; Vansteenkiste, Isabel; Weber, Pierre-François; Attinasi, Maria Grazia; Buysse, Kristel; Campos, Rodolfo; Clancy, Daragh; Essers, Dennis; Faccia, Donata; Freier, Maximilian; Gerinovics, Rinalds; Khalil, Makram; Kosterink, Patrick; Mancini, Michele; Manrique, Marta; McQuade, Peter; Molitor, Philippe; Pulst, Daniela; Timini, Jacopo; Van Schaik, Ilona; Valenta, Vilém; Vergara Caffarelli, Filippo; Viani, Francesca; Viilmann, Natalja; Almeida, Ana M.; Alonso, Daniel; Bencivelli, Lorenzo; Borgogno, Oscar; Borrallo, Fructuoso; Cuadro-Sáez, Lucía; Di Stefano, Enrica; Esser, Andreas; García-Lecuona, María; Habib, Maurizio; Jeudy, Bruno-Philippe; Lájer, Andrés; Le Gallo, Florian; Martonosi, Ádám; Millaruelo, Antonio; Miola, Andrea; Négrin, Pauline; Zangrandi, Michele Savini; Strobel, Felix; Tylko-Tylczynska, Kalina Paula
    Abstract: Over the past decade, geopolitical developments - and the policy responses to these by major economies around the world - have challenged economic openness and the process of globalisation, with implications for the economic environment in which central banks operate. The return of war to Europe and the energy shock triggered by the Russian invasion of Ukraine in 2022 are the latest in a series of episodes that have led the European Union (EU) to develop its Open Strategic Autonomy (OSA) agenda. This Report is a broad attempt to take stock of these developments from a central banking perspective. It analyses the EU's economic interdependencies and their implications for trade and finance, with a focus on strategically important dimensions such as energy, critical raw materials, food, foreign direct investment and financial market infrastructures. Against this background, the Report discusses relevant aspects of the EU's OSA policy agenda which extend to trade, industrial and state aid measures, as well as EU initiatives to strengthen and protect the internal market and further develop Economic and Monetary Union (EMU). The paper highlights some of the policy choices and trade-offs that emerge in this context and possible implications for the ECB's monetary policy and other policies. JEL Classification: F0, F10, F30, F4, F5, F45, E42, L5, Q43
    Keywords: capital flows, European Central Bank, European Economic and Monetary Union, financial market infrastructures, financial stability, geoeconomics, geopolitics, globalisation, global value chains, industrial policy, international trade, monetary policy, multilateralism, Open Strategic Autonomy
    Date: 2023–03
  17. By: Xuefan, Pan (University of Warwick)
    Abstract: I conduct content analysis and extent the existing models of analysing the reaction of the stock market and foreign currency markets to the release of Federal Open Market Committee (FOMC) statements and meeting minutes. The tone changes and uncertainty level of the monetary policy communication are constructed using the dictionary-based word-count approach at the whole document level. I further apply the Latent Dirichlet Allocation (LDA) algorithm to investigate the different impacts of topics in the meeting minutes. High-frequency data is used as the analysis is an event study. I find that the tone change and uncertainty level have limited explanation power on the magnitude of the effect of the release of FOMC documents especially statements on the financial market. The communication from FOMC is more informative for the market during the zero lower bound period, compared to the whole sample period.
    Keywords: Monetary policy ;Communication ; Text Mining JEL Classification: E52 ; E58
    Date: 2023
  18. By: Hisaki KONO; Abu SHONCHOY; Kazushi TAKAHASHI
    Abstract: Despite the expansion of microcredit access, its outreach is still limited among farmers. One potential cause is a timing mismatch between cash flow and credit flow. Farmers have little income until their harvest is realized, while standard microcredit requires weekly installment payments. This mismatch causes underinvestment and borrowing for repayment, resulting in lower uptake rates. Furthermore, agricultural investment is sequential, while credit is disbursed as a lump sum. Present-biased (PB) farmers may fail to set aside sufficient money for later investment. To test these predictions, we conducted a randomized control trial modifying standard microcredit targeted at tenant farmers by setting repayment schedules to one-time repayment after harvest and making loan disbursement sequential. Discarding weekly repayment increased uptake and borrower’s satisfaction without worsening repayment rates. Sequential disbursement increased later investments among PB borrowers and reduced loan sizes. We attribute the loan size reduction to the option value: Sequential disbursement allowed borrowers to adjust the total loan size after observing credit demand shocks, eliminating the need for precautionary borrowing. Calibrated models are used to evaluate counterfactual credit designs, showing that letting borrowers set the credit limit is beneficial for PB borrowers, while credit lines will be suboptimal for PB borrowers.
