nep-ban New Economics Papers
on Banking
Issue of 2023‒06‒12
39 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Information Sharing, Access to Finance, Loan Contract Design, and the Labor Market By Thorsten Beck; Patrick Behr; Raquel de Freitas Oliveira
  2. FinTech, Investor Sophistication and Financial Portfolio Choices By Leonardo Gambacorta; Romina Gambacorta; Roxana Mihet
  3. How much financial literacy matters? A simulation of potential influences on inequality levels By Gallo, Giovanni; Sconti, Alessia
  4. Theodore Roosevelt, the Election of 1912, and the Founding of the Federal Reserve By Matthew Jaremski; David C. Wheelock
  5. The Long-Run Real Effects of Banking Crises: Firm-Level Investment Dynamics and the Role of Wage Rigidity By Carlo Wix
  6. What Is “Outlook-at-Risk?” By Nina Boyarchenko; Richard K. Crump; Leonardo Elias; Ignacio Lopez Gaffney
  7. Enhancing Monitoring of NBFI Exposure: The Case of Open-End Funds By Nicola Cetorelli; Debashish Sarkar
  8. Not all ECB meetings are created equal By Sinem Kandemir; Peter Tillmann
  9. Systematic Review on Reinforcement Learning in the Field of Fintech By Nadeem Malibari; Iyad Katib; Rashid Mehmood
  10. The Financial and Non-Financial Performance of Token-Based Crowdfunding: Certification Arbitrage, Investor Choice, and the Optimal Timing of ICOs By Niclas Dombrowski; Wolfgang Drobetz; Lars Hornuf; Paul P. Momtaz
  11. Private Equity and Debt Contract Enforcement: Evidence from Covenant Violations By Sharjil M. Haque; Anya V. Kleymenova
  12. Monetary Policy without Commitment By Hassan Afrouzi; Marina Halac; Kenneth S. Rogoff; Pierre Yared
  13. Deposit Betas: Up, Up, and Away? By Alena Kang-Landsberg; Stephan Luck; Matthew Plosser
  14. Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update By Gara Afonso; Catherine Huang; Marco Cipriani; Abduelwahab Hussein; Gabriele La Spada
  15. CRISK: Measuring the Climate Risk Exposure of the Financial System By Hyeyoon Jung
  16. How Do Interest Rates (and Depositors) Impact Measures of Bank Value? By Stephan Luck; Matthew Plosser; Josh Younger
  17. Stressed Banks? Evidence from the Largest-Ever Supervisory Review By Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Paul E. Soto
  18. CBDC and business cycle dynamics in a New Monetarist New Keynesian model By Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka
  19. Measuring Inflation Expectations: How the Response Scale Shapes Density Forecasts By Becker, Christoph; Duersch, Peter; Eife, Thomas
  20. The Great Pandemic Mortgage Refinance Boom By Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Joelle Scally; Wilbert Van der Klaauw
  21. Political institutions, financial liberalisation, and access to finance: firm-level empirical evidence By Olayinka Oyekola; Sofia Johan; Rilwan Sakariyahu; Oluwatoyin Esther Dosumu; Shima Amini
  22. Stress testing with multi-faceted liquidity: the central bank collateral framework as a financial stability tool By Cuzzola, Angelo; Barbieri, Claudio; Bindseil, Ulrich
  24. Contagion in Debt and Collateral Markets By Jin-Wook Chang; Grace Chuan
  25. Évaluation économique du risque pays : Quelle démarche et pourquoi elle est indispensable pour les investisseurs. By Gaombalet, Célestin Guy-Serge
  27. Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk By Richard Berner; Marco Cipriani; Michael Holscher; Antoine Martin; Patrick E. McCabe
  28. Bank Regulation and Sovereign Risk: A Paradox By António Afonso; André Teixeira
  29. Bank Branch Access: Evidence from Geolocation Data By Jung Sakong; Alexander Zentefis
  30. The conditional path of central bank asset purchases By Christophe Blot; Paul Hubert; Jérôme Creel; Caroline Bozou
  31. Bank Funding during the Current Monetary Policy Tightening Cycle By Stephan Luck; Matthew Plosser; Josh Younger
  32. Banks Runs and Information By Haelim Anderson; Adam Copeland
  33. Monitoring Banks’ Exposure to Nonbanks: The Network of Interconnections Matters By Nicola Cetorelli; Mattia Landoni; Lina Lu
  34. Mortgage Securitization Dynamics in the Aftermath of Natural Disasters: A Reply By Amine Ouazad; Matthew E. Kahn
  35. Bank presence and health By Cramer, Kim Fe
  36. Does Monetary Policy Reinforce the Effects of Macroprudential Policy By Adam Gersl; Barbara Livorova
  37. Inflation Remains a Burden and Consumer Debt is on the Rise By Matthew Klesta
  38. Financial Fragility without Banks By Stein Berre; Asani Sarkar
  39. Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System? By Toni Gravelle; Ron Morrow; Jonathan Witmer

  1. By: Thorsten Beck; Patrick Behr; Raquel de Freitas Oliveira
    Abstract: Exploiting an exogenous change in the reporting threshold of Brazil’s public credit registry, we show an increase in borrowing for newly included risky firms and lower interest rates for safer
    Date: 2023–04
  2. By: Leonardo Gambacorta (Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)); Romina Gambacorta (Bank of Italy); Roxana Mihet (Swiss Finance Institute - HEC Lausanne)
