nep-ban New Economics Papers
on Banking
Issue of 2023‒07‒24
35 papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. The monetary and macroprudential policy framework in Colombia in the last 30 years: the lessons learnt and the challenges for the future By Gomez-Pineda, Javier Guillermo; Murcia, Andrés; Cabrera-Rodríguez, Wilmar Alexander; Vargas-Herrera, Hernando; Villar-Gómez, Leonardo
  2. Finance and Climate Resilience: Evidence from the long 1950s US Drought By Raghuram Rajan; Rodney Ramcharan
  3. Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  4. The COVID-19 shock and firm financing: Government or Market or Both? By Miguel Acosta-Henao; Andres Fernandez; Patricia Gomez-Gonzalez; Sebnem Kalemli-Ozcan
  5. Documentation Paper: Representative Survey on Attitudes and Knowledge About Inflation and Monetary Policy in Germany Conducted in December 2022 By Bernd Hayo
  6. Household Finance and Consumption Survey 2021: Results from Slovakia By Andrej Cupak; Judita Jurašeková Kucserová; Ján Klacso; Anna Strachotová
  7. Revisiting the monetary transmission mechanism through an industry‑level differential approach By Choi, Sangyup; Willens, Tim; Yoo, Seung Yong
  8. Conservation by Lending By Bård Harstad; Kjetil Storesletten
  9. The potential impact of broader central clearing on dealer balance sheet capacity: a case study of UK gilt and gilt repo markets By Baranova, Yuliya; Holbrook, Eleanor; MacDonald, David; Rawstorne, William; Vause, Nicholas; Waddington, Georgia
  10. Damaged Collateral and Firm-Level Finance: Evidence from Russia's War in Ukraine By Shpak, Solomiya; Earle, John S.; Gehlbach, Scott; Panga, Mariia
  11. Overborrowing, Underborrowing, and Macroprudential Policy By Fernando Arce; Julien Bengui; Javier Bianchi
  12. Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Surprises By Spencer D. Krane; Leonardo Melosi; Matthias Rottner
  13. Inflation Literacy, Inflation Expectations, and Trust in the Central Bank: A Survey Experiment By Dräger, Lena; Nghiem, Giang
  14. Social Sustainability in European Banks: A Machine Learning Approach using Interval- Based Composite Indicators By Drago, Carlo; Di Nallo, Loris; Russotto, Maria Lucetta
  15. Self-fulfilling fire sales and market backstops By Kalsi, Harkeerit; Vause, Nicholas; Wegner, Nora
  16. Social Sustainability in European Banks: A Machine Learning Approach using Interval- Based Composite Indicators By Carlo Drago; Loris Di Nallo; Maria Lucetta Russotto
  17. Credit during the pandemics: the case of Tuscany By Luca Casolaro; Francesco Suppressa
  18. Global Liquidity: Drivers, Volatility and Toolkits By Linda S. Goldberg
  19. What do politicians think of technocratic institutions? Experimental Evidence on the European Central Bank By Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
  20. Climate Fintech: the Italian market in an international perspective By Diego Scalise
  21. How Heterogeneous Beliefs Trigger Financial Crises By Florian Schuster; Marco Wysietzki; Jonas Zdrzalek
  22. Uninsured Deposits: Relevance and Evolutions Over Time By Van Roosebeke, Bert; Defina, Ryan; Wahyuni, Tri
  23. Fifty Shades of QE: Robust Evidence By Brian Fabo; Martina Jancokova; Elisabeth Kempf; Lubos Pastor
  24. Distressed Firms and the Large Effects of Monetary Policy Tightenings By Ander Pérez-Orive; Yannick Timmer
  25. The transmission of macroprudential policy in the tails: evidence from a narrative approach By Fernández-Gallardo, Álvaro; Lloyd, Simon; Manuel, Ed
  26. Monetary and Macroprudential Policy and Welfare in an Estimated Four-Agent New Keynesian Model By George J. Bratsiotis; Kasun D. Pathirage
  27. When Credit Turns Political: Evidence from the Spanish Financial Crisis By Pia Hüttl; Simon Baumgartner
  28. What Charge-Off Rates Are Predictable by Macroeconomic Latent Factors? By Hyeongwoo Kim; Jisoo Son
  29. The relationship between branch location, bank size and borrower race on the price of FSA Guaranteed Loans By Atkinson, Sarah A.; Dodson, Charles B.