    Keywords: Microcredit; Timing mismatch, Commitment; Option value; Precautionary borrowing
    JEL: G21 O16 Q14
    Date: 2023–03
  19. By: Viral V. Acharya; Rahul S. Chauhan; Raghuram Rajan; Sascha Steffen
    Abstract: When the Federal Reserve (Fed) expanded its balance sheet via quantitative easing (QE), commercial banks financed reserve holdings with deposits and reduced their average maturity. They also issued lines of credit to corporations. However, when the Fed halted its balance-sheet expansion in 2014 and even reversed it during quantitative tightening (QT) starting in 2017, there was no commensurate shrinkage of these claims on liquidity. Consequently, the financial sector was left more sensitive to potential liquidity shocks, with weaker-capitalized banks most exposed. This necessitated Fed liquidity provision in September 2019 and again in March 2020. Liquidity-risk-exposed banks suffered the most drawdowns and the largest stock price declines at the onset of the Covid crisis in March 2020. The evidence suggests that the expansion and shrinkage of central bank balance sheets involves tradeoffs between monetary policy and financial stability.
    JEL: G21
    Date: 2023–03
  20. By: Yuki Tada (Department of Economics, New School for Social Research, USA)
    Abstract: The main aim of this paper is to study the variety of financialized capitalism which are contingent on the institution, policy, and path dependency. Using the neo-Kaleckian model we study to model the US and UK shareholder-oriented financialized capitalism using our own version of the Miskyan cycle. Meanwhile, Japanese partially fledged financialized capitalism with high retention rates of firms is analyzed by using the paradox of the debt (Steindl) cycle. The analysis shows (1) instability arises when firms have a high retention rate of profit to deleverage; (2) debt-led Minsky regime and the debt-burdened paradox of debt regime can be distinguished by setting sufficiently low retention rates for the former and sufficiently high retention rate for the latter; (3) both in the Minskyan and Steindl regime we observe fixed capital investment is sluggish and observe secular stagnation in accumulation rate; (4) in the Steindl paradox of debt model, the debt-burdened economic stagnation transforms into a long wave cyclical growth with sufficiently high firms animal spirits, which exhibits the possibility of the investment-led cyclical growth after the secular stagnation from the paradox of debt.
    Keywords: Minsky, paradox of debt, capitalism, growth, financial instability, supercycle
    JEL: B52 D21 E12 E32
    Date: 2023–04
  21. By: Anastasios Petropoulos (Bank of Greece); Evangelos Stavroulakis (Bank of Greece); Panagiotis Lazaris (Bank of Greece); Vasilis Siakoulis (Bank of Greece); Nikolaos Vlachogiannakis (Bank of Greece)
    Abstract: In this study, we explore the impact of COVID-19 pandemic on the default risk of loan portfolios of the Greek banking system, using cutting edge machine learning technologies, like deep learning. Our analysis is based on loan level monthly data, spanning a 42-month period, collected through the ECB AnaCredit database. Our dataset contains more than three million records, including both the pre- and post-pandemic periods. We develop a series of credit rating models implementing state of the art machine learning algorithms. Through an extensive validation process, we explore the best machine learning technique to build a behavioral credit scoring model and subsequently we investigate the estimated sensitivities of various features on predicting default risk. To select the best candidate model, we perform comparisons of the classification accuracy of the proposed methods, in 2-months out-of-time period. Our empirical results indicate that the Deep Neural Networks (DNN) have a superior predictive performance, signalling better generalization capacity against Random Forests, Extreme Gradient Boosting (XGBoost), and logistic regression. The proposed DNN model can accurately simulate the non-linearities caused by the pandemic outbreak on the evolution of default rates for Greek corporate customers. Under this multivariate setup we apply interpretability algorithms to isolate the impact of COVID-19 on the probability of default, controlling for the rest of the features of the DNN. Our results indicate that the impact of the pandemic peaks in the first year, and then it slowly decreases, though without reaching yet the pre COVID-19 levels. Furthermore, our empirical results also suggest different behavioral patterns between Stage 1 and Stage 2 loans, and that default rate sensitivities vary significantly across sectors. The current empirical work can facilitate a more in-depth analysis of AnaCredit database, by providing robust statistical tools for a more effective and responsive micro and macro supervision of credit risk.