    Abstract: This paper analyses the links between advances in financial technology, investors’ sophistication, and the composition and returns of their financial portfolios. We develop a simple portfolio choice model under asymmetric information and derive some theoretical predictions. Using detailed microdata from Banca d’Italia, we test these predictions for Italian households over the period 2004- 20. 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 to 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
  3. By: Gallo, Giovanni; Sconti, Alessia
    Abstract: This paper aims to identify the potential influence of financial literacy's marginal change on households' income (wealth) inequality levels both at the mean value and along with the distribution value. Using data from the Bank of Italy Survey of Households Income and Wealth (SHIW)'s 2016 wave - which includes the Big Three questions, a widely used measure of financial literacy - we show that replacing 10% of respondents reporting no correct answers with respondents reporting two correct answers out of three correct answers would increase the mean value of the household equivalized disposable income by 0.8% (160€ per year). Additionally, the mean value would increase by +1.5% (285€ per year) if we replace 10% of respondents reporting no correct answers with those reporting three correct answers. These results are not trivial. A lump sum leading to the same household income increase would cost on average EUR 4.1 to 7.3 billion per year in Italy. Finally, heterogeneous analysis reveals that an increase in financial literacy levels is expected to have different outcomes across the population, engendering often a greater reduction of inequality levels among the most vulnerable groups. As a natural policy implication, our results strongly support mandatory financial education in schools.
    Keywords: Financial literacy, Household finance, Wealth inequality, Income inequality, RIF regressions
    JEL: D31 D63 G53 G51
    Date: 2023
  4. By: Matthew Jaremski; David C. Wheelock
    Abstract: This paper examines how the election of 1912 changed the makeup of Congress and led to the Federal Reserve Act. The decision of Theodore Roosevelt and other Progressives to run as third-party candidates split the Republican Party and enabled Democrats to capture the White House and Congress. We show that the election produced a less polarized Congress and that new members were more likely to support the Act. Absent the Republican split, Republicans would likely have held the White House and Congress, and enactment of legislation to establish a central bank would have been unlikely or certainly quite different.
    Keywords: Federal Reserve Act; Progressive Party; central bank; Aldrich plan
    JEL: N42 G28 P43
    Date: 2023–04
  5. By: Carlo Wix
    Abstract: I study the long-run effects of credit market disruptions on real firm outcomes and how these effects depend on nominal wage rigidity at the firm level. Exploiting variation in firms' refinancing needs during the global financial crisis, I trace out firms' investment and growth trajectories in response to a credit supply shock. Financially shocked firms exhibit a temporary investment gap for two years, resulting in a persistent accumulated growth gap six years after the crisis. Shocked firms with rigid wages exhibit a significantly steeper drop in investment and an additional long-run growth gap relative to shocked firms with flexible wages.
    Keywords: Financial Crises; Bank Lending; Real Effects; Firm Investment; Wage Rigidity
    JEL: E22 E24 E51 G01 G21 G31
    Date: 2023–04–11
  6. By: Nina Boyarchenko; Richard K. Crump; Leonardo Elias; Ignacio Lopez Gaffney
    Abstract: The Federal Open Market Committee (FOMC) has increased the target range for the federal funds rate by 4.50 percentage points since March 16, 2022. In tightening the stance of monetary policy, the FOMC balances the risk of inflation remaining persistently high if the economy continues to run “hot” against the risk of unemployment rising as the economy cools. In this post, we review a quantitative approach to measuring the evolution of risks to real GDP growth, the unemployment rate, and inflation that is inspired by our previous work on “Vulnerable Growth.” We find that, in February, downside risks to real GDP growth and upside risks to unemployment moderated slightly, and upside risks to inflation continued to decline.
    Keywords: risks to the economic outlook
    JEL: E2 G1
    Date: 2023–02–15
  7. By: Nicola Cetorelli; Debashish Sarkar
    Abstract: Non-bank financial institutions (NBFIs) have grown steadily over the last two decades, becoming important providers of financial intermediation services. As NBFIs naturally interact with banking institutions in many markets and provide a wide range of services, banks may develop significant direct exposures stemming from these counterparty relationships. However, banks may be also exposed to NBFIs indirectly, simply by virtue of commonality in asset holdings. This post and its companion piece focus on this indirect form of exposure and propose ways to identify and quantify such vulnerabilities.