  30. Bank Funding, SME lending and Risk Taking By Sander Lammers; Massimo Giuliodori; Robert Schmitz; Adam Elbourne
  31. Monetary Policy Operations: Theory, Evidence, and Tools for Quantitative Analysis By Ricardo Lagos; Gastón Navarro
  32. Smallholders’ experiences with credit and financial institutions and their impact on long-term investment – the case of oil palm replanting in Costa Rica By Latzko, Jakob V.; Qaim, Matin
  33. On the Nexus of Monetary Policy and Financial Stability: Novel Asset Market Monitoring Tools for Building Economic Resilience and Mitigating Financial Risks By Lauren Spits; Valerie Grossman; Enrique Martinez-Garcia
  34. Credit Supply or Demand? The Changing Role of Structural Market Forces in Bank Lending By Patrik Kupkovic
  35. Fear the Walking Dead? Zombie Firms in the Euro Area and Their Effect on Healthy Firms’ Credit Conditions By Havemeister, Lea Katharina; Horn, Kristian

  1. By: Gomez-Pineda, Javier Guillermo; Murcia, Andrés; Cabrera-Rodríguez, Wilmar Alexander; Vargas-Herrera, Hernando; Villar-Gómez, Leonardo
    Abstract: Over the past 30 years, monetary and macroprudential policy in Colombia evolved towards the pursuit of a low and credible inflation target and a stable financial system. The protracted inflation that began in the early seventies was defeated at the turn of the century with the help of the new framework for monetary policy formulation, inflation targeting. In the field of macroprudential policy, the financial crisis of the late nineties led to important institutional developments in the formulation and coordination of macroprudential policy, as well as in the assessment of systemic risk. Along with these developments, important lessons have been learnt. One is that, to preserve macroeconomic stability, the price stability objective must be complemented with the financial stability objective, as well as with macroprudential policy. Another lesson is that the new institutional framework for monetary policy formulation helped Banco de la República overcome 25 years of inflation, then called moderate inflation. The challenges for the future include to continue preserving price and financial stability, strengthening the role of the Banco de la República in macroprudential policy, and to continue strengthening the channels of international coordination and cooperation in macroprudential policy.
    Keywords: Monetary policy; Macroprudential policy; Inflation targeting; Foreign exchange market intervention; Financial stability
    JEL: E58 E5 E52 E44 E61 G01 G18 G21 G28
    Date: 2023–07
  2. By: Raghuram Rajan; Rodney Ramcharan
    Abstract: We study how the availability of credit shapes adaptation to a climatic shock, specifically, the long 1950s US drought. We find that bank lending, net immigration, and population growth decline sharply in drought exposed areas with limited initial access to bank finance. In contrast, agricultural investment and long-run productivity increase more in drought-exposed areas when they have access to bank finance, even allowing some of these areas to leapfrog otherwise similar areas in the subsequent decades. We also find unequal access to finance can drive migration from drought-hit finance-poor communities to finance-rich communities. These results suggest that broadening access to finance can enable communities to adapt to large adverse climatic shocks and reduce emigration.
    JEL: G0 J0 Q0
    Date: 2023–06
  3. By: Michael D. Bordo; John V. Duca
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth. Unlike M2 and divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more stable and can be reasonably empirically modeled in both the short run and the long run through the Covid-19 pandemic and to date. In the long run, these velocities depend on regulatory changes and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and an index of the stringency of government pandemic restrictions to control for the unusual effects of the pandemic. The velocity of broad Divisia money temporarily declines during crises like the Great and COVID Recessions, but later rebounds. In each recession monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 Trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting that the banking system was less impaired and could promote rather than hinder multiple deposit creation. Partly as a result, our framework implies that nominal GDP growth and inflationary pressures rebounded much more quickly from the COVID Recession versus the Great Recession. We consider different scenarios for future Divisa money growth and the unwinding of the pandemic that have different implications for medium-term nominal GDP growth and inflationary pressures as monetary policy tightening seeks to restore low inflation.
