nep-ban New Economics Papers
on Banking
Issue of 2023‒07‒17
forty-two papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Corporate credit and leverage in the EU: recent evolution, main drivers and financial stability implications By Beck, Thorsten; Peltonen, Tuomas; Perotti, Enrico; Sánchez Serrano, Antonio; Suarez, Javier
  2. Can Central Bank Credibility Improve Monetary Policy? A Meta-Analysis By Valentina Cepeda; Bibiana Taboada-Arango; Mauricio Villamizar-Villegas
  3. Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model By Mark A. Aguiar; Manuel Amador; Cristina Arellano
  4. Household indebtedness and their vulnerability to rising interest rates By Gaston Giordana; Michael H. Ziegelmeyer
  5. Reporting and derivation of data on financial transactions related to banks’ securities holdings By Colangelo, Antonio; Pérez, Asier Cornejo; Liberati, Danilo; Nuzzo, Giorgio; Caloca, Antonio Rodríguez
  6. Sovereign bond and CDS market contagion: A story from the Eurozone crisis By Georgios Bampinas; Theodore Panagiotidis; Panagiotis N. Politsidis
  7. Insights into credit loss rates: a global database By Li Lian Ong; Min Wei; Christian Schmieder
  8. FinGPT: Open-Source Financial Large Language Models By Hongyang Yang; Xiao-Yang Liu; Christina Dan Wang
  9. Specialization in bank lending: evidence from exporting firms By Paravisini, Daniel; Rappoport, Veronica; Schnabl, Philipp
  10. A Novel Framework to Evaluate Changes in Access to and Costs of Trade Finance By Marc Auboin; Eddy Bekkers; Dario De Quarti
  11. Uncovering the digital payment divide: understanding the importance of cash for groups at risk By Carin van der Cruijsen; Jelmer Reijerink
  12. International Spillovers of ECB Interest Rates: Monetary Policy & Information Effects By Santiago Camara
  13. Climate Crisis Attitudes among Financial Professionals and Climate Experts By Elisabeth Gsottbauer; Michael Kirchler; Christian König-Kersting
  14. Discretionary decisions in capital requirements under Solvency II By Grochola, Nicolaus; Schlütter, Sebastian
  15. Quasi-Fiscal Implications of Central Bank Crisis Interventions By John Hooley; Mr. Ashraf Khan; Claney Lattie; Istvan Mak; Ms. Natalia Salazar; Amanda Sayegh; Mr. Peter Stella
  16. Detecting Consumers' Financial Vulnerability using Open Banking Data: Evidence from UK Payday Loans By Victor Medina-Olivares; Raffaella Calabrese
  17. Gross bond issuance by Italian banks: key trends in times of crisis and unconventional monetary policy By Donato Ceci; Alessandro Montino; Sara Pinoli; Andrea Silvestrini
  18. Enhancing climate resilience of monetary policy implementation in the euro area By Aubrechtova, Jana; Heinle, Elke; Porcel, Rafel Moyà; Torres, Boris Osorno; Piloiu, Anamaria; Queiroz, Ricardo; Silvonen, Torsti; Cruz, Lia Vaz
  19. Firm-bank relationships: a cross-country comparison By Kosekova, Kamelia; Maddaloni, Angela; Papoutsi, Melina; Schivardi, Fabiano
  20. Cryptic Regulation of Crypto-Tokens By Joshua S. Gans
  21. Economic Consequences of Banks’ Use of their Discretion over the Accounting and Regulatory Treatment of Investment Securities By Marc Arnold; Minyue Dong; Romain Oberson
  22. The drivers of market-based inflation expectations in the euro area and in the US By Christian Hoynck; Luca Rossi
  23. Euro Area Monetary Policy Effects. Does the Shape of the Yield Curve Matter? By Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
  24. Getting up from the floor By Claudio Borio
  25. Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach By Jessica Reale
  26. The evolution of bank fees as a source of income: trends and new business models – evidence from Italy By Massimiliano Affinito; Matteo D'Amato; Raffaele Santioni
  27. Green Tilts By Lubos Pastor; Robert F. Stambaugh; Lucian A. Taylor
  28. Do Credit Lines Provide Reliable Liquidity Insurance? Evidence from Commercial-Paper Backup Lines By Amberg, Niklas
  29. Macroprudential Policy and Bank Systemic Risk: Does Inflation Targeting Matter? By Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi
  31. On the Instability of Fractional Reserve Banking By Heon Lee
  32. The effect of EIB operations on private sector lending outside the European Union By Gatti, Matteo; Gorea, Denis; Presbitero, Andrea
  33. The limits of hegemony: U.S. banks and Chilean firms in the Cold War By Felipe Aldunate; Felipe Gonzalez; Mounu Prem
  34. The Impact of Interest Rates on Bank Profitability: A Retrospective Assessment Using New Cross-country Bank-level Data By Callan Windsor; Terhi Jokipii; Matthieu Bussiere
  35. The Debt-Inflation Channel of the German Hyperinflation By Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
  36. Life after (Soft) Default By Giacomo De Giorgi; Costanza Naguib
  37. Quantitative easing, accounting and prudential frameworks, and bank lending By Andrea Orame; Rodney Ramcharan; Roberto Robatto
  38. Towards a climate just financial system By Yannis Dafermos
  39. The demand for long-term mortgage contracts and the role of collateral By Liu, Lu
  40. Global Liquidity: Drivers, Volatility and Toolkits By Linda S. Goldberg
  41. Why Consumers Disagree About Future Inflation By Naveen Rai; Patrick Sabourin
  42. Bank profitability and central bank digital currency By Bellia, Mario; Calès, Ludovic

  1. By: Beck, Thorsten; Peltonen, Tuomas; Perotti, Enrico; Sánchez Serrano, Antonio; Suarez, Javier
    Abstract: This report presents a long-term view of the evolution of financing of EU non-financial corporations (NFCs) in recent decades. It finds a decline in NFC leverage since at least 2008, and across countries, size categories and industries. It also documents a growing role of non-bank financial intermediaries in the provision of credit to NFCs. After exploring supply and demand drivers of the observed evolution, the report considers potential general equilibrium outcomes in terms of a reallocation of credit to other sectors or assets. This could generate greater systemic risk through unsustainable valuations or exposures to more highly correlated negative shocks. The report also stresses the urgency of developing a comprehensive macroprudential framework for non-bank financial intermediaries and calls macroprudential authorities to closely monitor the NFC sector.
