nep-ban New Economics Papers
on Banking
Issue of 2023‒05‒08
thirty-two papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Why strong banks fail By Ozili, Peterson K
  2. Specialization in Banking By Kristian Blickle; Cecilia Parlatore; Anthony Saunders
  3. Banking on Uninsured Deposits By Itamar Drechsler; Alexi Savov; Philipp Schnabl; Olivier Wang
  4. Banking in the Shadow of Bitcoin? The Institutional Adoption of Cryptocurrencies By Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss; Raphael A. Auer
  5. Bank Ownership Around the World By Ugo Panizza
  6. The Role of Climate in Deposit Insurers' Fund Management: More Than a Financial Risk Management Factor? By Van Roosebeke, Bert; Defina, Ryan
  7. Climate Stress Testing By Viral V Acharya; Richard Berner; Robert Engle; Hyeyoon Jung; Johannes Stroebel; Xuran Zeng; Yihao Zhao
  8. From Tech Hub to Banking Failure: Exploring the Implications of CBDCs on the Destiny of Silicon Valley Bank By Ali, Hassnian; Aysan, Ahmet Faruk; Yousef, Tariq M
  9. European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options By Petia Topalova; Ms. Laura Valderrama; Ms. Marina Marinkov; Patrik Gorse
  10. What Charge-Off Rates Are Predictable by Macroeconomic Latent Factors? By Kim, Hyeongwoo; Son, Jisoo
  11. Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities By Anusha Chari
  12. Money velocity, digital currency, and inflation dynamics By Hermawan, Danny; Lie, Denny; Sasongko, Aryo; Yusan, Richard
  13. Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy in The Gambia By Cham, Yaya
  14. How Inflation is Threatening Madagascar’s Economic Stability in 2022: An Analysis of Causes and Implications By Andrianady, Josué R.
  15. Renminbi Usage in Cross-Border Payments: Regional Patterns and the Role of Swaps Lines and Offshore Clearing Banks By Ms. Longmei Zhang; Hector Perez-Saiz
  16. Assessing global and local interest in eNaira CBDC and cryptocurrency information: implications for financial stability By Ozili, Peterson K
  17. Banks vs. Firms: Who Benefits from Credit Guarantees? By Alberto Martin; Sergio Mayordomo; Victoria Vanasco
  18. La hausse de l’inflation `a Madagascar en 2022 : causes, conséquences et perspectives pour l’avenir By Andrianady, Josué R.
  19. Calibrating Macroprudential Policies in Europe Amid Rising Housing Market Vulnerability By Ms. Laura Valderrama
  20. Quantitative analysis on selected deposits insurance issues for purposes of impact assessment By BELLIA Mario; CALÈS Ludovic; DI GIROLAMO Francesca; JOOSSENS Elisabeth; PETRACCO GIUDICI Marco
  21. Revisiting the Monetary Transmission Mechanism through an Industry-Level Differential Approach By Sangyup Choi; Tim Willems; Seung Yong Yoo
  22. How to Limit the Spillover from an Inflation Surge to Inflation Expectations? By Lena Dräger; Michael J. Lamla; Damjan Pfajfar
  23. Long Shadow of the U.S. Mortgage Expansion: Evidence from Local Labour Markets By Mitra, Aruni; Wei, Mengying
  24. Chinese overseas development funds: An assessment of their sustainability approaches By Mathias Lund Larsen; Tancrède Voituriez; Christoph Nedopil
  25. East Asia and the politics of global finance: a developmental challenge to the neoliberal consensus? By Pape, Fabian; Petry, Johannes
  26. Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media By Alistair Macaulay; Wenting Song
  27. From LVTS to Lynx: Quantitative Assessment of Payment System Transition By Ajit Desai; Zhentong Lu; Hiru Rodrigo; Jacob Sharples; Phoebe Tian; Nellie Zhang
  28. Hedging Valuation Adjustment for Callable Claims By Cyril B\'en\'ezet; St\'ephane Cr\'epey; Dounia Essaket
  29. The Transmission Mechanism of Stress in the International Banking System By Alexis Stenfors; Lilian Muchimba
  30. Medium-term growth-at-risk in the euro area By Lang, Jan Hannes; Rusnák, Marek; Greiwe, Moritz
  31. A Theory of Payments-Chain Crises By Saki Bigio
  32. Salient Attributes and Household Demand for Security Designs By Vokata, Petra

  1. By: Ozili, Peterson K
    Abstract: Many bank failures have occurred in history. The lessons learnt from past bank failures remind us that any bank can fail and they fail for different reasons. The first step to avoid the failure of a strong bank is to identify the factors that cause the failure of a strong bank. This paper focus on strong banks and identifies the reasons why strong banks might fail. The reasons why a strong bank might fail are numerous. The insights offered in the article can help existing banks to avoid a bank failure in the future. The insights offered in the article has financial stability implications which needs to be taken seriously.
