nep-ban New Economics Papers
on Banking
Issue of 2023‒05‒15
34 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Bank Concentration and Monetary Policy Pass-Through By Isabel Gödl-Hanisch
  2. Central Bank Digital Currency and Financial Inclusion By Brandon Tan
  3. Drivers of Sovereign Bond Demand – The Case of Japans By Carlos Alberto Piscarreta Pinto Ferreira
  4. A macroprudential look into the risk-return framework of banks’ profitability By Joana Passinhas; Ana Pereira
  5. Exploring the Determinants of Capital Adequacy in Commercial Banks: A Study of Bangladesh's Banking Sector By Md Shah Naoaj
  6. Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? By Jiang, Erica Xuewei; Matvos, Gregor; Piskorski, Tomasz; Seru, Amit
  7. Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems By Ms. Inutu Lukonga
  8. The impact of credit substitution between banks on investment By Francesco Bripi
  9. Open Mouth Operations. Monetary Policy by Threats and Arguments. The Monthly Meetings Between the Riksbank and the Commercial Banks, 1956-73 By Jonung, Lars
  10. Credit Risk and Financial Performance of Commercial Banks: Evidence from Vietnam By Ha Nguyen
  11. Financial intermediation and new technology: theoretical and regulatory implications of digital financial markets By Maurizio Trapanese; Michele Lanotte
  12. Climate Stress Testing By Viral V. Acharya; Richard Berner; Robert F. Engle III; Hyeyoon Jung; Johannes Stroebel; Xuran Zeng; Yihao Zhao
  13. The rise of crypto-assets: cool breeze or tsunami in balance of payments statistics? By Andrea Carboni; Giuseppe Carone; Giuseppina Marocchi
  14. Derivative Margin Calls: A New Driver of MMF Flows By Mr. German Villegas Bauer; Maddalena Ghio; Linda Rousova; Dilyara Salakhova
  15. Analysis of the Fintech Landscape in the Philippines By Quimba, Francis Mark A.; Barral, Mark Anthony A.; Carlos, Jean Clarisse T.
  16. The signaling value of legal form in debt financing By Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
  17. Individual Credit Market Experience and Beliefs about Bank Lending Policy: Evidence from a Firm Survey By Jarko Fidrmuc; Christa Hainz; Werner Hölzl
  18. The interpretive and relational work of financial innovation: A resemblance of assurance in Islamic finance By Pitluck, Aaron Z.
  19. China as an International Lender of Last Resort By Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
  20. Fintech, investor sophistication and financial portfolio choices By Leonardo Gambacorta; Romina Gambacorta; Roxana Mihet
  21. Currency Usage for Cross Border Payments By Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
  22. Assessing the Credit Risk of Crypto-Assets Using Daily Range Volatility Models By Fantazzini, Dean
  23. Inflation is Conflict By Guido Lorenzoni; Iván Werning
  24. Systemic risk measured by systems resiliency to initial shocks By Luka Klin\v{c}i\'c; Vinko Zlati\'c; Guido Caldarelli; Hrvoje \v{S}tefan\v{c}i\'c
  25. The Impact of Remittances on Monetary Transmission Mechanism in Remittance-recipient Countries: with Focus on Credit and Exchange Rate Channels By Jahan Abdul Raheem; Gazi M. Hassan; Mark J. Holmes
  26. Anatomy of a Run: The Terra Luna Crash By Jiageng Liu; Igor Makarov; Antoinette Schoar
  27. Using Functional Shocks to Assess Conventional and Unconventional Monetary Policy in Canada By Thorsten V. Koeppl; Jeremy M Kronick; James McNeil
  28. Capital Controls in Times of Crisis – Do They Work? By Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
  29. Decentralised finance- good technology, bad finance By Maria Demertzis; Catarina Martins
  30. Mobile Money, Interoperability and Financial Inclusion By Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
  31. Capital Controls or Macroprudential Regulation: Which is Better for Land Booms and Busts? By Yang Zhou; Shigeto Kitano
  32. Parameterized Neural Networks for Finance By Daniel Oeltz; Jan Hamaekers; Kay F. Pilz
  33. Modelling customer lifetime-value in the retail banking industry By Greig Cowan; Salvatore Mercuri; Raad Khraishi
  34. Are Digital and Traditional Financial Services Taxed the Same? A Comprehensive Assessment of Tax Policies in Nine African Countries By Niesten, Hannelore

  1. By: Isabel Gödl-Hanisch
    Abstract: This paper analyzes the implications of the gradual rise in bank concentration since the 1990s for the transmission of monetary policy. I use branch-level data on deposit and loan rates to evaluate the monetary policy pass-through conditional on the level of local bank concentration and bank capitalization. I find that banks operating in high-concentration markets and under-capitalized banks adjust short-term lending rates more. I then build a theoretical model with heterogeneous banks that rationalizes the empirical findings and explains the underlying mechanism. In the model, monopolistic competition in local deposit and loan markets, along with bank capital requirements, lead to frictions on the pass-through to the real economy. Counterfactual analyses highlight that the rise in bank concentration alters monetary policy pass-through by two channels: the market power and capital allocation channels. Both channels further strengthen monetary policy transmission to output and investment, amplify the credit cycle, and flatten the Phillips curve.