    Keywords: banks; nonbanks; nonbank financial institutions (NBFIs); supervision
    JEL: G1 G2
    Date: 2023–04–18
  8. By: Sinem Kandemir (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Most meetings of the Governing Council of the ECB take place intra muros at the ECB’s premises in Frankfurt. Some meetings, however, are held extra muros, i.e. outside Frankfurt, hosted by one of the national central banks. This paper uses high-frequency surprises from meeting days to show that the standard deviation of surprises is higher when the ECB meets intra muros. This difference is mostly due to larger timing, forward guidance and QE surprises when meeting in Frankfurt. We show that the transmission of policy surprises to longer-term interest rates is significantly weaker when meeting extra muros. In addition, when the meeting takes place extra muros, the wording of the ECB communication during the press conference is significantly more similar to the preceding meeting. The results suggest that the important decisions are taken in Frankfurt and that the ECB avoids large changes to the policy path when meeting extra muros. The difference across meeting types has consequences for the macroeconomic impact of monetary policy.
    Keywords: monetary policy, expectations, central bank communication, monetary policy committee, text analysis
    JEL: E58 E43
    Date: 2023
  9. By: Nadeem Malibari; Iyad Katib; Rashid Mehmood
    Abstract: Applications of Reinforcement Learning in the Finance Technology (Fintech) have acquired a lot of admiration lately. Undoubtedly Reinforcement Learning, through its vast competence and proficiency, has aided remarkable results in the field of Fintech. The objective of this systematic survey is to perform an exploratory study on a correlation between reinforcement learning and Fintech to highlight the prediction accuracy, complexity, scalability, risks, profitability and performance. Major uses of reinforcement learning in finance or Fintech include portfolio optimization, credit risk reduction, investment capital management, profit maximization, effective recommendation systems, and better price setting strategies. Several studies have addressed the actual contribution of reinforcement learning to the performance of financial institutions. The latest studies included in this survey are publications from 2018 onward. The survey is conducted using PRISMA technique which focuses on the reporting of reviews and is based on a checklist and four-phase flow diagram. The conducted survey indicates that the performance of RL-based strategies in Fintech fields proves to perform considerably better than other state-of-the-art algorithms. The present work discusses the use of reinforcement learning algorithms in diverse decision-making challenges in Fintech and concludes that the organizations dealing with finance can benefit greatly from Robo-advising, smart order channelling, market making, hedging and options pricing, portfolio optimization, and optimal execution.
    Date: 2023–04
  10. By: Niclas Dombrowski; Wolfgang Drobetz; Lars Hornuf; Paul P. Momtaz
    Abstract: What role does the selection of an investor and the timing of financing play in initial coin offerings (ICOs)? We investigate the operating and financial performance of ventures conducting ICOs with different types of investors at different points in the ventures’ life cycle. We find that, relative to purely crowdfunded ICO ventures, institutional investor-backed ICO ventures exhibit poorer operating performance and fail earlier. However, conditional on their survival, these ventures financially outperform those that do not receive institutional investor support. The diverging effects of investor backing on financial and operating performance are consistent with our theory of certification arbitrage; i.e., institutional investors use their reputation to drive up valuations and quickly exit the venture post-ICO. Our findings further indicate that there is an inverted U-shaped relationship for fundraising success of ICO ventures over their life cycle. Another inverted U-shaped relationship exists for the short-term financial performance of ICO ventures over their life cycle. Both the fundraising success and the financial performance of an ICO venture initially increase over the life cycle and eventually decrease after the product piloting stage.
    Keywords: Token Offering, Initial Coin Offering (ICO), crypto funds, operating versus financial performance, entrepreneurial finance, optimal timing
    JEL: G24 G32 K22 L26
    Date: 2023
  11. By: Sharjil M. Haque; Anya V. Kleymenova
    Abstract: We document the importance of a financial sponsor when a borrower violates a covenant, providing creditors the opportunity to enforce debt contracts. We identify private-equity (PE) sponsored borrowers in the Shared National Credit Program (SNC) data and find PE-sponsored borrowers violate covenants more often than comparable non-PE borrowers. Yet, compared to non-PE, PE-backed borrowers experience smaller reductions in credit commitment upon violation, suggesting lenders are lenient with PE sponsors. Moreover, this leniency is stronger among financially healthier lenders. We show that our results are consistent with a repeated-deals mechanism, as lenders frequently interact with financial sponsors and choose to preserve relationship rent. Consistent with this mechanism, we find little evidence that PE-sponsored loans eventually underperform relative to non-PE-sponsored ones following covenant violations. Our findings have important implications for understanding heterogeneity in debt contract enforcement and credit constraints faced by distressed borrowers with financial sponsors.