    Keywords: Bank failure, bank stability, financial crisis, capital adequacy, financial stability
    JEL: G01 G20 G21 G28
    Date: 2023
  2. By: Kristian Blickle; Cecilia Parlatore; Anthony Saunders
    Abstract: Using supervisory data on the loan portfolios of large US banks, we document that these banks specialize by concentrating their lending disproportionately in a few industries. This specialization is consistent with banks having industry-specific knowledge, reflected in reduced risk of loan defaults, lower aggregate charge-offs, and higher propensity to lend to opaque firms in the preferred industry. Banks attract high-quality borrowers by offering generous loan terms in their specialized industry, especially to borrowers with alternative options. Banks focus on their preferred industry in times of instability and relatively lower tier 1 capital as well as after sudden surges in deposits.
    JEL: D04 G20 G21
    Date: 2023–03
  3. By: Itamar Drechsler; Alexi Savov; Philipp Schnabl; Olivier Wang
    Abstract: Motivated by the regional bank crisis of 2023, we model the impact of interest rates on the liquidity risk of banks. Prior work shows that banks hedge the interest rate risk of their assets with their deposit franchise: when interest rates rise, the value of the assets falls but the value of the deposit franchise rises. Yet the deposit franchise is only valuable if depositors remain in the bank. This creates run incentives for uninsured depositors. We show that a run equilibrium is absent at low interest rates but appears when rates rise because the deposit franchise comes to dominate the value of the bank. The liquidity risk of the bank thus increases with interest rates. We provide a formula for the bank’s optimal risk management policy. The bank should act as if its deposit rate is more sensitive to market rates than it really is, i.e., as if its “deposit beta” is higher. This leads the bank to shrink the duration of its assets. Shortening duration has a downside, however: it exposes the bank to insolvency if interest rates fall. The bank thus faces a dilemma: it cannot simultaneously hedge its interest rate risk and liquidity risk exposures. The dilemma disappears only if uninsured deposits do not contribute to the deposit franchise (if they have a deposit beta of one). The recent growth of low-beta uninsured checking and savings accounts thus poses stability risks to banks. The risks increase with interest rates and are amplified by other exposures such as credit risk. We show how they can be addressed with an optimal capital requirement that rises with interest rates.
    JEL: E52 G12 G21
    Date: 2023–04
  4. By: Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss; Raphael A. Auer
    Abstract: The phenomenal growth of cryptocurrencies raises important questions about their footprint on the financial system. What role are traditional financial intermediaries playing in cryptocurrency markets and what drives their engagement? Are new nodes emerging? We help answer these questions by leveraging a novel global supervisory database of banks’ cryptocurrency exposures and by synthesising a range of complementary data sources for other types of institutions. We find that major banks’ exposures currently remain at very modest levels. Across countries, higher innovation capacity, more advanced economic development, and greater financial inclusion are associated with a higher likelihood of banks taking on cryptocurrency exposures. We show that substantial activity is concentrated in lightly regulated crypto exchanges. This “shadow crypto financial system” serves both retail and institutional clients, such as dedicated investment funds. An uneven regulatory treatment across banks and crypto exchanges and significant data gaps suggest that a proactive, holistic and forward-looking approach to regulating and overseeing cryptocurrency markets is needed. It should focus on ensuring a more level playing field with regard to financial services provided by established financial institutions and intermediaries in the emerging crypto shadow financial system by introducing more stringent regulatory and supervisory oversight for the latter.