    Date: 2023–06
  2. By: Valentina Cepeda; Bibiana Taboada-Arango; Mauricio Villamizar-Villegas
    Abstract: We bring together the largest meta-analysis ever conducted in the macroeconomic literature to investigate the effects of central bank credibility on monetary policy. With nearly 1, 200 surveyed effects, we first confirm that: (i) conventional policy significantly affects inflation and output, and (ii) unconventional policy significantly affects capital flows and the exchange rate. We next evaluate if different measures of credibility amplify these effects. Our findings indicate that central bank transparency has the largest payoff, as it increases policy effectiveness by 69% when dealing with foreign exchange intervention, by 59% when dealing with capital inflows, and by 14% when dealing with conventional policy. An alternative measure, medium and long-term anchoring in inflation expectations, is the runner up, increasing effectiveness by 31%, 9%, and 10%, respectively. Other measures, such as central bank independence and short-term anchoring in inflation expectations have lower and in some cases null effects. **** RESUMEN: Reunimos el primer meta-análisis sobre el impacto que tiene la credibilidad de los bancos centrales en la política monetaria. Con cerca de 1.200 efectos reportados, primero confirmamos que: (i) la política convencional significativamente afecta la inflación y el crecimiento económico y (ii) la política no convencional afecta significativamente los flujos de capital y tasa de cambio. Segundo, evaluamos si diferentes medidas de credibilidad amplifican estos efectos. Nuestros hallazgos indican que la transparencia del banco central tiene el mayor impacto, ya que aumenta la efectividad en un 69% cuando se trata de intervención cambiaria, en un 59% cuando se trata de flujos de capital, y en un 14% cuando se trata de la política convencional. Otras medidas de credibilidad, como el anclaje de expectativas de inflación y la independencia del banco, también magnifican la política monetaria, pero en menor proporción.
    Keywords: Meta-Analysis, Central bank credibility, Conventional policy, Unconventional policy, Capital Flows, Foreign exchange intervention, Meta-Análisis, Credibilidad Monetaria, Política Convencional, Política No Convencional, Flujos de Capital, Intervención Cambiaria
    JEL: C83 E52 E58
    Date: 2023–06
  3. By: Mark A. Aguiar; Manuel Amador; Cristina Arellano
    Abstract: This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt. The framework also provides a tractable tool to explore the use of fiscal policy to escape the Effective Lower Bound (ELB) on nominal interest rates and the resolution of the “forward guidance puzzle.” A common theme throughout is that following the monetary policy guidance from the standard Ricardian framework leads to excess fluctuations in income and inflation.
    JEL: E4 E60
    Date: 2023–06
  4. By: Gaston Giordana; Michael H. Ziegelmeyer
    Abstract: High inflation and rising interest rates could increase financial vulnerability among Luxembourg households, who tend to carry significant debt. This paper uses micro-data on individual households from the Luxembourg Household Finance and Consumption Survey (HFCS) to identify pockets of financial vulnerability across the resident population. We calculate seven standard debt burden indicators and simulate their evolution through the end of 2023 based on BCL macroeconomic projections. According to several indicators, the share of financially vulnerable households increased from 2018 to 2021. Our simulations suggest this trend continued in 2022 and 2023 for those indicators that focus on the risk of delayed payment, although it may have reverted for other indicators that focus on the level of debt. Risk is concentrated among low-income households, but indebted households in this group only account for 11% of the number of mortgage contracts and 9% of aggregate household sector debt.