    Keywords: monetary transmission, bank heterogeneity, monopolistic competition, bank regulation
    JEL: E44 E51 E52 G21
    Date: 2023
  2. By: Brandon Tan
    Abstract: In this paper, we develop a model incorporating the impact of financial inclusion to study the implications of introducing a retail central bank digital currency (CBDC). CBDCs in developing countries (unlike in advanced countries) have the potential to bank large unbanked populations and boost financial inclusion which can increase overall lending and reduce bank disintermediation risks. Our model captures two key channels. First, CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked). Second, data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending. We find that CBDC can increase overall lending if (1) bank deposit liquidity risk is low, (2) the size and relative wealth of the previously unbanked population is large, and (3) CBDC is valuable to households as a means of payment or for credit-building. CBDC can still be optimal for household welfare even when overall lending decreases as households benefit from the value of using CBDC for payments, CBDC provides an alternative "safe" savings vehicle, and CBDC generates greater surplus in lending by reducing credit-risk information asymmetry. Most countries are considering a "two-tier" CBDC model, where central banks issue CBDC to commercial banks which in turn distribute them to consumers. If non-bank payment system providers can distribute CBDC, fewer funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access CBDC. If CBDC data is shareable with banks, those without bank accounts can still build credit and access lower interest rate loans. This design is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.
    Keywords: CBDC; Financial Inclusion; Digital currency; CBDC issuance; credit-risk information asymmetry; CBDC data; CBDC model; CBDC wallet; Central Bank digital currencies; Commercial banks; Deposit rates; Loans; Global
    Date: 2023–03–17
  3. By: Carlos Alberto Piscarreta Pinto Ferreira
    Abstract: The aim of this empirical paper is to understand the portfolio decisions of banks regarding their asset allocation to sovereign bonds applied to the case of Japan, over the period 2002-21. The issue is relevant because globally central banks are moving to a passive holder or even net seller stance, raising the question of whether banks can be counted among the investors which will replace them. Japan makes an interesting case since Japanese banks are among the banks in advanced economies with a larger share of non-official holdings of domestic sovereign debt, their mean ratio of gross claims on the central government to total assets is about three times above average values in the United States or in the Euro Area, and government portfolios are relatively more homogeneous. We contribute to the existing literature by exploring the impact of unconventional monetary policy on sovereign bond bank demand and putting to test the significance of risk on banks´ asset portfolio decisions using a dynamic rather than a static setting. Our results show that banks struggling to grow, more diversified, better capitalized, or larger banks during expansion periods tend to hold relatively fewer sovereign bonds. On the contrary, past higher profitability, higher economic volatility and funding risk encourage relatively greater holdings. Though less clearly, data also suggests that banks facing weaker loan performance and regional banks with more significant need of collateral hold a higher proportion of sovereign bonds. Quantitative and Qualitative Monetary Easing had a major disruptive effect over banks’ government bond demand. Excess reserves at the Bank of Japan became a low risk/low return alternative to government bonds, as banks with relatively higher excess reserves have relatively less government bond holdings in their assets. Going forward, only a reversion of the monetary base expansion may help government bonds regain their role of the single riskless asset for Japanese banks.