    Keywords: cryptocurrencies, decentralised finance, digital currencies, financial regulation, financial supervision, exchange stablecoin, Bitcoin, Ethereum
    JEL: E42 G12 G21 G23 G28 O33
    Date: 2023
  5. By: Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper builds a dataset on bank ownership that covers more than 6, 500 banks in 181 countries (59 low-income economies, 72 middle-income economies, and 50 high-income economies) over 1995-2020. I show that until 2010, there was a reduction in state-ownership of banks and an increase foreign ownership. However, the Global Financial Crisis interrupted or reversed these trends. At the country level, the relationship between bank ownership and each of GDP growth and financial depth is mixed- regressions with country fixed effects indicate that the presence of foreign-owned banks is positively associated with future economic growth and state-ownership is negatively but not robustly associated with future financial depth. Bank-level regressions show that state-owned banks are less profitable and have a higher share of non-performing loans than their private (domestic or foreign) counterparts. State-owned and foreign-owned banks located in developing economies pay and charge lower interest rates than their domestic private counterparts. There is also evidence that state-owned banks stabilize credit in the presence of domestic shocks while foreign banks amplify external shocks. In terms of domestic shocks, foreign banks are not significantly different from their domestic private counterparts.
    Keywords: State-owned banks; Foreign-owned banks; Economic growth; Financial depth; Non-performing loans; Credit cyclicality
    JEL: G21 G28 G32 F21 F36 O16
    Date: 2023–04–18
  6. By: Van Roosebeke, Bert; Defina, Ryan
    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: 2023–03–01
  7. By: Viral V Acharya; Richard Berner; Robert Engle; Hyeyoon Jung; Johannes Stroebel; Xuran Zeng; Yihao Zhao
    Abstract: We explore the design of climate stress tests to assess and manage macro-prudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to (i) consider many transition risks as dynamic policy choices; (ii) better understand and incorporate feedback loops between climate change and the economy; and (iii) further explore “compound risk” scenarios in which climate risks co-occur with other risks. We discuss how the process of mapping climate stress scenarios into financial firm outcomes can incorporate existing evidence on the effects of various climate-related risks on credit and market outcomes. We argue that more research is required to (i) identify channels through which plausible scenarios can lead to meaningful short-run impact on credit risks given typical bank loan maturities; (ii) incorporate bank-lending responses to climate risks; (iii) assess the adequacy of climate risk pricing in financial markets; and (iv) better understand and incorporate the process of expectations formation around the realizations of climate risks. Finally, we discuss the relative advantages and disadvantages of using market-based climate stress tests that can be conducted using publicly available data to complement existing stress testing frameworks.
    Keywords: climate finance
    JEL: G00
    Date: 2023
  8. By: Ali, Hassnian; Aysan, Ahmet Faruk; Yousef, Tariq M
    Abstract: The potential implications of central bank digital currencies (CBDCs) on Silicon Valley Bank (SVB) are vast, particularly when it comes to oversight of the bank. This paper aims to explore how the introduction of CBDCs could have impacted SVB and its eventual collapse. The introduction of CBDCs has the potential to disrupt traditional banking systems, which could impact the stability of the financial industry. However, CBDCs can also provide real-time monitoring and oversight, which could help to prevent bank failures. This paper examines the potential impact of CBDCs on SVB and how it could have been impacted by the real-time monitoring provided by the Federal Reserve. The findings suggest that the introduction of CBDCs could have helped to prevent the collapse of SVB by allowing for real-time monitoring and oversight. The implications of this research are significant, as it highlights the potential benefits of CBDCs in preventing future banking failures and strengthening financial stability.
    Keywords: SVB, CBDCs, Federal Reserve, Digital Bank Run
    JEL: G28 H12 O32
    Date: 2023–04–06
  9. By: Petia Topalova; Ms. Laura Valderrama; Ms. Marina Marinkov; Patrik Gorse
    Abstract: European housing markets are at a turning point as the cost-of-living crisis has eroded real incomes and the surge in interest rates has made borrowers more vulnerable to financial distress. This paper aims to (i) shed light on the risks in European housing markets, (ii) quantify household vulnerabilties, (iii) assess banking sector implications and (iv) examine policies’ effectiveness using simulations based on microdata from the Household Finance and Consumption Survey (HFCS) and EU statistics on income and living conditions (EU-SILC). Under the baseline IMF macroeconomic forecast, the share of households that could struggle to meet basic expenses could rise by 10 pps reaching a third of all households by end 2023. Under an adverse scenario, 45 percent of households could be financially stretched, representing over 40 percent of mortgage debt and 45 percent of consumer debt. The impact on the banking sector seems contained under the baseline forecast, though there are pockets of vulnerability. A 20 percent house price correction could deplete CET1 capital by 100-300 basis points. Fiscal measures, such as subsidies to the bottom income tercile, could save 7 percent of households from financial distress at an estimated cost of 0.8 percent of GDP.
    Keywords: Housing markets; overvaluation; affordability; household vulnerability; tenure status; income distribution; consumption; financial stability; targeted support; macroprudential policy.