    Keywords: Private Equity Funds; Covenants; Debt Contract Enforcement; Bank Lending
    JEL: G00 G10 G30 G32 G33
    Date: 2023–04–11
  12. By: Hassan Afrouzi; Marina Halac; Kenneth S. Rogoff; Pierre Yared
    Abstract: This paper studies the implications of central bank credibility for long-run inflation and inflation dynamics. We introduce central bank lack of commitment into a standard non-linear New Keynesian economy with sticky-price monopolistically competitive firms. Inflation is driven by the interaction of lack of commitment and the economic environment. We show that long-run inflation increases following an unanticipated permanent increase in the labor wedge or decrease in the elasticity of substitution across varieties. In the transition, inflation overshoots and then gradually declines. Quantitatively, the inflation response is large, as is the welfare loss from lack of commitment relative to inflation targeting.
    JEL: D02 E02 E52 E58 E61
    Date: 2023–05
  13. By: Alena Kang-Landsberg; Stephan Luck; Matthew Plosser
    Abstract: Deposits make up an $18 trillion market that is simultaneously the main source of bank funding and a critical tool for households’ financial management. In a prior post, we explored how deposit pricing was changing slowly in response to higher interest rates as of 2022:Q2, as measured by a “deposit beta” capturing the pass-through of the federal funds rate to deposit rates. In this post, we extend our analysis through 2022:Q4 and observe a continued rise in deposit betas to levels not seen since prior to the global financial crisis. In addition, we explore variation across deposit categories to better understand banks’ funding strategies as well as depositors’ investment opportunities. We show that while regular deposit funding declines, banks substitute towards more rate-sensitive forms of finance such as time deposits and other forms of borrowing such as funding from Federal Home Loan Banks (FHLBs).
    Keywords: deposits; beta; banks; Interest rate
    JEL: D14 E52 G2
    Date: 2023–04–11
  14. By: Gara Afonso; Catherine Huang; Marco Cipriani; Abduelwahab Hussein; Gabriele La Spada
    Abstract: The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor’s perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve.
    Keywords: bank deposits; Beta; Effective Federal Funds Rate (EFFR); money market funds; monetary policy
    JEL: E52 G1 G2
    Date: 2023–04–03
  15. By: Hyeyoon Jung
    Abstract: A growing number of climate-related policies have been adopted globally in the past thirty years (see chart below). The risk to economic activity from changes in policies in response to climate risks, such as carbon taxes and green subsidies, is often referred to as transition risk. Transition risk can adversely affect the real economy through the banking sector. For example, a shock to borrowers’ transition risk can impair their ability to repay, which can then lead to an amplified effect on banks’ current and expected future profits, resulting in a systemic undercapitalization of banks. In a recent Staff Report co-authored with Robert Engle and Richard Berner, we examine whether banks are sufficiently capitalized to absorb losses during stressful conditions due to heightened climate (transition) risk.
    Keywords: climate; climate risk; financial stability; stress testing; systemic risk
    JEL: G1 G2
    Date: 2023–04–20
  16. By: Stephan Luck; Matthew Plosser; Josh Younger
    Abstract: The rapid rise in interest rates across the yield curve has increased the broader public’s interest in the exposure embedded in bank balance sheets and in depositor behavior more generally. In this post, we consider a simple illustration of the potential impact of higher interest rates on measures of bank franchise value.
    Keywords: interest rate risk; banks; valuation
    JEL: G2
    Date: 2023–04–07
  17. By: Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Paul E. Soto
    Abstract: We study short-term and medium-term changes in bank risk-taking as a result of supervision, and the associated real effects. For identification, we exploit the European Central Bank's asset-quality review (AQR) in conjunction with security and credit registers. After the AQR announcement, reviewed banks reduce riskier securities and credit supply, with the greatest effect on riskiest securities. We find negative spillovers on asset prices and firm-level credit availability. Moreover, non-banks with higher exposure to reviewed banks acquire the shed risk. After the AQR compliance, reviewed banks reload riskier securities but not riskier credit, resulting in negative medium-term firm-level real effects. These effects are especially strong for firms with high ex-ante credit risk. Among these non-safe firms, even those with high ex-ante productivity experience negative real effects. Our findings suggest that banks' liquid assets help them to mask risk from supervisors and risk adjustments banks make in response to supervision have persistent corporate real effects.