    Keywords: Sovereign Debt, Portfolio Choice, Banks, Monetary Policy, Panel Data
    JEL: C23 E58 G11 G21 H63
    Date: 2023–03
  4. By: Joana Passinhas; Ana Pereira
    Abstract: Ensuring the resilience of the financial system implies managing a trade-off between expected bank profitability and tail risk in bank returns. To describe this trade-off, we estimate a dynamic quantile regression model using bank-level data for Portugal that links future bank profitability to the current cyclical systemic risk environment net of the prevailing level of capital-based resilience (residual cyclical systemic risk). We find that an increase in residual cyclical systemic risk negatively affects the conditional distribution of bank profitability at the medium-term projection horizons, confirming the findings in the literature. We propose a novel calibration rule for the countercyclical capital buffer (CCyB), which is flexible enough to accommodate different preferences of the policymaker and factors in the prevailing levels of cyclical systemic risk and capital-based resilience. We illustrate the operationalisation of this rule under different assumptions for the policymaker preferences and show how tightening capital requirements alters the risk-return relationship of future profitability in the banking sector. We find evidence that increasing the CCyB rate improves the outlook for medium-term downside risk in bank profitability and worsens the outlook for short-term expected profitability, stressing the tradeoff faced by the policymaker when deploying policy instruments and the misalignment in the horizons at which costs and benefits take place.
    Keywords: Macroprudential policy, systemic risk, bank profitability, quantile regression
    JEL: C21 C54 G17 G21 G28
    Date: 2023–03
  5. By: Md Shah Naoaj
    Abstract: This study investigates the factors that influence the capital adequacy of commercial banks in Bangladesh using panel data from 28 banks over the period of 2013-2019. Three analytical methods, including the Fixed Effect model, Random Effect model, and Pooled Ordinary Least Square (POLS) method, are employed to analyze two versions of the capital adequacy ratio, namely the Capital Adequacy Ratio (CAR) and Tier 1 Capital Ratio. The study reveals that capital adequacy is significantly affected by several independent variables, with leverage and liquidity risk having a negative and positive relationship, respectively. Additionally, the study finds a positive correlation between real GDP and net profit and capital adequacy, while inflation has a negative correlation. For the Tier 1 Ratio, the study shows no significant relationship betweenleverage and liquidity risk, but a positive correlation with the number of employees, net profit, and real GDP, while a negative correlation with size and GDP deflator. Pooled OLS analysis reveals a negative correlation with leverage, size, and inflation for both CAR and Tier 1 Capital Ratio, and a positive correlation with liquidity risk, net profit, and real GDP. Based on the Hausman test, the Random Effect model is deemed moresuitable for this dataset. These findings have important implications for policymakers, investors, and bank managers in Bangladesh by providing insights into the factors that impact the capital ratios of commercial banks.
    Date: 2023–03
  6. By: Jiang, Erica Xuewei (U of Southern California); Matvos, Gregor (Northwestern U); Piskorski, Tomasz (Columbia U); Seru, Amit (Stanford U)
    Abstract: We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
    Date: 2023–03
  7. By: Ms. Inutu Lukonga
    Abstract: Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
    Keywords: Central Bank Digital Currencies; CBDC; CBDC Pilots; Monetary Policy; Islamic Finance; impact monetary policy implementation; design option; unremunerated CBDC; monetary policy implication; deposit disintermediation; Commercial banks; Velocity of money; Islamic banking; Monetary base; Global
    Date: 2023–03–17
  8. By: Francesco Bripi (Bank of Italy)
    Abstract: This paper estimates the elasticity of substitution across banks using matched bank-firm data and assuming monopolistic competition in local credit markets. It also quantifies the impact of credit supply shocks on corporate investment as shaped by this elasticity. Credit supply shocks have significant effects on firms’ investments in industries with a lower degree of substitutability. In these industries, where firms find it difficult to acquire funding and obtain better credit conditions from other banks, a 1 per cent increase in credit supply increases firms’ investment rates by 0.2 per cent. The effect of lenders substitutability on investment offsets that of bank specialization, thus highlighting that the risks of excessive bank concentration in specific industries may be alleviated by lenders substitution. Overall, the evidence suggests that considering the demand side, i.e. the heterogeneous effects of the elasticity of substitution in credit markets, is crucial for a better understanding of the bank lending channel.