    Date: 2023–03–24
  10. By: Kim, Hyeongwoo; Son, Jisoo
    Abstract: Charge-offs signal important information about the riskiness of loan portfolios in the banking system, which can generate systemic risk towards deep recessions. We compiled the net charge-off rate (COR) data of the top 10 bank holding companies (BHCs) in the U.S., utilizing consolidated financial statements. We propose factor-augmented forecasting models for CORs by estimating latent common factors, including targeted factors, via an array of data dimensionality reduction methods for a large panel of macroeconomic predictors. Our models outperform the benchmark models especially well for business loan and real estate loan CORs, while enhancing predictive contents for consumer loan CORs is difficult especially at short horizons. Real activity factors improve the out-of-sample predictability over the benchmarks for business loan CORs even when financial sector factors are excluded.
    Keywords: Net Charge-Off Rate; Bank Holding Companies; Principal Component Analysis; Partial Least Squares; Out-of-Sample Forecast
    JEL: C5 F3
    Date: 2023–03–31
  11. By: Anusha Chari
    Abstract: Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly open-end mutual funds and ETFs, accounts for nearly half of the external financing flows to emerging markets exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk-sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks such as tightening US dollar funding conditions relative to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns with implications for the role of macroprudential policy.
    JEL: F21 F32 F36 F65 G11 G15 G23
    Date: 2023–04
  12. By: Hermawan, Danny; Lie, Denny; Sasongko, Aryo; Yusan, Richard
    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;
    JEL: E31 E32 E41 E42 E50 E51 E58
    Date: 2023–03–29
  13. By: Cham, Yaya
    Abstract: Limitations of domestic Monetary Policies in The Gambia highlight the challenges faced by developing countries in managing their domestic economies in the context of bank lending as well as financial globalisation. The high level of financial integration with global markets, brought about by globalisation and advancements in science and technology, means that domestic monetary policies in developing countries have a limited impact on managing the domestic economies, as interest rates and exchange rates are increasingly influenced by global factors beyond the control of domestic monetary and fiscal policies . As such, these countries experience challenges in managing inflation and promoting economic growth. At the same time, scientific advancements and technology have facilitated financial globalisation and made it easier for banks to lend to customers in different countries, but these developments have also raised concerns about the regulation of cross-border lending and the potential for financial instability in the global financial system. It has become increasingly important for affected countries to put in place policies and strategies that shield their economies from these external shocks and influences to allow them to control inflation and promote economic growth.
    Keywords: Financial Globalization, Bank Lending, Domestic Monetary Policy and The Gambia
    JEL: F6 G2 N1
    Date: 2023–04–11
  14. By: Andrianady, Josué R.
    Abstract: This article examines the characteristics of inflation in Madagascar in 2022 and the measures taken to mitigate its impact. The causes of inflation, such as the global geopolitical situation’s impact on energy prices, and the consequences, including the rise in living costs for households, are explored. The government’s efforts to protect consumers from inflation, such as price controls and financial aid for vulnerable house�holds, are also discussed. Additionally, the article analyzes the measures taken by the Banky Foiben’i Madagasikara (BFM) to control inflation, including monetary policy and managing the money supply. The effectiveness of these measures is evaluated. Fi�nally, the article provides a summary of the characteristics of inflation in Madagascar in 2022 and the measures taken to address it, as well as future prospects and potential measures to limit its impact.
    Keywords: Madagascar, inflation, causes, consequences, government measures, Banky Foiben’i Madagasikara (BFM), monetary policy, living costs, price controls, financial aid, 2022.
    JEL: E31 P24 P44
    Date: 2023
  15. By: Ms. Longmei Zhang; Hector Perez-Saiz
    Abstract: The paper examines the usage of the Renminbi (RMB) as an international payment currency. Globally, the use of RMB remains small, accounting for 2 percent of total cross-border transactions. Using country-level transaction data from Swift** for 2010–21, we find significant regional variations in the use of RMB for cross-border payments. While RMB is little used in some regions, it has gained traction in others, and these cross-country differences have widened over the years. Such differences can be partly explained by an economy’s geographic distance, political distance, and trade linkages with China. However, it also reflects the impact of policy measures by the People’s Bank of China, including establishing bilateral swap lines and offshore clearing banks. Both policy measures helped to address offshore RMB liquidity shortages given China’s overall capital account restrictions, with the offshore clearing banks having a quantitatively larger impact. Our analysis contributes to a better understanding of the growing importance of RMB within the international monetary system.