    Keywords: Corporate real effects from bank credit; Asset quality review; Stress tests; Supervision; Risk-masking; Costs of safe assets
    JEL: E58 G21 G28 H63 L51
    Date: 2023–04–13
  18. By: Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka
    Abstract: To study implications of an interest-bearing CBDC on the economy, we integrate a New Monetarist-type decentralised market that explicitly accounts for the means-of-exchange function of bank deposits and CBDC into a New Keynesian model with financial frictions. The central bank influences the store-of-value function of money through a conventional Taylor rule while it affects the means-of-exchange function of money through CBDC operations. Peak responses to monetary policy shocks remain similar in the presence of an interest-bearing CBDC, implying that monetary transmission is not impaired. At the same time however, the provision of CBDC helps smooth responses to macroeconomic shocks. By supplying CBDC, the central bank contributes to stabilising the liquidity premium, thereby affecting bank funding conditions and the opportunity costs of money, which dampens and smoothes the reaction of investment and consumption to macroeconomic shocks. JEL Classification: E58, E41, E42, E51, E52
    Keywords: Central bank digital currency, DSGE, monetary policy, search and matching
    Date: 2023–05
  19. By: Becker, Christoph; Duersch, Peter; Eife, Thomas
    Abstract: In density forecasts, respondents are asked to assign probabilities to pre-specified ranges of inflation. We show in two large-scale experiments that responses vary when we modify the response scale. Asking an identical question with modified response scales induces different answers: Shifting, compressing or expanding the scale leads to shifted, compressed and expanded forecasts. Mean forecast, uncertainty, and disagreement can change by several percentage points. We discuss implications for survey design and how central banks can adjust the response scales during times of high inflation.
    Keywords: density forecast; survey; Inflation; Experiment
    Date: 2023–05–05
  20. By: Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Joelle Scally; Wilbert Van der Klaauw
    Abstract: Total debt balances grew by $148 billion in the first quarter of 2023, a modest increase after 2022’s record growth. Mortgages, the largest form of household debt, grew by only $121 billion, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. The increase was tempered by a sharp reduction in both purchase and refinance mortgage originations. The pandemic boom in purchase originations was driven by many factors – low mortgage rates, strong household balance sheets, and an increased demand for housing. Homeowners who refinanced in 2020 and 2021 benefitted from historically low interest rates and will be enjoying low financing costs for decades ­to come. These “rate refinance” borrowers have lowered their monthly mortgage payments, improving their cash flow, while other “cash-out” borrowers extracted equity from their real estate assets, making more cash available for consumption. Here, we explore the refi boom of 2020-21–who refinanced, who took out cash, and how much potential consumption support these transactions provided. In this analysis, as well as the Quarterly Report, we use our Consumer Credit Panel (CCP), which is based on anonymized credit reports from Equifax.
    Keywords: mortgage; Consumer Credit Panel; refinance; pandemic
    JEL: D14 G21
    Date: 2023–05–15
  21. By: Olayinka Oyekola (Department of Economics, University of Exeter); Sofia Johan (College of Business, Florida Atlantic University); Rilwan Sakariyahu (Business School, Edinburgh Napier University); Oluwatoyin Esther Dosumu (Alliance Manchester Business School, University of Manchester); Shima Amini (Department of Finance, University of Leeds)
    Abstract: Worldwide, lack of access to finance has been identified by many firms as the most detrimental obstacle facing business entities. This article studies how political institutions and financial liberalisation alleviate or deepen financial constraints faced by firms. We hypothesise that a complementarity exists between political institutions and financial liberalisation in constructing barriers to firms securing bank financing. Evidence from an international sample of over 63, 000 firms in 75 countries, establishes that political institutions, proxied by democracy level in a country, and financial liberalisation, proxied by entry and participation of foreign banks, are significant factors in explaining cross-country disparities in firm-level credit accessibility. Importantly, we find a strong support for our proposition, documenting a remarkably significant and sizeable positive interaction effect between foreign bank presence and the level of democracy for access to finance. These results are robust against various forms of sensitivity checks. Overall, our study provides fresh insights into the financing effects of foreign bank activities interacted with democracy on firms. We conclude that these results may be of considerable benefit to policymakers, especially within developing, and emerging, economies, who are searching for economic growth, to re-evaluate what are the primary lending obstacles for their small and medium-sized enterprises.
    Keywords: financial liberalisation, foreign banks, political institutions, access to finance, credit constraints, firm-level data
    JEL: G21 G23 G32 O16
    Date: 2023–05–15
  22. By: Cuzzola, Angelo; Barbieri, Claudio; Bindseil, Ulrich
    Abstract: The paper studies the central bank collateral framework and its impact on banks’ liquidity under an adverse stress test scenario. We construct a stress test model that accounts for a granular and multi-faceted representation of the liquidity of marketable and non-marketable assets. In particular, the model analyses banks’ strategic decisions to mobilise assets through four funding channels: unsecured loans, asset sales, private repurchase agreements, or Central Bank lending. We test three scenarios: the EBA regulatory stress test exercise, a shock to Russia and the Eastern European countries, and a shock to the Southern European countries. Results show that illiquidity can trigger insolvency and that liquidity adjustment can last significantly after the initial shock. We find evidence of a threshold in the benefits of expanding the collateral framework and highlight the heterogeneous effects across different jurisdictions and financial institutions. We find that bank equity losses are reduced in aggregate up to 17% at the tail of the loss distribution and on average by around 5% when financial institutions can rely on the collateral framework channel. JEL Classification: C63, E52, G01, G28
    Keywords: Asset liquidity, Central Bank Collateral Framework, Collateral, Lender-Of-Last Resort, Stress test
    Date: 2023–05
  23. By: Polina Popova (National Research University Higher School of Economics); Maria Semenova (National Research University Higher School of Economics); Vladimir Sokolov (National Research University Higher School of Economics)
    Abstract: The COVID-19 pandemic caused a significant change in the consumption, savings, and employment patterns of individuals. This study investigates the reaction of individual bank depositors to the spread of COVID-19 from the perspective of the outflow of retail deposits and the shift in their maturity structure across Russian regions which were differently hit by the pandemic. Exploiting the cross-regional variation in COVID-19 cases in Russia from April 2020 to September 2021, we document higher deposit outflows and a shift to short-term deposits in banks that were operating in the regions with higher rates of COVID-19 relative to banks from the regions that were less affected by the pandemic. We demonstrate that these effects are driven by increased unemployment, the lack of state-financed beds in hospitals, and the lack of financial literacy. Stricter isolation measures and underdeveloped bank branch networks smoothed the withdrawals of banks deposits caused by increased number of new COVID-19 cases. The maturity shifts are additionally driven by lower regional income and increased household health expenditures. Our results do not support the alternative hypothesis that those changes were forced by market discipline mechanisms.