    Keywords: banks, credit, substitution, investments
    JEL: G21 D22 E22
    Date: 2023–04
  9. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: After World War II and prior to the financial deregulation of the 1980s, monetary policy in Sweden as well as in other western European countries rested chiefly on a system of far- reaching non-market-oriented controls of credit flows and interest rates. How was monetary policy conducted in such an environment of financial repression, where the central bank was unable to rely on traditional monetary policy instruments working on "free" and "unregulated" money and capital markets?<p> This study provides an answer from the Swedish experience. It is based on a unique set of confidential minutes from about 160 monthly meetings between the Riksbank and the commercial banks during the years 1956-73. These minutes, written during or directly after the meetings, have not been available to scholars before. Most likely, a similar archive material does not exist for any other country.<p> The examination of the minutes demonstrates that monetary policy was framed in a process involving threats and arguments in a small and closed club involving the central bank and the chief executives of the commercial banks. According to a joke assigned to Erik Lundberg “open market operations were replaced by open mouth operations” - albeit the dialogue was kept within the club.<p> When Swedish financial markets were deregulated in the 1980s, the standard tools of monetary policy rapidly replaced the meetings between the central bank and the commercial banks. Today, the Riksbank communicates in an open way to all financial market participants, instead of turning to a small set of commercial bankers in meetings closed to outsiders.
    Keywords: Credit controls; interes rate controls; exchange controls; financial repression; liquidity ratios; the Riksbank; Sweden
    JEL: B22 E42 E50 E58 E65 G21 N14
    Date: 2023–04–24
  10. By: Ha Nguyen
    Abstract: Credit risk is a crucial topic in the field of financial stability, especially at this time given the profound impact of the ongoing pandemic on the world economy. This study provides insight into the impact of credit risk on the financial performance of 26 commercial banks in Vietnam for the period from 2006 to 2016. The financial performance of commercial banks is measured by return on assets (ROA), return on equity (ROE), and Net interest margin (NIM); credit risk is measured by the Non-performing loan ratio (NPLR); control variables are measured by bank-specific characteristics, including bank size (SIZE), loan loss provision ratio (LLPR), and capital adequacy ratio (CAR), and macroeconomic factors such as annual gross domestic product (GDP) growth and annual inflation rate (INF). The assumption tests show that models have autocorrelation, non-constant variance, and endogeneity. Hence, a dynamic Difference Generalized Method of Moments (dynamic Difference GMM) approach is employed to thoroughly address these problems. The empirical results show that the financial performance of commercial banks measured by ROE and NIM persists from one year to the next. Furthermore, SIZE and NPLR variables have a significant negative effect on ROA and ROE but not on NIM. There is no evidence found in support of the LLPR and CAR variables on models. The effect of GDP growth is statistically significant and positive on ROA, ROE, and NIM, whereas the INF is only found to have a significant positive impact on ROA and NIM.
    Date: 2023–04
  11. By: Maurizio Trapanese (Banca d'Italia); Michele Lanotte (Banca d'Italia)
    Abstract: Technological progress in finance has been accelerating over the last decade. In the future, it is likely that financial intermediaries may undergo significant challenges as regards their traditional business model and functions, since an increasing share of payments may be settled without banks’ deposits and capital markets may increasingly provide direct credit to the economy. This paper aims to outline the theoretical and regulatory implications stemming from digital financial markets, with a particular focus on the growing importance of BigTech and FinTech firms. We study the importance of information and communication in financial intermediation, and outline the impact of technological progress on the core functions traditionally performed by banks and other financial institutions, and on payment systems. In this context, we discuss the role of public policies, and the main issues for regulation, supervision, competition, and consumer protection.
    Keywords: firm behaviour, international financial markets, financial institutions, financial policy and regulation, risk management JEL Classification: D21, G15, G20, G28, G32
    Date: 2023–04
  12. By: Viral V. Acharya; Richard Berner; Robert F. Engle III; 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.
    JEL: G0 Q0
    Date: 2023–04
  13. By: Andrea Carboni (Bank of Italy); Giuseppe Carone (Bank of Italy); Giuseppina Marocchi (Bank of Italy)
    Abstract: Recent years have shown a significant acceleration in the adoption and development of blockchains or Distributed Ledger Technologies, particularly in the financial sector. Alongside the well-known and widely used Bitcoin, other cryptocurrencies have been developed and have become popular (Ethereum, XRP...). As a result, digital wallets and exchange platforms are becoming commonly used technologies. Meanwhile, different instruments are being developed rapidly, which could be launched and reach scale in the near future; this is the case of stablecoins, Central Bank Digital Currencies (CBDCs) and Non-Fungible Tokens (NFTs). Besides technical details and contingent regulatory requirements, the purpose of this paper is to evaluate and highlight the impacts of such instruments on the compilation of external statistics. After a brief digression on the features and classification of digital assets, the potential effects on some BoP items are discussed (the current and financial account).