    Keywords: RMB internationalization; Swift; Swap lines; Offshore Clearing Banks
    Date: 2023–03–31
  16. By: Ozili, Peterson K
    Abstract: Abstract This paper investigates the global and local interest in internet information about cryptocurrency and the Nigeria central bank digital currency which is also known as eNaira. Granger causality test and GMM coefficient matrix methodologies were used. The findings reveal that there is sustained increase in global and local interest in internet information about eNaira in the first six weeks after eNaira adoption. Local interest in internet information about cryptocurrency in Nigeria exceeded global interest in internet information about cryptocurrency. The South-East region had the highest interest in cryptocurrency information followed by the South-South, the North-Central, the North-East, the North-West and the South-West regions. In contrast, the North-East region had the highest interest in internet information about eNaira followed by the North-West, the North-Central, the South-West, the South-South and the South-East regions. Nigeria recorded the highest global interest in internet information about cryptocurrency and eNaira while Japan and Brazil recorded the lowest interest during the period. The correlation results show a significant and positive correlation between interest in cryptocurrency information and interest in eNaira information. The granger causality results show that global interest in cryptocurrency information causes both global and local interest in eNaira information. Also, local interest in cryptocurrency information causes global interest in eNaira information. The GMM regression coefficient matrix shows a significant positive relationship between interest in cryptocurrency information and eNaira information.
    Keywords: internet, information, trends, eNaira, cryptocurrency, central bank digital currency, CBDC, bitcoin
    JEL: G02 G23 G29 O31
    Date: 2023
  17. By: Alberto Martin; Sergio Mayordomo; Victoria Vanasco
    Abstract: Many countries implemented large-scale programs to guarantee private credit in response to the outbreak of COVID-19. Yet the role of banks in allocating guarantees - and thus in shaping their effects - is not well understood. We study this role in an economy where entrepreneurial effort is crucial for efficiency but it is not contractible, giving rise to a debt overhang problem. In such an environment, credit guarantees increase efficiency to the extent that they allow firms to reduce their repayment obligations. We show that banks follow a pecking order when allocating guarantees, prioritizing riskier, highly indebted, firms, from whom they can extract more surplus. The competitive equilibrium is constrained inefficient: all else equal, the planner would tilt the allocation of guarantees towards more productive, safer firms, and would fully pass-through the benefits of guarantees to firms in the form of lower repayments. We confirm the model's main predictions on the universe of all credit guarantees granted in Spain following the outbreak of COVID.
    Keywords: credit guarantees, Debt Overhang, liquidations
    Date: 2023–04
  18. By: Andrianady, Josué R.
    Abstract: This article examines the characteristics of inflation in Madagascar in 2022 and the measures taken to mitigate its impact. The causes of inflation, such as the global geopolitical situation’s impact on energy prices, and the consequences, including the rise in living costs for households, are explored. The government’s efforts to protect consumers from inflation, such as price controls and financial aid for vulnerable house�holds, are also discussed. Additionally, the article analyzes the measures taken by the Banky Foiben’i Madagasikara (BFM) to control inflation, including monetary policy and managing the money supply. The effectiveness of these measures is evaluated. Fi�nally, the article provides a summary of the characteristics of inflation in Madagascar in 2022 and the measures taken to address it, as well as future prospects and potential measures to limit its impact.
    Keywords: Madagascar, inflation, causes, consequences, government measures, Banky Foiben’i Madagasikara (BFM), monetary policy, living costs, price controls, financial aid, 2022
    JEL: E31 E58 P24 P44
    Date: 2023
  19. By: Ms. Laura Valderrama
    Abstract: Housing market developments are in the spotlight in Europe. Over-stretched valuations amid tightening financial conditions and a cost-of-living crisis have increased risks of a sustained downturn and exposed challenging trade-offs for macroprudential policy between ensuring financial system resilience and smoothing the macro-financial cycle. Against this backdrop, this paper provides detailed considerations regarding how to (re)set macroprudential policy tools in response to housing-related systemic risk in Europe, providing design solutions to avoid unintended consequences during a tightening phase, and navigating the trade-offs between managing the build-up of vulnerabilities and the macro-financial cycle in a downturn. It also proposes a novel framework to measure the effectiveness of tools and avoid overlaps by quantifying the risks addressed by different macroprudential instruments. Finally, it introduces a taxonomy allowing to assess a country’s macroprudential stance and whether adjustments to current policy settings are warranted—such as the relaxation of capital-based tools and possibly some borrower-based measures in the event of a more severe downturn.