    Keywords: Household debt; Financial vulnerability; Interest rates; Micro-simulation
    JEL: E44 E47 G21 G28 G51
    Date: 2023–06
  5. By: Colangelo, Antonio; Pérez, Asier Cornejo; Liberati, Danilo; Nuzzo, Giorgio; Caloca, Antonio Rodríguez
    Abstract: This paper contributes to the ongoing efforts by the European authorities to reduce the reporting burden for banks by assessing the statistical methods currently used to compile data on financial transactions related to securities holdings. Based on statistical information collected from the Banca d’Italia, we compare data on purchases of securities net of sales and redemptions reported by banks with transaction estimates based on indirect (balance sheet) methods that are permitted within the methodological framework of datasets compiled by the European System of Central Banks (ESCB). Although the direct method of collecting data on transactions is more costly for reporting agents, it produces results which are fully aligned with current statistical methodological standards (European System of Accounts 2010, ESA 2010). By contrast, the indirect method is a simplified and less costly approach. The recent development of high-quality data sources such as the ESCB integrated system for the market prices of securities – the Centralised Securities Database – has boosted the attractiveness of indirect methods since they have the potential to deliver accurate and reliable estimates. The significance of the differences between direct collection and indirect compilation of these data is analysed in detail for listed ISIN securities that are actively traded on exchanges, by also considering the impact of price volatility and trading activity. From an aggregated perspective, all indirect methods produce results which are comparable and consistent with the ESA 2010 methodology for all instrument types. There are some minor differences for equity instruments, due to the higher price volatility and trading activity associated with these instruments, but the overall aggregated dynamics are also well captured by indirect methods in these cases. [...] JEL Classification: C18, C81, G15
    Keywords: micro data, securities, security-by-security data, transaction data
    Date: 2023–06
  6. By: Georgios Bampinas (Department of Economics and Regional Development, Panteion University of Social and Political Sciences, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece); Panagiotis N. Politsidis (Finance Department, Audencia Business School, France)
    Abstract: We examine the asymmetric and nonlinear nature of the cross- and intra-market linkages of eleven EMU sovereign bond and CDS markets during 2006-2018. By adopting the excess correlation concept of Bekaert et al. (2005) and the local Gaussian correlation approach of Tjøstheim and Hufthammer (2013), we find that contagion phenomena occurred during two major phases. The first, extends from late 2009 to mid 2011 and concerns the outright contagion transmission from EMU South bond markets towards all European CDS markets. The second, is during the revived fears of a Greek exit in November 2011 and is characterized by contagion from (i) CDS spreads in the EMU South towards bond yields in the same bloc and Belgium, and (ii) from Italian and Spanish CDS spreads towards all European CDS spreads. Consistent with their “too big to bail out” status, Italy and Spain emerge as pivotal for the evolution of sovereign credit risk across the Eurozone. Our examination of the relevant mechanisms, highlights the importance of credit risk over liquidity risk, and the containment effect of the naked CDS ban.
    Keywords: sovereign bond market, sovereign CDS market, nonlinear dependence, contagion, local Gaussian correlation
    JEL: G01 G14 G15 C1 C58
    Date: 2023–06
  7. By: Li Lian Ong; Min Wei; Christian Schmieder
    Abstract: Credit risk has played a significant role in many financial crises, including the great financial crisis. The COVID-19 pandemic also highlighted bank credit losses to the private sector. However, there remains a significant gap in terms of reliable economy-level credit risk data for financial stability analysis, given that such information is not readily available to the public in any systematic manner. Building upon the work of Hardy and Schmieder (2020), we derive time series of actual as well as forward-looking market- and macro-implied credit loss rates for the majority of jurisdictions around the world. Our database, intended as a public good, is available through a user-friendly interactive dashboard, which allows downloads of credit loss rate time series for the desired jurisdiction(s). Users are also able to run simple scenario analyses based on their projected GDP paths. The data series will be updated on an ongoing basis as new information is published by the original sources.
    Keywords: credit risk, credit loss rates, data gap, forward-looking, loss given default (LGD), macro-implied, probability of default (PD), stress test
    JEL: F34 E44 E52 G28 G32 P52
    Date: 2023–05
  8. By: Hongyang Yang; Xiao-Yang Liu; Christina Dan Wang
    Abstract: Large language models (LLMs) have shown the potential of revolutionizing natural language processing tasks in diverse domains, sparking great interest in finance. Accessing high-quality financial data is the first challenge for financial LLMs (FinLLMs). While proprietary models like BloombergGPT have taken advantage of their unique data accumulation, such privileged access calls for an open-source alternative to democratize Internet-scale financial data. In this paper, we present an open-source large language model, FinGPT, for the finance sector. Unlike proprietary models, FinGPT takes a data-centric approach, providing researchers and practitioners with accessible and transparent resources to develop their FinLLMs. We highlight the importance of an automatic data curation pipeline and the lightweight low-rank adaptation technique in building FinGPT. Furthermore, we showcase several potential applications as stepping stones for users, such as robo-advising, algorithmic trading, and low-code development. Through collaborative efforts within the open-source AI4Finance community, FinGPT aims to stimulate innovation, democratize FinLLMs, and unlock new opportunities in open finance. Two associated code repos are \url{} and \url{ ation/FinNLP}
    Date: 2023–06
  9. By: Paravisini, Daniel; Rappoport, Veronica; Schnabl, Philipp
    Abstract: We develop a novel approach for measuring bank specialization using granular data on borrower activities and apply it to Peruvian exporters and their banks. We find that borrowers seek credit from banks that specialize in their export destinations, both when expanding exports and when exporting to new countries. Firms experiencing country-specific export demand shocks adjust borrowing disproportionately from specialized banks. Specialized bank credit supply shocks affect exports disproportionately to countries of specialization. Our results demonstrate that firm credit demand is bank- and activity-specific, which reduces banking competition and affects the transmission and amplification of shocks through the banking sector
    JEL: F3 G3
    Date: 2023–06–20
  10. By: Marc Auboin; Eddy Bekkers; Dario De Quarti
    Abstract: In this paper we integrate the costs of trade finance in a computable general equilibrium (CGE) model to evaluate the trade and output effects of counterfactual policy experiments on costs of and access to trade finance. The costs of financing international trade consist of two components: the financial costs and the costs associated with the risk of goods not being delivered, considering risk aversion of traders. These costs are determined for four ways to finance international trade (cash-in-advance, trade loans, letters of credit, and exports financed with internal working capital). Trade finance costs are a weighted average of the costs under the four different ways of financing. The framework is applied to trade of four ECOWAS countries employing data collected on financial costs, costs of risk and trade finance instrument shares through a comprehensive bank survey in these countries complemented with data from the literature. Counterfactual experiments on increases in the availability of letters of credit and trade loans and the costs of these instruments show that raising the shares and costs to African averages would increase trade of the four ECOWAS countries by about 11%. The framework is generic and can be applied to other countries.