    Keywords: Credit Risk;Deep Learning; AnaCredit; COVID-19
    JEL: G24 C38 C45 C55
    Date: 2023–03
  22. By: Osei-Tutu, Francis; Weill, Laurent
    Abstract: We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29, 000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. The effect takes place through the demand channel: firms in leader regions face fewer hurdles in applying for loans. We find no evidence, however, of preferential lending from banks to firms in leader regions. Thus, regional favoritism affects access to credit through differences in perceptions of firm managers, not deliberate changes in the allocation of resources by political leaders.
    Keywords: regional favoritism, access to credit, borrower discouragement
    JEL: D72 G21
    Date: 2023
  23. By: van Netten, Jamie (Monash University)
    Abstract: This paper examines the relationship between economic inequality and expansions of bank credit in Australia throughout recent decades. This relationship is a central component of what has become colloquially known as the “Rajan hypothesis†and more technically referred to as the “inequality, credit, crisis nexus†. The findings of the paper suggest that although there is a strong positive relationship between inequality and expansions of bank credit in Australia at the most aggregated level (consistent with international studies of the phenomenon in which Australia was included in panel data), when the types of loans are examined in more detail, their correlation with inequality is not consistent with the belief that credit is channelled specifically to low income households as inequality worsens (as is suggested by the Rajan hypothesis). There are multiple ways in which the Australian case differs from the American which may contribute to the differing results, some of which include a lower levels of income inequality, more progressive taxation policy which reduces consumption inequality, and stricter macroprudential policy which resulted in fewer subprime loans.
    Keywords: Inequality ; Credit booms ; Loans ; Rajan JEL classifications: D63 ; E51 ; G21 ; G28
    Date: 2023
  24. By: Gao, Mingze; Hasan, Iftekhar; Qiu, Buhui; Wu, Eliza
    Abstract: This paper proposes an early-warning bank risk measure based on the syndicate concentration of recent syndicated loans that a bank participates in. At the bank level, higher values of the measure predict greater risks (i.e., loan loss provisions, idiosyncratic return volatility, default probability, and frequency of lawsuits) and lower profitability at least three years ahead, especially for opaque and complex banks. Banks failing the Federal Reserve's forward-looking stress tests subsequently exhibit a reduction in the syndicate concentration measure. At the aggregate level, higher values of the measure predict both greater financial sector risks and economic slowdowns measured by private-sector investment, business activity, total factor productivity, industrial production, and gross domestic product.
    Keywords: syndicate concentration, early-warning, bank risks, financial sector risks, economic slowdowns
    JEL: G21 E02
    Date: 2023
  25. By: Manuel Amador; Javier Bianchi
    Abstract: We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are irrelevant.