    Keywords: banks, retail deposits, COVID-19, Russian regions
    JEL: Z
    Date: 2023
  24. By: Jin-Wook Chang; Grace Chuan
    Abstract: This paper investigates contagion in financial networks through both debt and collateral markets. We find that the role of collateral is mitigating counterparty exposures and reducing contagion but has a phase transition property. Contagion can change dramatically depending on the amount of collateral relative to the debt exposures. When there is an abundance of collateral (leverage is low), then collateral can fully cover debt exposures, and the network structure does not matter. When there is an adequate amount of collateral (leverage is moderate), then collateral can mitigate counterparty contagion, and having more links in the network reduces contagion, as interlinkages act as a diversifying mechanism. When collateral is not enough (leverage is high) and agents in the network are too interconnected, then the collateral price can plummet to zero and the whole network can collapse. Therefore, we show the importance of the interaction between the level of collateral and interconnectedness across agents. The model also provides the minimum collateral-to-debt ratio (haircut) to attain a robust macroprudential state for a given network structure and aggregate state.
    Keywords: Collateral; Financial network; Fire sale; Systemic risk
    JEL: D49 D53 G01 G21 G33
    Date: 2023–04–11
  25. By: Gaombalet, Célestin Guy-Serge
    Abstract: The ultimate objective of the economic evaluation of country risk (EECR) is to assess the likely level of risk that investors are willing to accept. In this perspective, this paper aims to raise awareness of the role, function and practice of the country risk economist in today's financial world where cross-border capital mobility is not only a real vector of economic and social development for receiving countries, but also a sovereign risk factor for foreign investors. Thus, benchmarking a country aims at knowing it well enough to be able to explain it to the executive committees of international financial institutions (IFIs) and/or multinational enterprises (MNEs), which will then take a position on what could happen, in order to help decide whether or not to invest there. Also, this paper attempts to address some of the concerns by making some contributions to the work of country risk economists in financial institutions and establishments, other non-deposit taking financial companies (NDFCs) offering financial services such as insurance industries, private equity or mutual funds, pension funds, leasing companies, sovereign wealth funds, etc. Multinational companies (MNFs), research firms, think tanks and even individuals with real financing capacity are also concerned by this contribution note.
    Keywords: Country risk analyst - Sovereign issuer - Economic evaluation - International finance - Investors
    JEL: F21 F31 G15 G2
    Date: 2023–05–12
  26. By: Paolo Emilio Mistrulli (Bank of Italy); Md Taslim Uddin (Independent University Bangladesh); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR)
    Abstract: In this paper, we explore empirically whether immigrants, other things being equal, pay more for mortgages than natives and whether the probability that banks approve their loan applications is systematically lower. To this aim, we use two extensive and unique dataset of mortgage contracts and banks' requests for initial information about potential mortgagors drawn from the Italian Credit Register for the period 2011-2016, and survey data from the Survey on Household Income and Wealth conducted by the Bank of Italy for the period 2006-2016. We find that immigrants pay 20-24 basis points more than native Italians on single-name mortgages and 28-40 basis points more on jointly-owned ones. This interest rate gap narrows significantly, but does not disappear, when immigrant borrowers' credit history lengthens or if they borrow from a cooperative bank. Finally we find that immigrants have a 2.7% smaller chance of getting a mortgage compared to natives, which decreases for mortgage applications submitted to cooperative banks. Overall, our findings suggest that the disparity of treatment of immigrants in the Italian mortgage market is mostly due to a greater difficulty of banks in assessing the credit-worthiness of culturally distant borrowers. However, we also detect that cultural distance may fuel persistent disparity between migrants and natives.