    Keywords: trade credit, international trade, financial institutions, general equilibrium simulations
    JEL: F10 F14 F39 G21
    Date: 2023
  11. By: Carin van der Cruijsen; Jelmer Reijerink
    Abstract: The ongoing digital transition in the payment landscape offers countless advantages to many people. However, certain segments of the population encounter difficulties navigating this digital world, particularly individuals within groups at risk. Little is known about the payment behaviour and preferences of these groups. Our research focuses on people with low digital literacy, disabilities or financial difficulties. Using rich payment diary data of Dutch consumers, our study reveals that cash is an important means of payment to many. 7% of the respondents in our study say they always use cash at points of sale and 28% indicate they cannot do without cash. Furthermore, we find that cash is especially important for people with low digital literacy, people who are blind or visually impaired, people with limited or no hand function, people with a mild intellectual disability and people who find it difficult to make ends meet on their income.
    Keywords: payment behaviour; groups at risk; payment diaries; consumer survey; cash; cards
    JEL: D12 D14 E42 E58
    Date: 2023–06
  12. By: Santiago Camara
    Abstract: This paper shows that disregarding the information effects around the European Central Bank monetary policy decision announcements biases its international spillovers. Using data from 23 economies, both Emerging and Advanced, I show that following an identification strategy that disentangles pure monetary policy shocks from information effects lead to international spillovers on industrial production, exchange rates and equity indexes which are between 2 to 3 times larger in magnitude than those arising from following the standard high frequency identification strategy. This bias is driven by pure monetary policy and information effects having intuitively opposite international spillovers. Results are present for a battery of robustness checks: for a sub-sample of ``close'' and ``further away'' countries, for both Emerging and Advanced economies, using local projection techniques and for alternative methods that control for ``information effects''. I argue that this biases may have led a previous literature to disregard or find little international spillovers of ECB rates.
    Date: 2023–06
  13. By: Elisabeth Gsottbauer; Michael Kirchler; Christian König-Kersting
    Abstract: Climate change constitutes one of the major challenges to humankind in the 21st century. To address this crisis, it is necessary to transform the economy and reduce greenhouse gas emissions. The finance industry has the potential to play a central role in this transformation by implementing sustainable investment and financing policies.We document climate mitigation preferences and attitudes toward the climate crisis of finance professionals — the key protagonists on financial markets — and climate experts — the key protagonists providing scientific findings. We use an incentivized choice experiment to measure the willingness to forgo individual payout to curb greenhouse gas emissions and survey participants to elicit their attitudes and beliefs toward the climate crisis. To learn how well both groups understand each other, we also ask participants what they believe the other stakeholder group believes. Our results provide suggestive evidence that finance professionals have a lower willingness to curb greenhouse gas emissions, measured through incentivized indifference valuations of carbon offsets, and are also less concerned about climate change compared to climate experts. Additionally, we find that the motivations and priorities of the two groups in addressing the climate crisis differ, with finance professionals being more driven by economic and reputational considerations and climate experts prioritizing the ecological and social consequences of the crisis. Finally, we find that finance professionals are less supportive of a carbon tax. Our findings have implications for policy and communication efforts, highlighting the importance of financial incentives and reputational concerns in motivating finance professionals to address the climate crisis.
    Keywords: Climate Crisis, Financial Professionals, Climate Experts, Greenhouse Gas Emissions, Carbon Tax
    Date: 2023–06
  14. By: Grochola, Nicolaus; Schlütter, Sebastian
    Abstract: The capital requirements of Solvency II allow insurers to make discretionary choices. Besides extensive possibilities regarding the choice of a risk model (ranging between a regulatory prescribed standard formula to a full self-developed internal model), insurers can make use of transitional measures and adjustments, which can have a substantial impact on their reported solvency level. The aim of this article is to study the effect of these long-term guarantee measures and to identify drivers of the discretionary decisions. For this purpose, we first assess the risk profile of 49 European insurers by estimating the sensitivities of their stock returns to movements in market risk drivers, such as interest rates and credit spreads. In a second step, we analyze to what extent insurers' risk profiles influence their discretionary decisions in the capital requirement calculation. We gather information on discretionary decisions based on hand-collected Solvency II data for the years 2016 to 2020. We find that insurers optimize their reported solvency situation by making discretionary decisions in such a way that capital requirements for material risk drivers are clearly reduced. For instance, we find that the usage of the volatility adjustment is positively related to the interest rate risk as perceived by financial markets, even when controlling for the portion of life insurance in technical provisions. Similarly, the matching adjustment is linked to significantly higher credit risk sensitivities. Our results point out that due to discretionary decisions Solvency II figures can substantially deviate from a market-oriented, risk-based view on insurance companies' risk situation.
    Keywords: Solvency II, capital requirements, discretionary decisions
    Date: 2023
  15. By: John Hooley; Mr. Ashraf Khan; Claney Lattie; Istvan Mak; Ms. Natalia Salazar; Amanda Sayegh; Mr. Peter Stella
    Abstract: We develop a stylized balance sheet framework to help identify ‘quasi-fiscal’ components of central bank crisis interventions and show how sources of fiscal risk are created from both the new claims and how they are funded. Combining central bank balance sheet data with survey evidence from intervention announcements, we document the risks to the public sector balance sheet from central banks’ interventions in response to the Covid-19 crisis, including non-conventional lending to the financial and non-financial sectors and large-scale purchases of government securities. Case study analysis indicates that management of fiscal risks from central bank crisis interventions varies greatly across countries, although several good practices can be identified.