    Keywords: crypto-assets, crypto-currencies, stablecoins, balance of payments, remittances, payment services
    JEL: E4 F02 F24 F3
    Date: 2023–04
  14. By: Mr. German Villegas Bauer; Maddalena Ghio; Linda Rousova; Dilyara Salakhova
    Abstract: During the March 2020 market turmoil, euro area money-market funds (MMFs) experienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs related to derivative margin payments. We combine three highly granular unique data sources (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lipper data for daily MMF flows) to construct a daily fund-level panel dataset spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EURdenominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an important driver of the flows of EUR-denominated MMFs domiciled in euro area.
    Keywords: liquidity risk; money market funds; big data; interconnectedness; non-bank financial intermediaries.; EUR-denominated MMFs; derivative margin calls; MMF flow; variation margin payment; VM flow; Stocks; Liquidity; Mutual funds; Nonbank financial institutions; Pension spending; Global
    Date: 2023–03–17
  15. By: Quimba, Francis Mark A.; Barral, Mark Anthony A.; Carlos, Jean Clarisse T.
    Abstract: Financial technology (fintech) in the Philippines has gained more attention in recent years, especially during the onset of the COVID-19 pandemic when lockdowns were prevalent and cashless payments were encouraged. Thus, digital payments and engagements through various platforms have increased, resulting in more diversified financial products and services. Despite these developments, financial inclusion in the Philippines has lagged behind other Association of Southeast Asian Nations member-states. This paper analyzes the state of the fintech industry and investigates how the government can support the development of its ecosystem to ensure its contribution to the country’s development goals. It concludes that the Philippines has a strong fintech industry, as indicated by a growing number of fintechs (particularly in payments, lending, and banking technology verticals) and increasing capitalization. Finally, for the fintech industry to support the country’s financial inclusion goals, the availability of talent and credit for the sector must be improved.
    Keywords: business models;financial literacy;financial inclusion;e-money;fintech;FinTech ecosystem;lending
    Date: 2023
  16. By: Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
    Abstract: We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.
    Keywords: legal form, minimum capital requirements, signaling, access to debt, financial constraint
    Date: 2023–04–17
  17. By: Jarko Fidrmuc; Christa Hainz; Werner Hölzl
    Abstract: We study how firms’ individual credit market experience influences their beliefs about the bank lending policy, using the Austrian Business Survey between 2011 and 2016. Firms which have recently experienced a loan rejection are more likely to believe that the lending policy is restrictive. We see similar effects for firms who were granted loans, but with conditions worse than anticipated. Exploiting the panel structure shows that firms without recent credit market experience are less likely to change their beliefs, which converge towards the middle category. Our findings are in line with theories of rational inattention and with asymmetric experience effects.
    Keywords: Formation of beliefs, rational inattention, pessimism, persistence, behavioral macroeconomics
    JEL: G21 E51 D22
    Date: 2023
  18. By: Pitluck, Aaron Z. (Illinois State University)
    Abstract: What social forces shape the trajectory of novel, moralized forms of finance such as social finance, green finance, or Islamic banking and finance? More broadly, how do agents mobilize arguments and organize each other to create any form of financial innovation? This article addresses both questions by contributing an ethnography of a novel financial innovation pseudonymously named Sukuk Illumination, an internationally traded moral alternative to a corporate bond. This article’s findings both elaborate and subsume existing functionalist and critical explanations of financial innovation. The central argument is that we can better understand what causes financial innovation and the trajectory that new innovations take when we conceptualize each financial instrument as a polysemic cultural object materialized in legal contracts and institutionalized work practices and created by parties with asymmetric power to define the new object. Financial innovation necessarily involves multiple parties in a financial service commodity chain with multivalent motivations co-producing and hotly debating interpretations of the prospective financial instrument while simultaneously creating, refashioning, and differentiating existing relationships with one another. Sukuk Illumination demonstrates both the potential and constraints for creating new moralized financial instruments and for transforming financial systems.