    JEL: E31 E52 E58 E61 E63
    Date: 2023–03
  26. By: Andreeva, Desislava (European Central Bank); Coman, Andra (European Central Bank); Everett, Mary (Central Bank of Ireland); Froemel, Maren (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France and European Central Bank); Pedrono, Justine (Banque de France); Reinhardt, Dennis (Bank of England); Wong, Andrew (Hong Kong Monetary Authority); Wong, Eric (Hong Kong Monetary Authority); Żochowski, Dawid (European Central Bank)
    Abstract: We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centres (IFCs) – the United Kingdom, Hong Kong and Ireland – we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-centre affiliates. We find that NIRP impairs the bank-lending channel for cross‑border lending to non-bank sectors, especially for those banks that have only a weak deposit base in IFCs – and are thus relatively more exposed to NIRP in their headquarters. Using euro-area data, including bank-level data from France, we find that NIRP does not influence overall cross-border lending from banks’ headquarters’ economies, but NIRP does impair lending to financial sectors based in IFCs. This impairment is stronger for banks with a large deposit base in headquarter economies exposed to NIRP.
    Keywords: Bank lending; cross-border lending; international financial centres; monetary policy; negative interest rates; risk-taking.
    JEL: E52 F34 F36 F42 G21
    Date: 2023–01–06
  27. By: Dipti Rani Hazra; Md. Shah Naoaj; Mohammed Mahinur Alam; Abdul Kader
    Abstract: Inspired by the recent debate on the macroeconomic implications of the new bank regulatory standards known as Basel III, we tried to find out in this study that the impact of Basel III liquidity and capital requirements in Bangladesh proposed by Basel Committee on Banking Supervision (BCBS, 2010a). A small set of macro variables, using a sample of 22 private commercial banks operating in Bangladesh for the period of 2010-2014, are used to estimate long-run relationships among the variables. The macroeconomic variables are included The profitability of banks, GDP, banks' lending to private sector, Net Stable Funding Ratio, Tier 1 capital Ratio, Interest rate spread, real interest rate. The cost is quantified using Driscoll and Kraay panel data models with fixed effect. Impact of higher capital and liquidity requirement on Interest rate spread and lending to private sector of banks were considered as the cost to the economy as a whole whereas impact of higher capital and liquidity requirement on profitability of banks(ROE) was considered as the cost of banks. Here it is found that, the interest rate level is positively affected by the tighter liquidity and capital requirements which driven toward lessen of the private sector lending of banks. The return on equity of banks varies negatively with the liquidity and capital. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses (BCBS, 2010b).
    Date: 2023–03
  28. By: Grahame Johnson
    Abstract: The economic lockdowns that began in March 2020 in response to the COVID-19 pandemic led to an unparalleled level of financial market disruption. Investors sought liquidity by selling financial assets and drawing down loans and credit lines. The speed, scale and one-way nature of these transactions caused an almost complete breakdown of market functioning. In response, the Bank of Canada launched 10 extraordinary programs, 9 of which had never been used before, to restore market functioning. As market conditions improved, 9 of the 10 programs were wound down. One, the Government of Canada Bond Purchase Program, was continued and transitioned into a monetary policy tool. In general, most of the programs were well designed and effectively executed—an impressive achievement given the circumstances under which they were conceived, developed and deployed. The extreme level of uncertainty and the magnitude of the downside risks to economic and financial activity warranted an aggressive response. Going forward, however, several areas exist where program design and implementation could be changed if these programs ever need to be used again. Overall, the design and implementation recommendations for future interventions focus on the need to ensure the programs are appropriately structured, in terms of both size and duration, for the financial and economic circumstances. Given the speed with which the outlook can change, program parameters must be flexible, and the Bank must be nimble in making the necessary adjustments.
    Keywords: Coronavirus disease (COVID-19); Financial markets; Financial stability
    JEL: D47 E41 E5 G01 G14 G23 H12
    Date: 2023–03
  29. By: Chloé Zapha (Banque de France - Banque de France, Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Banque de France
    Abstract: This paper identifies the credit restrictions that small firms are facing after emerging from bankruptcy. Using the French credit register, I implement a differencein-difference strategy that exploits staggered removal of bankruptcy flags in the form of an exogenous change in credit ratings. I focus on small and medium businesses between 2012 and 2019 and show that the flag removal leads to an increase in bank credit of 1.7%. The flag removal does not make relationship banks forget about the past bankruptcy. Instead, it removes adverse information for new banks that subsequently start lending. As a result, financially constrained firms rely less on supplier debt and increase their investment by 15%.