    Keywords: Housing markets; household vulnerability; income distribution; economic cycle; financial stability; macroprudential policy.
    Date: 2023–03–24
  20. By: BELLIA Mario (European Commission - JRC); CALÈS Ludovic; DI GIROLAMO Francesca (European Commission - JRC); JOOSSENS Elisabeth (European Commission - JRC); PETRACCO GIUDICI Marco (European Commission - JRC)
    Abstract: The EU bank crisis management and deposit insurance (CMDI) framework lays out the rules for handling bank failures, while preserving financial stability, protecting depositors, and aiming to avoid the risk of excessive use of public financial resources. Notwithstanding the progress achieved in promoting a stable and integrated financial system, the objective of shielding public money from the effect of bank failures is only partially achieved. The evaluation of the current rules to handle a banking failure has in fact identified potential issues with the framework’s design, implementation, and application. The review of the CMDI framework should provide solutions to address these issues and enable the framework to fully achieve its objectives and be fit for its purpose. Notably, the revision calls for a further harmonization of insolvency law to increase its efficiency and overall coherence to manage bank crises in the EU, as well as to enhance the level of depositor protection, including the creation of a common depositor protection mechanism (European Deposit Insurance Scheme, EDIS). The following report covers in particular three aspects closely related to the Deposit Insurance design and efficiency which are mentioned in the review: the potential coverage of temporary high deposit balances (THDBs), the effectiveness and pooling effect of the EDIS, and the assessment of alternative methodologies to compute risk-based contribution to a common European Deposit Insurance Fund.
    Keywords: Financial Stability, European Deposit Insurance Scheme, EDIS
    Date: 2023–04
  21. By: Sangyup Choi (Yonsei University); Tim Willems (Bank of England); Seung Yong Yoo (Yale University)
    Abstract: We combine industry-level data on output and prices with monetary policy shock estimates for 105 countries to analyze how the effects of monetary policy vary with industry characteristics. Next to being interesting in their own right, our findings are informative on the importance of various transmission mechanisms, as they are thought to vary systematically with the included characteristics. Results suggest that monetary policy has greater output effects in industries featuring assets that are more difficult to collateralize, consistent with the credit channel, followed by industries producing durables, as predicted by the interest rate channel. The credit channel is stronger during bad times as well as in countries with lower levels of financial development, in line with financial accelerator logic. We do not find support for the cost channel of monetary policy, nor for a channel running via exports. Our database (containing estimated monetary policy shocks for 177 countries) may be of independent interest to researchers.
    Keywords: Monetary policy transmission; Industry growth; Financial frictions; Heterogeneity in transmission; Monetary policy shocks.
    JEL: E32 E52 F43 G20
    Date: 2023–04
  22. By: Lena Dräger; Michael J. Lamla; Damjan Pfajfar
    Abstract: We study the effects of forward-looking communication in an environment of rising inflation rates on German consumers’ inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using forward-looking information about inflation. Among these information treatments, professional forecasters’ projections seem to reduce inflation expectations by more than policymaker’s characterization of inflation as a temporary phenomenon.
    Keywords: short-run and long-run inflation expectations, inflation surge, randomized control trial, survey experiment, persistent or transitory inflation shock
    JEL: E31 E52 E58 D84
    Date: 2023
  23. By: Mitra, Aruni; Wei, Mengying
    Abstract: We construct U.S. county-level credit supply shocks by interacting the mortgage growth of multi-market lenders with a county’s initial exposure to those lenders. The credit shocks did not impact the local labour markets during the credit boom but had a negative effect during the Great Recession. While local unemployment rates recovered post-Recession, wage growth remained depressed. Further, a long-run increase in older firms’ employment share suggests a credit-induced reduction in business dynamism and labour demand. A mechanism through occasionally binding financial constraints tied to house prices can qualitatively explain these asymmetric effects of credit shocks in booms and busts.