    Date: 2023–04–12
  19. By: Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
    Abstract: This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
    JEL: F2 F33 F42 F65 G15 H63 N25
    Date: 2023–04
  20. By: Leonardo Gambacorta (Bank for International Settlements); Romina Gambacorta (Bank of Italy); Roxana Mihet (HEC Lausanne)
    Abstract: This paper analyses the links between advances in financial technology, investors' sophistication, and their financial portfolios' composition and returns. We develop a simple portfolio choice model under asymmetric information and derive some theoretical predictions. Using detailed micro data from the Bank of Italy, we test these predictions for Italian households over the period 2004-2020. In general, heterogeneity in portfolio composition and in returns between sophisticated and unsophisticated investors grows with improvements in financial technology. This heterogeneity is reduced only if financial technology is accessible by everyone and if investors have a similar capacity to use it.
    Keywords: inequality, inclusion, fintech, innovation, Matthew effect
    JEL: G1 G5 G4 D83 L8 O3
    Date: 2023–04
  21. By: Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
    Abstract: While the global usage of currencies other than the U.S. dollar and the euro for cross-border payments remains limited, rapid technological (e.g. digital money) or geopolitical changes could accelerate a regime shift into a multipolar or more fragmented international monetary system. Using the rich Swift database of cross-border payments, we empirically estimate the importance of legal tender status, geopolitical distance, and other variables vis-à-vis the large inertia effects for currency usage, and perform several forecasting simulations to better understand the role of these variables in shaping the future payments landscape. While our results suggest a substantially more fragmented international monetary system would be unlikely in the short and medium term, the impact of new technologies remains highly uncertain, and much more rapid geopolitical developments than expected could accelerate the transformation of the international monetary system towards multipolarity.
    Keywords: Cross border payments; Swift; currency dominance; legal tender; international monetary system (IMS)
    Date: 2023–03–24
  22. By: Fantazzini, Dean
    Abstract: In this paper, we analyzed a dataset of over 2000 crypto-assets to assess their credit risk by computing their probability of death using the daily range. Unlike conventional low-frequency volatility models that only utilize close-to-close prices, the daily range incorporates all the information provided in traditional daily datasets, including the open-high-low-close (OHLC) prices for each asset. We evaluated the accuracy of the probability of death estimated with the daily range against various forecasting models, including credit scoring models, machine learning models, and time-series-based models. Our study considered different definitions of ``dead coins'' and various forecasting horizons. Our results indicate that credit scoring models and machine learning methods incorporating lagged trading volumes and online searches were the best models for short-term horizons up to 30 days. Conversely, time-series models using the daily range were more appropriate for longer term forecasts, up to one year. Additionally, our analysis revealed that the models using the daily range signaled, far in advance, the weakened credit position of the crypto derivatives trading platform FTX, which filed for Chapter 11 bankruptcy protection in the United States on 11 November 2022.
    Keywords: daily range; bitcoin; crypto-assets; cryptocurrencies; credit risk; default probability; probability of death; ZPP; cauchit; random forests
    JEL: C32 C35 C51 C53 C58 G12 G17 G32 G33
    Date: 2023
  23. By: Guido Lorenzoni; Iván Werning
    Abstract: This paper isolates the role of conflict or disagreement on inflation in two ways. In the first part of the paper, we present a stylized model, kept purposefully away from traditional macro models. Inflation arises despite the complete absence of money, credit, interest rates, production, and employment. Inflation is due to conflict; it cannot be explained by monetary policy or departures from a natural rate of output or employment. In contrast, the second part of the paper develops a flexible framework that nests many traditional macroeconomic models. We include both goods and labor to study the interaction of price and wage inflation. Our main results provide a decomposition of inflation into “adjustment” and “conflict” inflation, highlighting the essential nature of the latter. Conflict should be viewed as the proximate cause of inflation, fed by other root causes. Our framework sits on top of a wide set of particular models that can endogenize conflict.