    Keywords: Immigrants; discrimination; mortgage lending; interest rates; loan approval
    JEL: G21 J15 J71
    Date: 2023–05
  27. By: Richard Berner; Marco Cipriani; Michael Holscher; Antoine Martin; Patrick E. McCabe
    Abstract: The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run.
    Keywords: bank run; Minimum Balance at Risk; money market funds (MMFs); uninsured deposits
    JEL: F0 G2 G01
    Date: 2023–04–14
  28. By: António Afonso; André Teixeira
    Abstract: This paper investigates the impact of banking prudential regulation on sovereign risk. We show that prudential regulation reduces sovereign risk and induces governments to spend more. As a result, countries with tight prudential regulation have lower primary budget balances and accumulate more government debt over time. This means that prudential regulation reduces private debt, while paradoxically increasing government debt. We explore several explanations for this paradox. Our results suggest that prudential regulation enables governments to accumulate debt because they improve the nation’s credit rating and its borrowing conditions in sovereign bond markets.
    Keywords: bank regulation, fiscal policy, macroprudential policy, sovereign debt, sovereign risk.
    JEL: E52 E58 E62 H3 G28
    Date: 2023–05
  29. By: Jung Sakong; Alexander Zentefis
    Abstract: Low-income and Black households are less likely to visit bank branches than high-income and White households, despite the former two groups appearing to rely more on branches as means of bank participation. We assess whether unequal branch access can explain that disparity. We propose a measure of bank branch access based on a gravity model of consumer trips to bank branches, estimated using mobile device geolocation data. Residents have better branch access if branches are closer or have superior qualities that attract more visitors. Because the geolocation data is distorted to protect user privacy, we estimate the gravity model with a new econometric method that adapts the Method of Simulated Moments to handle high-dimensional fixed effects. We find no evidence that low-income communities lack access to bank branches and instead find that lower demand for bank branch products or services explains their lower branch use. But in Black communities, worse access explains their entire drop-off in branch use. For residents of these areas, weaker access is not from having lower quality branches, but from branches being located farther away from them. The results highlight parts of the country that would benefit the most from policies that expand access to banking.
    Keywords: Inequality; location economics; spatial analysis; Banking
    JEL: D14 G21 J15 R20
    Date: 2023–04–11
  30. By: Christophe Blot; Paul Hubert; Jérôme Creel; Caroline Bozou
    Abstract: We investigate the financial market effects of central bank asset purchases by exploiting the unique setting provided by ECB’s PSPP and PEPP policies. While the PSPP aimed to counter deflationary risks, the PEPP was announced to alleviate sovereign risks, these programs consist in purchases of identical assets. We assess their impacts on various asset prices. We find that they have different effects on two variables: PSPP positively affects inflation swaps whereas PEPP negatively impacts sovereign spreads, but not the opposite. We document the channels for these differentiated effects and highlight the role of clarifying the rationale of a policy.
    Keywords: monetary policy, asset prices, central bank communication, central bank reaction function, intermediate objectives
    JEL: G12 E52 E58
    Date: 2023
  31. By: Stephan Luck; Matthew Plosser; Josh Younger
    Abstract: Recent events have highlighted the importance of understanding the distribution and composition of funding across banks. Market participants have been paying particular attention to the overall decline of deposit funding in the U.S. banking system as well as the reallocation of deposits within the banking sector. In this post, we describe changes in bank funding structure since the onset of monetary policy tightening, with a particular focus on developments through March 2023.
    Keywords: deposits; monetary policy; Fed Funds
    JEL: E52 G01 G21
    Date: 2023–05–11
  32. By: Haelim Anderson; Adam Copeland
    Abstract: The collapse of Silicon Valley Bank (SVB) and Signature Bank (SB) has raised questions about the fragility of the banking system. One striking aspect of these bank failures is how the runs that preceded them reflect risks and trade-offs that bankers and regulators have grappled with for many years. In this post, we highlight how these banks, with their concentrated and uninsured deposit bases, look quite similar to the small rural banks of the 1930s, before the creation of deposit insurance. We argue that, as with those small banks in the early 1930s, managing the information around SVB and SB’s balance sheets is of first-order importance.
    Keywords: bank runs; information management; bank crises; banking crisis
    JEL: G21 G01
    Date: 2023–05–12
  33. By: Nicola Cetorelli; Mattia Landoni; Lina Lu
    Abstract: The first post in this series discussed the potential exposure of banks to the open-end funds sector, by virtue of commonalities in asset holdings that expose banks to balance sheet losses in the event of an asset fire sale by these funds. In this post, we summarize the findings reported in a recent paper of ours, in which we expand the analysis to consider a broad cross section of non-bank financial institution (NBFI) segments. We unveil an innovative monitoring insight: the network of interconnections across NBFI segments and banks matters. For example, certain nonbank institutions may not have a meaningful asset overlap with banks, but their fire sales could nevertheless represent a vulnerability for banks because their assets overlap closely with other NBFIs that banks are substantially exposed to.