    Keywords: Central bank; quasi-fiscal; fiscal risks; monetary policy; fiscal policy; sovereign debt management; policy coordination
    Date: 2023–06–02
  16. By: Victor Medina-Olivares; Raffaella Calabrese
    Abstract: Behind the debt trap concept is the rationale that payday loans exacerbate consumers' financial vulnerability. To investigate this relationship, we propose a Mixed Poisson Hidden Markov approach to model the number of payday loans a borrower obtains in each period. Given the lack of agreement in the literature on financial vulnerability, we introduce financial distress as an unobserved binary variable using a hidden Markov process (vulnerable and non-vulnerable). Using data from 90, 523 anonymised transactions for 1, 817 UK consumers, we find that the effect of certain time-varying covariates depends greatly on the borrower's hidden state. For instance, luxury expenses and non-recurring income increase the need for payday loans when financially vulnerable, but the opposite is true when not vulnerable. Additionally, we demonstrate that almost 60\% of payday loan borrowers remain vulnerable for 12 or more consecutive weeks, with two-thirds experiencing consistent financial difficulties. Finally, our analysis underscores the need for a nuanced approach to payday lending that recognises the varying levels of vulnerability among borrowers, which can prove helpful for policymakers and lenders to enhance responsible lending practices.
    Date: 2023–05
  17. By: Donato Ceci (Bank of Italy); Alessandro Montino (Bank of Italy); Sara Pinoli (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: This paper examines the issuance of bonds by Italian banks from the onset of the global financial crisis in 2007-08 to the end of 2022, in light of the macroeconomic environment and the unconventional monetary policy measures adopted in the euro area. The sovereign debt crisis was followed by a progressive reduction in the gross issuance of bank bonds, together with an increase in retail deposits and refinancing operations with the Eurosystem. Disaggregated data show that Italian banks have partially replaced bond issues with alternative sources of funding. This has mitigated the transmission of financial shocks to the cost of funding but, on the other hand, has increased the reliance of the banking system on quantitative measures of monetary policy. In the ongoing phase of monetary policy normalization, banks may once again have to increase bond financing to replace their maturing funds. This could lead to a significant tightening of funding conditions for the private sector in a context of slowing economic activity. The overall cost of bank funding should be constantly monitored in order to prevent unexpected shocks arising within the banking system.
    Keywords: bank bonds, bond issuance, crisis, unconventional monetary policy, cost of funding
    JEL: G12 G21 G32
    Date: 2023–06
  18. By: Aubrechtova, Jana; Heinle, Elke; Porcel, Rafel Moyà; Torres, Boris Osorno; Piloiu, Anamaria; Queiroz, Ricardo; Silvonen, Torsti; Cruz, Lia Vaz
    Abstract: Central banks around the world are increasingly monitoring climate change risks and how these affect their balance sheets and their monetary policy transmission. The European Central Bank (ECB) extensively reviewed its monetary policy implementation framework in 2020-21 to better account also for climate change risks. This paper describes these considerations in detail to provide a holistic perspective of one central bank’s climate-related work in relation to its monetary policy implementation framework. The paper starts by characterising the strategic reflections behind the principles of the enhanced framework and their relationship with the ECB monetary policy strategy review. Climate-related disclosures, improvements in risk assessment, a strengthened collateral framework and tilting of corporate bond purchases are the main pillars of the framework enhancements. The paper sheds light on the key motivations behind these enhancements, including the aspects that were reviewed but left unchanged. It also takes stock of the different challenges involved in the identification and estimation of climate change-related risk, how these can be partially overcome, and when they cannot be overcome, how they can constrain the ability of financial institutions, including central banks, to take further action. The integration of climate change considerations into the monetary policy implementation framework is at its inception. As data availability and quality improve, and risk methodologies develop, central banks will be able to deepen their approach. This paper also examines possible future avenues that central banks, including the ECB, might take to further refine their monetary policy implementation using an assessment framework for climate change-related adjustments. JEL Classification: E52, E58, Q54, D53
    Keywords: climate change, monetary policy implementation
    Date: 2023–06
  19. By: Kosekova, Kamelia; Maddaloni, Angela; Papoutsi, Melina; Schivardi, Fabiano
    Abstract: We document the structure of firm-bank relationships across eleven euro area coun-tries and present new stylised facts using data from the Eurosystem credit registry -AnaCredit. We look at the number of banking relationships, reliance on the main bank, credit instruments, loan maturity, and interest rates. Firms in Southern Europe borrow from more banks and obtain a lower share of credit from the main bank than those in Northern Europe. They also tend to borrow more on short term, more expensive instru-ments and to obtain loans with shorter maturity. This is consistent with the hypothesis that firms in Southern Europe rely less on relationship banking and obtain credit less conducive to firm growth, in line with their smaller average size. Relationship lending does not translate in lower rates, possibly because banks appropriate part of the surplus generated by relationship lending through higher rates. JEL Classification: G21, G3, G32
    Keywords: AnaCredit, bank credit, corporate financing, firm-bank relationship
    Date: 2023–06
  20. By: Joshua S. Gans
    Abstract: This paper investigates the alignment of existing securities regulations with the emerging landscape of crypto-tokens and blockchain technology. By examining the features of these digital assets, including decentralization, consensus mechanisms, and programmability, we analyze how they interact with existing financial rules. We compare approaches to regulation across countries, considering potential impacts on innovation. Furthermore, we explore the issues that may arise with blockchain networks, such as payment efficiency and market safety. The study aims to contribute to discussions about balancing innovation within the blockchain sphere and ensuring investor protection and market security, underlining areas that may necessitate regulatory improvements.