    JEL: E0 E12 E31
    Date: 2023–04
  24. By: Luka Klin\v{c}i\'c; Vinko Zlati\'c; Guido Caldarelli; Hrvoje \v{S}tefan\v{c}i\'c
    Abstract: The study of systemic risk is often presented through the analysis of several measures referring to quantities used by practitioners and policy makers. Almost invariably, those measures evaluate the size of the impact that exogenous events can exhibit on a financial system without analysing the nature of initial shock. Here we present a symmetric approach and propose a set of measures that are based on the amount of exogenous shock that can be absorbed by the system before it starts to deteriorate. For this purpose, we use a linearized version of DebtRank that allows to clearly show the onset of financial distress towards a correct systemic risk estimation. We show how we can explicitly compute localized and uniform exogenous shocks and explained their behavior though spectral graph theory. We also extend analysis to heterogeneous shocks that have to be computed by means of Monte Carlo simulations. We believe that our approach is more general and natural and allows to express in a standard way the failure risk in financial systems.
    Date: 2023–04
  25. By: Jahan Abdul Raheem (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: Remittances contribute to welfare enhancement and poverty alleviation in many remittance-recipient economies. However, recent literature also focuses on the macroeconomic impact of remittances due to their increasing inflow into these economies. We use an unbalanced heterogeneous panel Structural Vector Autoregression (SVAR) methodology to study the impact of remittances on intermediate monetary transmission channels in remittance-recipient countries. In particular, we analyse the effect of remittances on credit and exchange rate channels in these economies. We, initially, estimate credit and exchange rate impulse responses (IRs) to a shock in remittances. The IRs estimates suggest a significant variation among countries in credit and exchange rates in response to a shock in remittances. In the next stage, we run a cross-section regression of these responses to identify the factors influencing the IRs of these variables. We find that the magnitude of remittances received by an economy significantly impacts the exchange rate channel thus affecting the smooth functioning of the monetary transmission mechanism. However, the effect of remittances on the credit channel is dependent on the level of remittance inflows and savings in remittance-recipient economies. Our finding also reveals that remittances weaken the functioning of the credit channel at a higher level of remittance inflows, especially, when the remittances are higher than approximately five percent of GDP in remittance-recipient economies. Overall, our findings have broad policy implications revealing that policymakers have to pay attention to the possible effects of remittances on intermediate monetary transmission channels in achieving the monetary policy targets.
    Keywords: remittances;monetary policy;monetary transmission mechanism
    JEL: E5 E52 F24
    Date: 2023–04–20
  26. By: Jiageng Liu; Igor Makarov; Antoinette Schoar
    Abstract: Terra, the third largest cryptocurrency ecosystem after Bitcoin and Ethereum, collapsed in three days in May 2022 and wiped out $50 billion in valuation. At the center of the collapse was a run on a blockchain-based borrowing and lending protocol (Anchor) that promised high yields to its stablecoin (UST) depositors. Using detailed data from the Terra blockchain and trading data from exchanges, we show that the run on Terra was a complex phenomenon that happened across multiple chains and assets. It was unlikely due to concentrated market manipulation by a third party but instead was precipitated by growing concerns about the sustainability of the system. Once a few large holders of UST adjusted their positions on May 7th, 2022, other large traders followed. Blockchain technology allowed investors to monitor each other's actions and amplified the speed of the run. Wealthier and more sophisticated investors were the first to run and experienced much smaller losses. Poorer and less sophisticated investors ran later and had larger losses. The complexity of the system made it difficult even for insiders to understand the buildup of risk. Finally, we draw broader lessons about financial fragility in an environment where a regulatory safety net does not exist, pseudonymous transactions are publicly observable, and market participants are incentivized to monitor the financial health of the system.
    JEL: E42 E44 G21
    Date: 2023–04
  27. By: Thorsten V. Koeppl; Jeremy M Kronick (C.D. Howe Insitute); James McNeil (Dalhousie University)
    Abstract: We develop a new series of Canadian monetary policy shocks and analyze their impact on inflation and real GDP from 1996–2020. Our shocks are constructed as the daily change in the Nelson-Siegel yield curve factors after a monetary policy announcement. Because these shocks include information along the entire yield curve, they provide a more comprehensive view of Canadian monetary policy relative to the existing literature, which focuses on shocks to the short-run interest rate. We document that monetary policy shocks often twist the yield curve, which tends to make monetary policy less effective. Furthermore, we find that lower real interest rates have muted the overall impact of monetary policy over time. Looking at particular episodes, there is little evidence that forward guidance or quantitative easing had a significant impact on inflation or real GDP.