    JEL: E41 E51 E52 E58
    Date: 2023–06
  4. By: Miguel Acosta-Henao (Central Bank of Chile); Andres Fernandez (International Monetary Fund); Patricia Gomez-Gonzalez (Fordham University, Department of Economics); Sebnem Kalemli-Ozcan (University of Maryland)
    Abstract: We study the interaction between government’s fiscal support policies and firms’ market financing. Using regulatory data on the universe of Chilean firms, we test the role of Central Bank’s special credit line to domestic banks and government-backed credit guarantees provided during COVID-19. Through a regression discontinuity design, we find that firms with access to government support policies increased their domestic debt relative to foreign debt, even though foreign debt in foreign currency is much cheaper than domestic debt in local currency under deviations from the UIP. Further results document how policies reduced UIP premia for firms eligible of guarantees. An open economy model with heterogeneous firms helps rationalize these facts. A shock to the cost of external financing leads to a higher mass of firms with access to domestic credit when the government subsidizes the cost of domestic credit. The government’s credit guarantees loosen domestic collateral constraints and reduce banks’ risk aversion, while the central bank’s special credit line increases the aggregate supply of credit in the economy.
    Keywords: Capital flows, firm financing, unconventional policies, COVID-19
    JEL: F32 F41
    Date: 2023
  5. By: Bernd Hayo (University of Marburg)
    Abstract: This paper provides background information on, and basic descriptive statistics for, a representative survey of the German population conducted on my behalf by GfK in December 2022. It replicates a survey done in December 2021. The main difference affecting answers lies in the different time of inflation environment, i.e. low in 2021 and high in 2022. The survey covers various topics having to do with inflation and monetary policy, including: 1) inflation perceptions and expectations, 2) interest in and subjective, as well as objective, knowledge about monetary policy, 3) attitude to and knowledge about the ECB’s monetary policy reform in 2021, 4) trust in the ECB and perception of its independence, 5) importance of climate-change-related measures, and 6) an experiment evaluating whether information about the ECB’s monetary policy reform in 2021 reduces people’s trust in the ECB and their perception of its independence. A broad range of socio-demographic and economic indicators are collected too.
    Keywords: Public opinion survey, Attitudes, Inflation perception, Inflation expectation, Monetary policy, ECB’s monetary policy reform in 2021, Germany
    JEL: D90 E31 E58 E71
    Date: 2023
  6. By: Andrej Cupak (National Bank of Slovakia); Judita Jurašeková Kucserová (National Bank of Slovakia); Ján Klacso (National Bank of Slovakia); Anna Strachotová (National Bank of Slovakia)
    Abstract: This report presents the main findings from the fourth wave of the Household Finance and Consumption Survey (HFCS) conducted in Slovakia in 2021. The survey provides a structural overview of information about household assets, liabilities, income and consumption, extended by indicators regarding financial literacy, labour market effects of the pandemic, and measures of household expectations. We find that median household net wealth stood at more than €97, 000 in 2021, up from €70, 000 in the previous survey wave in 2017. This rapid appreciation was mainly due to a remarkable increase in real estate prices over the considered period. Household assets remain substantially concentrated towards real estate, which account for nearly 80% of all household assets. Households continue to be conservative also in terms of financial assets, holding mainly risk-free deposits or low-yield savings accounts. Only 6% of households hold investment-based financial assets such as shares, bonds, or mutual funds. Relatively poor inclusion in financial markets is coupled with low levels of financial literacy of the Slovak population; however, we observe a slight improvement since 2014. While the level of household indebtedness increased substantially between 2017 and 2021, there was some moderation in debt burden indicators (such as LTV and DSTI ratios) mainly due to tighter borrowerbased measures. Given the steep rise in value of owner-occupied housing and growth in labour income, both wealth and income inequality declined and hence ensured more equal distribution of economic resources across society.
    Date: 2023–05
  7. By: Choi, Sangyup (Yonsei University); Willens, Tim (Bank of England); Yoo, Seung Yong (Yonsei University)
    Abstract: We combine industry‑level data on output and prices with monetary policy shock estimates for 105 countries to analyse how the effects of monetary policy vary with industry characteristics. Next to being interesting in their own right, our findings are informative on the importance of various transmission mechanisms, as they are thought to vary systematically with the included characteristics. Results suggest that monetary policy has greater output effects in industries featuring assets that are more difficult to collateralise, consistent with the credit channel, followed by industries producing durables, as predicted by the interest rate channel. The credit channel is stronger during bad times as well as in countries with lower levels of financial development, in line with financial accelerator logic. We do not find support for the cost channel of monetary policy, nor for a channel running via exports. Our database (containing estimated monetary policy shocks for 177 countries) may be of independent interest to researchers.