    JEL: K22 O38
    Date: 2023–06
  21. By: Marc Arnold (University of St. Gallen and Swiss Finance Institute); Minyue Dong (University of Lausanne); Romain Oberson (Université Laval)
    Abstract: The current accounting and regulatory framework grants banks considerable discretion in the treatment of investment securities. We show that banks' use of this discretion increases the information asymmetry reflected in their equity prices. In addition, we find that this source of bank opacity contributes to individual bank risk and systemic risk in the financial sector. To address endogeneity concerns, we apply a two-stage instrumental variable approach, which confirms our conjecture. Our results highlight important unintended economic consequences of the current accounting and regulatory framework for investment securities.
    Keywords: investment securities, accounting discretion, regulatory arbitrage, information asymmetry, banks
    JEL: G21 G28 K22 M41
    Date: 2023–06
  22. By: Christian Hoynck (Bank of Italy); Luca Rossi (Bank of Italy)
    Abstract: In this paper, we propose a methodology to assess the structural drivers of inflation expectations, as measured by inflation-linked swaps. To this end, we estimate a Bayesian Vector Autoregressive (BVAR) model for the euro area (EA) and the United States (US) on daily asset price movements in the two economies. Shocks are identified using sign and magnitude restrictions, also taking into account international spillovers. The inclusion of inflation expectations helps to clearly distinguish between supply and demand innovations. The findings suggest that over the course of 2021-23 inflation expectations in the US were steadily sustained by domestic demand, while in the EA they mostly reflected supply shocks, and only more recently a growing strength of demand factors. Our evidence also indicates that monetary policy shocks gradually contributed to lowering inflation expectations in both jurisdictions, although with different timing and vigour.
    Keywords: inflation expectations, international transmission, monetary policy, high-frequency identification.
    JEL: C32 C54 E31 E44 E52
    Date: 2023–06
  23. By: Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
    Abstract: This paper investigates the effects of monetary policy in the euro area. We make three main contributions to the literature. First, we use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. Second, we construct a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Third, we show that the way conventional and unconventional monetary policy announcements shape expectations inherent in the term structure influences the response of key macroeconomic variables.
    Keywords: Monetary Policy, Euro Area, Quantitative Easing
    JEL: E50 E20 E37
    Date: 2023
  24. By: Claudio Borio
    Abstract: Since the Great Financial Crisis, a growing number of central banks have adopted abundant reserves systems ("floors") to set the interest rate. However, there are good grounds to return to scarce reserve systems ("corridors"). First, the costs of floor systems take considerable time to appear, are likely to grow and tend to be less visible. They can be attributed to independent features of the environment which, in fact, are to a significant extent a consequence of the systems themselves. Second, for much the same reasons, there is a risk of grossly overestimating the implementation difficulties of corridor systems, in particular the instability of the demand for reserves. Third, there is no need to wait for the central bank balance sheet to shrink before moving in that direction: for a given size, the central bank can adjust the composition of its liabilities. Ultimately, the design of the implementation system should follow from a strategic view of the central bank's balance sheet. A useful guiding principle is that its size should be as small as possible, and its composition as riskless as possible, in a way that is compatible with the central bank fulfilling its mandate effectively.
    Keywords: monetary policy operating procedures, central bank balance sheets, abundant vs scarce reserves systems
    JEL: E42 E43 E52 E58
    Date: 2023–05
  25. By: Jessica Reale
    Abstract: This study investigates the functioning of modern payment systems through the lens of banks' maturity mismatch practices, and it examines the effects of banks' refusal to roll over short-term interbank liabilities on financial stability. Within an agent-based stock-flow consistent framework, banks can engage in two segments of the interbank market that differ in maturity, overnight and term. We compare two interbank matching scenarios to assess how bank-specific maturity targets, dependent on the dictates of the Net Stable Funding Ratio, impact the dynamics of the interbank market and the effectiveness of conventional monetary policies. The findings reveal that maturity misalignment between deficit and surplus banks compromises the interbank market's efficiency and increases reliance on the central bank's standing facilities. Monetary policy interest-rate steering practices also become less effective. The study also uncovers a dual stability-based configuration in the banking sector, resembling the segmented European interbank structure. This paper suggests that heterogeneous maturity mismatches between surplus and deficit banks may result in asymmetric funding frictions that might precede credit- and sovereign-risk explanations of interbank tensions. Also, a combined examination of macroprudential tools and rollover-based interbank dynamics can enhance our understanding of how regulatory changes impact the stability of heterogeneous banking sectors.
    Date: 2023–06
  26. By: Massimiliano Affinito (Bank of Italy); Matteo D'Amato (Bank of Italy); Raffaele Santioni (Bank of Italy)
    Abstract: The analysis of bank fees combines three research areas: the soundness of individual financial institutions, overall system stability, and customer protection. In fact, high fees could entail both risks to the sustainability of business models and frictions in the fairness of customer relationships. This paper describes the evolution of bank fees in Italy between 2008 and 2021, distinguishing between fee types, bank categories, and time spans, and it presents an analysis of the bank characteristics most strongly associated with the relevance of fees. The paper shows that the growth in fee income observed since the global financial crisis involved all categories of banks, but the share of gross income generated by fees varies broadly across banks. At the bank level, higher fees are associated with higher operating expenses and lower capital levels. Our estimates suggest that there is no systematic relationship between greater recourse to fees as a source of income and bank business models that are more focused on household lending.
    Keywords: fee income, customer protection, bank business model
    JEL: D18 G21
    Date: 2023–06
  27. By: Lubos Pastor; Robert F. Stambaugh; Lucian A. Taylor
    Abstract: We estimate financial institutions' portfolio tilts that relate to stocks' environmental, social, and governance (ESG) characteristics. We find ESG-related tilts totaling 6% of the investment industry's assets under management in 2021. ESG tilts are significant at both the extensive margin (which stocks are held) and the intensive margin (weights on stocks held). The latter tilts are larger. Institutions divest from brown stocks more by reducing positions than by eliminating them. The industry tilts increasingly toward green stocks, due to only the largest institutions. Other institutions and households tilt increasingly toward brown stocks. UNPRI signatories tilt greener; banks tilt browner.