    Keywords: Monetary Policy Shocks, Canada, Yield Curve, Local Projections, Unconventional Monetary Policy
    JEL: E52 E65 C58 G12
    Date: 2023–04
  28. By: Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
    Abstract: This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
    Keywords: Capital controls; capital outflows; financial crises; inflow control; outflow controls Introduced; outflow control; controls on outflow; tightening control; Capital account; Capital flows; Caribbean; Global
    Date: 2023–03–17
  29. By: Maria Demertzis; Catarina Martins
    Abstract: Given the importance of digitalisation, it is fair to ask whether these digital decentralised services will become established and normalised.
    Date: 2023–04
  30. By: Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
    Abstract: This paper explores the tradeoff between competition and financial inclusion given by the vertical integration between mobile network and money operators. Joining novel data on mobile money fees built through the WayBack machine, with sources on network coverage and financials, we examine the staggering across African operators and countries of platform interoperability – a policy that promotes transactions and competition across mobile money operators. Our findings show that interoperability lowers mobile money fees and reduces network coverage and mobile towers, especially in rural and poor districts. Interoperability also results in a decline in various survey metrics of financial inclusion. Keywords: Mobile Money, Interoperability, Financial inclusion JEL Codes: E42, L14, O10
    Date: 2023
  31. By: Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Junir Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.
    Keywords: Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE
    JEL: E69 F32 F38 F41
    Date: 2023–04
  32. By: Daniel Oeltz; Jan Hamaekers; Kay F. Pilz
    Abstract: We discuss and analyze a neural network architecture, that enables learning a model class for a set of different data samples rather than just learning a single model for a specific data sample. In this sense, it may help to reduce the overfitting problem, since, after learning the model class over a larger data sample consisting of such different data sets, just a few parameters need to be adjusted for modeling a new, specific problem. After analyzing the method theoretically and by regression examples for different one-dimensional problems, we finally apply the approach to one of the standard problems asset managers and banks are facing: the calibration of spread curves. The presented results clearly show the potential that lies within this method. Furthermore, this application is of particular interest to financial practitioners, since nearly all asset managers and banks which are having solutions in place may need to adapt or even change their current methodologies when ESG ratings additionally affect the bond spreads.
    Date: 2023–04
  33. By: Greig Cowan; Salvatore Mercuri; Raad Khraishi
    Abstract: Understanding customer lifetime value is key to nurturing long-term customer relationships, however, estimating it is far from straightforward. In the retail banking industry, commonly used approaches rely on simple heuristics and do not take advantage of the high predictive ability of modern machine learning techniques. We present a general framework for modelling customer lifetime value which may be applied to industries with long-lasting contractual and product-centric customer relationships, of which retail banking is an example. This framework is novel in facilitating CLV predictions over arbitrary time horizons and product-based propensity models. We also detail an implementation of this model which is currently in production at a large UK lender. In testing, we estimate an 43% improvement in out-of-time CLV prediction error relative to a popular baseline approach. Propensity models derived from our CLV model have been used to support customer contact marketing campaigns. In testing, we saw that the top 10% of customers ranked by their propensity to take up investment products were 3.2 times more likely to take up an investment product in the next year than a customer chosen at random.
    Date: 2023–04
  34. By: Niesten, Hannelore
    Abstract: This background report looks at tax implications for those providing and using digital financial services (DFS), and gives general observations as to whether DFS in Africa are taxed the same as traditional financial services (TFS). There is no categorical answer to this question. It varies country by country, depending on the specific arrangements in their legal and tax framework. Therefore, a country-specific approach is necessary. This report analyses key legislative, tax and regulatory policy instruments to compare the tax framework in nine African countries – Burundi, Côte d’Ivoire, Ghana, Kenya, Rwanda, South Sudan, Tanzania, Uganda and Zimbabwe. The country studies illustrate the diverse experience across the nine African economies, and the tension between the need for greater mobilisation of domestic resources and the desire to see rapid roll-out of digital infrastructure and services. The cross-country assessment highlights areas where the tax situation is different for DFS providers and users, compared to traditional financial institutions and actors. We present a number of preliminary considerations and lessons learned. These can help to shape an optimal tax environment, reduce friction, enhance beneficial competition in the financial services market, and minimise any negative consequences for DFS providers and users that arise within the taxation framework in all countries studied.
    Keywords: Finance,
    Date: 2023

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