    Keywords: mortgage lending, credit supply shocks, local labour markets
    JEL: E24 E32 E44 G01 G20
    Date: 2023–04–05
  24. By: Mathias Lund Larsen (CBS - Copenhagen Business School [Copenhagen]); Tancrède Voituriez (IDDRI - Institut du Développement Durable et des Relations Internationales - Institut d'Études Politiques [IEP] - Paris, Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement); Christoph Nedopil (UCAS - University of Chinese Academy of Sciences [Beijing])
    Abstract: A growing number of emerging economies receive significant parts of their overseas finance and investment from Chinese state-owned or state-linked institutions. While academic research has focused on how Chinese policy and state-owned banks approach sustainable development issues, Chinese sovereign-backed overseas development funds are a critical yet overlooked component. This paper addresses this knowledge gap by providing the first comprehensive overview of such funds regarding their scope, activities and capitalization, as well as by assessing the funds' policy approach to sustainability. Qualitative and quantitative data are collected from databases, funds' websites, newspaper articles and public statements in both Chinese and English to identify common features between funds and to analyse their sustainability policies in comparison with global best practices. The paper specifically analyses the funds' sustainability approaches rather than impact due to a lack of comprehensive data on the funds' investments. First, the paper finds that given their number, announced capital size of US$213 billion, geographic scope and sectorial focus, including on high-emissions projects such as mining, energy and heavy industry, the funds are influential players in global development finance. Second, regarding the funds' approaches to sustainability, the paper finds that the funds lack transparency about their policies and practices,
    Keywords: investment funds, china, Sustainability
    Date: 2023–03–29
  25. By: Pape, Fabian; Petry, Johannes
    Abstract: Recent IPE scholarship locates the key dynamics of financial globalization in two areas: public money flows between the US and Asia, or private banking flows between the US and Europe. This dichotomy presents the globalization of private finance as firmly anchored within transatlantic, neoliberal financial norms. We argue that this creates a blind spot regarding the growing role of East Asian finance within the global financial system. Combining CPE insights on institutional characteristics of Asian financial systems with a macro-financial analysis of the global financial system, this paper analyzes the global implications of the geographic shift towards East Asia. First, we demonstrate the growing importance of East Asia for global macro-financial flows, actors and markets that goes beyond the rise of China. Second, we explore how the institutional arrangements that underpin Asian financial systems differ significantly from transatlantic finance. By investigating the growing importance of global investors in Asian markets and Asian investors in global markets, we explore how the shift towards East Asia introduces a growing role of developmental characteristics within global finance. This calls for a reconsideration of conventional analyses of the global financial system which often assume its role as a force of neoliberal globalization.
    Keywords: comparative political economy; East Asia; global financial system; international political economy; comparative capitalism; developmentalism; global finance; macro-finance; neoliberalism; post-crisis; Warwick T&F agreement
    JEL: F3 G3 J1
    Date: 2023–03–15
  26. By: Alistair Macaulay; Wenting Song
    Abstract: This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media’s reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.
    Keywords: Financial markets; Inflation and prices; Monetary policy
    JEL: D84 E32 E43 E44 E5 G1
    Date: 2023–04
  27. By: Ajit Desai; Zhentong Lu; Hiru Rodrigo; Jacob Sharples; Phoebe Tian; Nellie Zhang
    Abstract: Modernizing Canada’s wholesale payments system to Lynx from the Large Value Transfer System (LVTS) brings two key changes: (1) the settlement model shifts from a hybrid system that combined components of both real-time gross settlement (RTGS) and deferred net settlement (DNS) to an RTGS system; (2) the policy regarding queue usage changes from discouraging it to encouraging the adoption of the new liquidity-saving mechanism. We utilize this unique opportunity to quantitatively assess the effects of those changes on the behaviour of participants in the high-value payments system. Our analysis reveals the following: (1) At the system level, most payments are settled in a single stream with the liquidity-savings mechanism in Lynx—facilitating liquidity pooling and leading to higher efficiency than LVTS where payments were distributed in two streams. Moreover, due to Lynx’s liquidity-saving mechanism, many payments arrive earlier than those in LVTS, providing more opportunities for liquidity saving at the cost of slightly increased payment delay. (2) At the participant level, the responses are rather heterogeneous; however, our analysis suggests that liquidity efficiency is improved for several participants, and most experience slightly longer payment delays in Lynx than in LVTS.
    Keywords: Financial institutions; Financial services; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: E42 G28 C10
    Date: 2023–04
  28. By: Cyril B\'en\'ezet (LaMME, ENSIIE); St\'ephane Cr\'epey (LPSM); Dounia Essaket (LPSM)
    Abstract: Darwinian model risk is the risk of mis-price-and-hedge biased toward short-to-medium systematic profits of a trader, which are only the compensator of long term losses becoming apparent under extreme scenarios where the bad model of the trader no longer calibrates to the market. The alpha leakages that characterize Darwinian model risk are undetectable by the usual market risk tools such as value-at-risk, expected shortfall, or stressed value-at-risk.Darwinian model risk can only be seen by simulating the hedging behavior of a bad model within a good model. In this paper we extend to callable assets the notion of hedging valuation adjustment introduced in previous work for quantifying and handling such risk. The mathematics of Darwinian model risk for callable assets are illustrated by exact numerics on a stylized callable range accrual example. Accounting for the wrong hedges and exercise decisions, the magnitude of the hedging valuation adjustment can be several times larger than the mere difference, customarily used in banks as a reserve against model risk, between the trader's price of a callable asset and its fair valuation.