    Keywords: nonbank financial institutions (NBFIs); fire sale; network; monitoring
    JEL: G1 G2
    Date: 2023–04–18
  34. By: Amine Ouazad; Matthew E. Kahn
    Abstract: Climate change poses new risks for real estate assets. Given that the majority of home buyers use a loan to pay for their homes and the majority of these loans are purchased by the Government Sponsored Enterprises (GSEs), it is important to understand how rising natural disaster risk affects the mortgage finance market. The climate securitization hypothesis (CSH) posits that, in the aftermath of natural disasters, lenders strategically react to the GSEs conforming loan securitization rules that create incentives that foster both moral hazard and adverse selection effects. The climate risks bundled into GSE mortgage-backed securities emerge because of the complex securitization chain that creates weak monitoring and screening incentives. We survey the recent theoretical literature and empirical literature exploring screening incentive effects. Using regression discontinuity methods, we test key hypotheses presented in the securitization literature with a focus on securitization dynamics immediately after major hurricanes. Our evidence supports the CSH. We address the data construction issues posed by LaCour-Little et. al. and show that their concerns do not affect our main results. Under the current rules of the game, climate risks exacerbates the established lemons problem commonly found in loan securitization markets.
    Date: 2023–05
  35. By: Cramer, Kim Fe
    Abstract: This paper demonstrates that increasing bank presence in underserved areas can substantially improve households’ health. I apply a regression discontinuity design to a policy of the Reserve Bank of India. Six years after the policy introduction, treatment districts have 19% more branches than control districts. Households’ probability of suffering from a non-chronic disease in a given month is 36% lower. I show evidence that two understudied aspects of banking play a role: banks provide health insurance to households and credit to hospitals. In equilibrium, I observe an increase in health care demand and supply.
    Keywords: financial development; banks; health; insurance; credit
    JEL: G21 O16 I10
    Date: 2023–04–19
  36. By: Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Barbara Livorova (Institute of Economic Studies, Faculty of Social Sciences, Charles University & Czech National Bank)
    Abstract: This paper contributes to studying the interaction between monetary and macroprudential policies by examining whether the impact of macroprudential policy on credit and house price growth differs between the two key phases of monetary policy cycle, i.e. monetary policy tightening and loosening. The dataset covers 33 advanced and 33 emerging market countries in the period 1990 - 2019 in quarterly frequency. Using the GMM estimation method, the results show that tightening of monetary policy does on average reinforce the effects of macroprudential policy on credit and house prices. Furthermore, we show that this reinforcing effect works for some but not all types of macroprudential policy measures, and that the results differ between advanced countries and emerging markets.
    Keywords: Macroprudential Policy, Monetary Policy Cycle, Credit Growth, House Price Growth, Interaction of Policies
    JEL: E52 E58 G21 G28 E32
    Date: 2023–05
  37. By: Matthew Klesta
    Abstract: The Federal Reserve Bank of Cleveland’s Community Issues Survey (CIS) collects information semiannually from direct service providers to monitor economic conditions and identify issues impacting low- and moderate-income (LMI) households in the Fourth District—a region that includes Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. In March 2023, we surveyed more than 600 service providers who directly serve LMI individuals and communities across our District and received 95 responses (15 percent response rate). The results of this survey, summarized here, provide insights into how organizations and the households they serve are faring as they continue to navigate the impacts of inflation.
    Keywords: financial well-being; affordable housing; inflation
    Date: 2023–05–23
  38. By: Stein Berre; Asani Sarkar
    Abstract: Proponents of narrow banking have argued that lender of last resort policies by central banks, along with deposit insurance and other government interventions in the money markets, are the primary causes of financial instability. However, as we show in this post, non-bank financial institutions (NBFIs) triggered a financial crisis in 1772 even though the financial system at that time had few banks and deposits were not insured. NBFIs profited from funding risky, longer-dated assets using cheap short-term wholesale funding and, when they eventually failed, authorities felt compelled to rescue the financial system.
    Keywords: nonbank financial institutions; nonbank financial institutions (NBFIs); crisis of 1772; financial intermediation; economic history
    JEL: G01 G2 N00
    Date: 2023–04–17
  39. By: Toni Gravelle; Ron Morrow; Jonathan Witmer
    Abstract: At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. This decision was informed by the analysis and assessment of the two frameworks in this paper. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework. Our evaluation includes a discussion of how these relative merits have changed since the pandemic began. Specifically, we examine the evolving regulatory landscape, changes in payment systems, and the Bank's quantitative easing program to understand their implications for the relative strengths of the two frameworks for monetary policy implementation.
    Keywords: Market structure and pricing; Monetary policy implementation; Payment clearing and settlement systems
    JEL: D4 D47 E42 E5 E58
    Date: 2023–05

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