    JEL: G11 G23
    Date: 2023–06
  28. By: Amberg, Niklas (Research Department, Central Bank of Sweden)
    Abstract: Commercial-paper backup lines account for a substantial share of undrawn loan commitments in the corporate sector, but have despite this received scant attention in the credit-line literature. In this paper, I study the liquidity-insurance properties of backup lines using a comprehensive loan- and security-level dataset and the sharp contraction of the Swedish commercial-paper market during the COVID-19 pandemic as an exogenous shock to the supply of market-provided liquidity. I find that backup lines provide commercial-paper issuers with reliable liquidity insurance and that banks’ liquidity provision via commercial-paper backup lines in periods of distress does not crowd out lending to other firms.
    Keywords: Credit lines; bank lending; liquidity insurance; commercial paper; COVID-19
    JEL: D22 G21 G32
    Date: 2023–06–01
  29. By: Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi
    Abstract: This paper investigates macroprudential policy effects on bank systemic risk and the role of inflation targeting in such effects. Using bank-level data for 45 countries comprising various monetary and exchange rate regimes, our regime-dependent dynamic panel regression results point to complementarities between monetary and macroprudential policies. We find that the tightening of most macroprudential tools—including DSTI and LTV limits, and capital requirements—reduces bank systemic risk further under inflation targeting. Our findings lend credence to the view that inflation targeting strengthens macroprudential policy roles in mitigating financial stability risks.
    Keywords: Macroprudential Policies; Banks; Systemic Risk; Monetary Policy; Inflation Targeting
    Date: 2023–06–02
  30. By: Korsu, Robert Dauda; Tamuke, Edmund
    Abstract: The paper investigates the effect of bank credit to the private sector on private investment in Sierra Leone and the role of macroeconomic uncertainty in the relationship. An autoregressive distributed lag model of private investment is estimated with annual data from 1980 to 2019, using OLS in the context of Pesaran-Shin-Smith approach. The results show that there is a long run relationship between private investment and the model variables and in the long run, bank credit has a positive and significant effect on private investment in Sierra Leone, while macroeconomic uncertainty vitiates this effect. In the short run however, bank credit is not found to have a significant effect on private investment, though it contributes positively and the impact of macroeconomic uncertainty on this effect is also not significant, though it reduces the impact of bank credit. Hence, during high macroeconomic uncertainty, like the current global environment, strongly leveraging on bank credit to the private sector is useful for boosting private investment in Sierra Leone. However, there is strong need for an end to higher global uncertainty, as it is inimical to the positive impact bank credit has on private investment.
    Keywords: Private Investment, Macroeconomic Uncertainty, Bank Credit, Autoregressive Distributed Lag
    JEL: E22 E44 E51
    Date: 2023–05–09
  31. By: Heon Lee
    Abstract: This paper develops a dynamic monetary model to study the (in)stability of the fractional reserve banking system. The model shows that the fractional reserve banking system can endanger stability in that equilibrium is more prone to exhibit endogenous cyclic, chaotic, and stochastic dynamics under lower reserve requirements, although it can increase consumption in the steady-state. Introducing endogenous unsecured credit to the baseline model does not change the main results. This paper also provides empirical evidence that is consistent with the prediction of the model. The calibrated exercise suggests that this channel could be another source of economic fluctuations.
    Date: 2023–05
  32. By: Gatti, Matteo; Gorea, Denis; Presbitero, Andrea
    Abstract: Does an increase in lending by multinational development banks affect the private lending activity in developing countries? We show that this is indeed the case using data on loans and investments by the European Investment Bank (EIB) in combination with data on syndicated loans. We find that a pronounced increase in EIB operations is followed by a surge in the number and volumes of syndicate loans in countries outside the European Union. Our results suggest that multinational banks can incentivize private sector lending by playing an important role in signaling to private markets that borrowers in emerging and developing countries are safe.
    Keywords: European Investment Bank, Financial assistance, Financial conditions, Public and private lending, Syndicated loans
    JEL: F21 F34 H81
    Date: 2023
  33. By: Felipe Aldunate (Universidad de Los Andes, ESE Business School); Felipe Gonzalez (Queen Mary University of London, School of Economics and Finance); Mounu Prem (Einaudi Institute for Economics and Finance)
    Abstract: Governments in hegemonic states use economic sanctions to induce changes in other countries. What happens to international business networks when these sanctions are in place? We use new historical firm-level data to document the destruction of financial relations between U.S. banks and Chilean firms after socialist Salvador Allende took office in 1970. Business reports and stock prices suggest that firms were mostly unaffected by having fewer links with U.S. banks. Substitution of financial relations towards domestic banks appears to be the key mechanism explaining these findings.
    Keywords: firms, banks, Cold War, United States, Salvador Allende.
    Date: 2023–06–21
  34. By: Callan Windsor (Reserve Bank of Australia); Terhi Jokipii (Swiss National Bank); Matthieu Bussiere (Banque de France)
    Abstract: This paper provides a retrospective assessment of the relationship between bank profitability and interest rates, focusing on the period when rates were very low or negative. To do this we use new confidential bank-level data covering about 1, 500 banks operating in 10 banking systems, with most samples spanning the two decades up to the end of 2019. Our analysis confirms the empirical regularity that declining interest rates reduce banks' net interest margins. However, we find a smaller effect than in previous studies: on average across countries, a 100 basis point fall in short-term interest rates results in a 5 basis point decline in net interest margins in the short run. Notably, there are substantial cross-country differences, and, in some cases, the estimated effect is greater. Importantly, the effect of lower interest rates on net interest margins is larger than the effect on assets returns, suggesting that banks can shield overall profitability in the face of lower interest rates. For example, lower interest rates alleviate debt-servicing burdens and are associated with a fall in provisions set aside to cover losses on loans. There is therefore no one-size-fits-all result for the impact of low interest rates on overall profitability: in some jurisdictions banks maintained their level of profitability as the beneficial impact of lower rates on loan-loss provisions and other factors, including an increased focus on cost efficiencies and streamlining business models, materially offset the drag from lower interest margins.