    Date: 2023–04
  29. By: Alexis Stenfors (University of Portsmouth); Lilian Muchimba (University of Portsmouth)
    Abstract: Significant and volatile deviations from the covered interest parity (CIP) are indicators of stress in the international banking system. This paper uses a TVP-VAR model to investigate the dynamic connectedness and spillovers of such stress between the US, the UK, Japan and the Eurozone from 4 July 2006 to 9 June 2022. To do so, we use daily price data on cross-currency basis swaps (CRSs), typically used to trade and express CIP deviations for maturities of 1 year and beyond. We also incorporate a yield curve dimension by including prices representative of the short-term (1Y), medium-term (5Y) and long-term (10Y) to obtain a more nuanced picture of the role of market expectations. Our findings suggest that overall connectedness is highly event-dependent and peaks during periods of high volatility and market stress. However, the transmission mechanism across banking systems and yield curve maturities has evolved considerably over time, which has significant implications for policies attempting to mitigate future crises.
    Keywords: Banks, CIP deviations, Cross-currency basis swaps, Dynamic connectedness, TVP-VAR, Yield curves
    JEL: C32 C5 F3 G15
    Date: 2023–04–24
  30. By: Lang, Jan Hannes; Rusnák, Marek; Greiwe, Moritz
    Abstract: Financial stability indicators can be grouped into financial stress indicators that reflect heightened spreads and market volatility, and financial vulnerability indicators that reflect credit and asset price imbalances. Based on a panel of euro area countries, we show that both types of indicators contain information about downside risks to real GDP growth (growth-at-risk) in the short-term (1-year ahead). However, only vulnerability indicators contain information about growth-at-risk in the medium-term (3-years ahead and beyond). Among various vulnerability indicators suggested in the literature, the Systemic Risk Indicator (SRI) proposed by Lang et al. (2019) outperforms in terms of in-sample explanatory power and out-of-sample predictive ability for medium-term growth-at-risk in euro area countries. Shocks to the SRI induce a rich ”term structure” for growth-at-risk: downside risks to real GDP growth are reduced in the short-term, but over the medium-term the effect reverses and downside risks to real GDP growth go up considerably. We also show that using cross-country information from the panel of euro area countries can improve the out-of-sample forecasting performance of growth-at-risk for the euro area aggregate. JEL Classification: E37, E44, G01, G17, C22
    Keywords: financial stress, financial vulnerabilities, growth-at-risk, local projections, quantile regression
    Date: 2023–04
  31. By: Saki Bigio (UCLA; NBER)
    Abstract: This paper introduces an endogenous network of payments chains into a business cycle model. Agents order production in bilateral relations. Some payments are executed immediately. Other payments, chained payments, are delayed until other payments are executed. Because production starts only after orders are paid, chained payments induce production delays. In equilibrium, agents choose the amount of chained payments given interest rates and access to internal funds or credit lines. This choice determines the payments-chain network and aggregate total-factor productivity (TFP). The paper characterizes equilibrium dynamics and their innate inefficiencies. Agents internalize the direct costs of their payment delays, but do not internalize the costs induced onto others. This externality produces novel policy insights and rationalizes permanent reductions in TFP under excessive debt.
    Keywords: Payments, Networks, Business Cycles
    Date: 2023–04
  32. By: Vokata, Petra (Ohio State U)
    Abstract: Using a large database of complex securities, I study how salient attributes of security design distort household investment decisions. I show banks add non-standard (fine-print) conditions to artificially increase advertised rates of headline return and downside protection-a phenomenon I term "enhancement." Enhancement increases headline returns by 11 percentage points, on average, but does not increase realized returns. Flexibly controlling for all other product attributes and using high-frequency shocks to structuring costs of enhancement for identification, I find demand is highly elastic to enhancement. Enhancement is costly to investors: a one standard deviation decrease implies savings of more than $1 billion in fees.
    JEL: D18 G11 G23 G40 G50
    Date: 2023–04

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