    Keywords: Corporate Bankruptcy, Debt Restructuring, Credit Rating, Bank Lending Relationship, SMEs
    Date: 2023–01–26
  30. By: Laine, Olli-Matti; Pihlajamaa, Matias
    Abstract: We study asymmetric inflation effects of both conventional and unconventional monetary policy in the euro area during the period of low nominal interest rates. We find that rate cuts are inflationary also during low interest rates. Positive quantitative easing surprises have a deflationary effect, but negative quantitative easing surprises have no inflationary effects. This result may be explained by information effects. The effect of monetary policy depends on the size of policy surprise and is lower during recessions than during booms. We also provide evidence that interest rate policy, forward guidance and quantitative easing are complementary to one another.
    Keywords: Monetary policy, asymmetric effects, inflation
    JEL: E50 E31
    Date: 2023
  31. By: Fatouh, Mahmoud (Bank of England); Giansante, Simone (University of Palermo)
    Abstract: We model the evolution of stylised bank loan portfolios to assess the impact of IFRS 9 and US GAAP expected loss model (ECL) on the cyclicality of loan write-off losses, loan loss provisions (LLPs) and capital ratios of banks, relative to the incurred loss model of IAS 39. We focus on the interaction between the changes in LLPs' charges (the flow channel) and stocks (the stock channel) under ECL. Our results show that, when GDP growth does not demonstrate high volatility, ECL model smooths the impact of credit losses on profits and capital resources, reducing the procyclicality of capital and leverage ratios, especially under US GAAP. However, when GDP growth is highly volatile, the large differences in lifetime probabilities of defaults (PDs) between booms and busts cause sharp increases in LLPs in deep downturns, as seen for US banks during the Covid-19 crisis. Volatile GDP growth makes capital and leverage ratios more procyclical, with sharper falls in both ratios in deep downturns under US GAAP, compared to IAS 39. IFRS 9 ECL demonstrates less sensitivity to lifetime PDs fluctuations due to the existence of loan stages, and hence can reduce the procyclicality of capital and leverage ratios, even when GDP is highly volatile.
    Keywords: IFRS 9; IAS 39; US GAAP; expected credit loss model; loan loss provisions; cyclicality of bank profits; leverage ratio; risk-weighted assets
    JEL: D92 G21 G28 G31 L51
    Date: 2023–01–20
  32. By: Bagattini, Giulio; Fecht, Falko; Maddaloni, Angela
    Abstract: Flows of funds run by banks or by firms that belong to the same financial group as a bank are less volatile and less sensitive to bad past performance. This enables bank-affiliated funds to better weather distress and to hold lower precautionary cash buffers in comparison with their unaffiliated peers. Banks provide liquidity support to distressed affiliated funds by buying shares of those funds that are experiencing large outflows. This, in turn, diminishes the severity of strategic complementarities in investors’ redemptions. Liquidity support and other benefits of bank affiliation are conditional on the financial health of the parent company. Distress in the banking system spills over to the mutual fund sector via ownership links. Our research high-lights substantial dependencies between the banking system and the asset management industry, and identifies an important channel via which financial stability risks depend on the organisational structure of the financial sector. JEL Classification: G2, G23, G3
    Keywords: bank affiliation, mutual funds, redemptions
    Date: 2023–03
  33. By: Enrique G. Mendoza (University of Pennsylvania and NBER); Vincenzo Quadrini (University of Southern California and CEPR)
    Abstract: The sharp, secular decline in the world real interest rate of the past thirty years suggests that the surge in global demand for financial assets outpaced the growth in their supply. We argue that this phenomenon was driven by: (i) faster growth in emerging markets, (ii) changes in the financial structure of both emerging and advanced economies, and (iii) changes in demand and supply of public debt issued by advanced economies. We then showthat the low-interest-rate environment made the world economy more vulnerable to financial crises. These findings are the quantitative predictions of a two-region model in which privately-issued financial assets (i.e., inside money) provide productive services but can be defaulted on.
    Date: 2023–03–18

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