    Keywords: interest rates; bank profitability; net interest margins; monetary policy
    JEL: E52 F34 F36 G21
    Date: 2023–06
  35. By: Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
    Abstract: This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible.
    JEL: E31 G0 G20 G30 N2
    Date: 2023–06
  36. By: Giacomo De Giorgi; Costanza Naguib
    Abstract: We analyze the impact of soft credit default (i.e. a delinquency of 90+ days) on individual trajectories. Using a proprietary dataset on about 2 million individuals for the years 2004 to 2020, we find that a soft default has substantial and long-lasting (i.e. up to ten years after the event) negative effects on credit score, total credit limit, home-ownership status, and income.
    Date: 2023–06
  37. By: Andrea Orame (Bank of Italy); Rodney Ramcharan (University of Southern California); Roberto Robatto (University of Wisconsin-Madison)
    Abstract: We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks' net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks' balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms' credit constraints through the bank lending channel.
    Keywords: unconventional monetary policy, bank lending channel, sovereign default premia, regulatory capital, historical cost accounting
    JEL: G28 E52 M48
    Date: 2023–06
  38. By: Yannis Dafermos (Department of Economics, SOAS University of London)
    Abstract: In recent years, private and public financial institutions have increasingly focused on addressing the implications of the climate crisis. However, existing efforts to align the financial system with climate change suffer from a significant limitation: they exacerbate global climate injustice. In this paper, I identify several climate finance injustice channels and explain how these can be addressed via the development of a 'climate just financial system'. I define the latter as a system whereby climate justice criteria are incorporated into the policies governing public and private financial institutions, and the financing of private and public climate spending is in line with the principle of common but differentiated responsibilities and respective capabilities. A climate just financial system has three key elements: (i) differentiated climate responsibilities for global North and global South financial institutions, with the latter primarily focusing on climate adaptation and the former prioritising climate mitigation; (ii) climate justice stabilising mechanisms that establish a permanent commitment by global North countries to provide climate financing support to global South countries without making the latter more financially vulnerable; and (iii) the incorporation of climate justice criteria in the design and use of climate mitigation tools by global North financial institutions. Creating a climate just financial system requires significant transformations in multilateral financial mechanisms, public banking, central banking, financial regulation and private financial institutions. Although these transformations would face political and technical challenges, they can potentially be overcome if climate justice gets centre stage in the climate policy agenda.
    Keywords: climate justice, climate-aligned development, central banking, public banking, climate finance, global financial architecture
    JEL: D63 E50 Q01 Q54
    Date: 2023–06
  39. By: Liu, Lu
    Abstract: Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price apprecia-tion. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts. JEL Classification: D15, E43, G21, G22, G5, G52
    Keywords: credit risk, household finance, household risk management, house prices, interest rate risk, mortgage choice
    Date: 2023–07
  40. By: Linda S. Goldberg
    Abstract: Global liquidity refers to the volumes of financial flows—largely intermediated through global banks and non-bank financial institutions—that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through global liquidity evolve in response to regulation, the characteristics of financial institutions, and actions of official institutions around liquidity provision. Strong prudential policies in the home countries of global banks and official facilities reduce funding strains during stress events. Country-specific policy challenges, summarized by the monetary and financial trilemmas, are partially alleviated. However, risk migration across types of financial intermediaries underscores the importance of advancing regulatory agendas related to non-bank financial institutions.
    Keywords: global liquidity; global dollar cycle; trilemma; exchange market pressure; risk sensitivity; safe haven; capital flows; non-bank financial intermediaries; risk migration
    JEL: E44 F30 G15 G18 G23
    Date: 2023–06–01
  41. By: Naveen Rai; Patrick Sabourin
    Abstract: Since 2022, consumer inflation expectations have shifted, with a significant increase in those expecting high inflation in the coming year and a surge in those expecting deflation further in the future. Using data from the Canadian Survey of Consumer Expectations, this paper seeks to assess the factors that influence people to expect high inflation, moderate inflation or deflation. While expectations of high inflation are largely based on perceptions about current inflation, most of those anticipating future deflation do not see the Canadian economy as currently deflationary. Rather, their deflationary outlook since 2022 has hinged on the belief that current inflation-inducing supply and demand factors such as supply chain issues are temporary and will reverse, triggering price declines.
    Keywords: Inflation and prices
    JEL: C83 D84 E31
    Date: 2023–06
  42. By: Bellia, Mario (European Commission); Calès, Ludovic
    Abstract: This paper analyzes the potential effect of a European Central Bank Digital Currency (CBDC) on banks’ profitability. We use a large sample of EU banks that span the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the deposits. Using quantile regression, we estimate the conditional profit distribution of a representative bank. We then introduce a shock on the amount of deposits that would be replaced by the CBDC. Our results show that, for a large take-up of CBDC, there might be substantial challenges for the profitability of banks, especially for small banks, that mostly rely on deposits as a source of funding.
    Keywords: Central Bank Digital Currency, CBDC, ECB, bank deposits
    JEL: G18 G28 G32
    Date: 2023–05

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