    Keywords: Monetary policy transmission; industry growth; financial frictions; heterogeneity in transmission; monetary policy shocks
    JEL: E32 E52 F43 G20
    Date: 2023–05–26
  8. By: Bård Harstad; Kjetil Storesletten
    Abstract: This project analyzes how a principal can motivate an agent to conserve rather than exploit a depletable resource. This dynamic problem is relevant for tropical deforestation as well as for other environmental problems. It is shown that the smaller is the agent's discount factor (e.g., because of political instability), the more the principal benefits from debt-for-nature contracts compared to flow payments (in return for lower deforestation). The debt-for-nature contract combines a loan to the agent with repayments that are contingent on the forest cover.
    Keywords: environmental conservation, sovereign debt, sustainability-linked bonds, default, hyperbolic discounting, time inconsistency
    Date: 2023
  9. By: Baranova, Yuliya (Bank of England); Holbrook, Eleanor (Bank of England); MacDonald, David (Bank of England); Rawstorne, William (Bank of England); Vause, Nicholas (Bank of England); Waddington, Georgia (Bank of England)
    Abstract: More widespread central clearing could enhance dealers’ ability to intermediate financial markets by increasing the netting of buy and sell trades, thereby reducing the impact of trading on balance sheets and capital ratios. Drawing on trade‑level regulatory data, we study the netting benefits for UK dealers if comprehensive central clearing had been introduced to the cash gilt and gilt repo markets ahead of the March 2020 dash for cash (DFC) crisis. For the gilt repo market, we estimate that the policy would have reduced the gilt repo exposures on UK dealers’ balance sheets by 40% and, hence, boosted their aggregate leverage ratio by 3 basis points. If that policy had been accompanied by standardisation of repo maturity dates, such that they fell on the same day of the week (apart from for overnight repo), the reduction in exposures would have risen to 60% and the increase in the aggregate leverage ratio to 5 basis points. Such improvements in netting rates would in principle have allowed the dealers’ repo desks to expand their trading during the DFC by 2.5 times more than under prevailing clearing rates for each incremental unit of capital available to them. For cash gilt trades, central clearing would only have reduced unsettled trade exposures for dealers using a particular accounting treatment, but would have done so by up to 80% for that group, boosting its aggregate leverage ratio by 0.4 basis points. However, changes to the computation of the Basel III leverage ratio implemented in January 2023 would also have had these effects on cash trades.
    Keywords: Central clearing; dealers; gilts; market structure; repo
    JEL: G12 G18 G23 G28
    Date: 2023–06–02
  10. By: Shpak, Solomiya; Earle, John S.; Gehlbach, Scott; Panga, Mariia
    Abstract: How much has Russia's war in Ukraine damaged the collateral of Ukrainian firms, and how much damage has that caused the Ukrainian financial system? We address this question using unusually rich high-frequency supervisory data of Ukrainian banks combined with a survey of banks on the location and condition of corporate borrowers' collateral between February and November 2022. Exploiting plausibly exogenous variation in collateral value resulting from damage to collateral, we find that a 10-percent reduction in the collateral-loan ratio lowers the probability of getting any new loan by nearly eight percentage points; new lending falls by over two percentage points. Our results additionally imply that the same reduction in collateral value raises default rates and banks' assessment of firms' probability of default by approximately eight and four percentage points, respectively. The results imply that, in the absence of sufficient aid to repair the damage, Ukraine may experience reduced investment and lower economic growth in the future.
    Date: 2023–06–28
  11. By: Fernando Arce; Julien Bengui; Javier Bianchi
    Abstract: In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies.
    Keywords: Macroprudential Policy; Over-borrowing; Under-borrowing
    JEL: E58 F31 F32 F34
    Date: 2023–05
  12. By: Spencer D. Krane; Leonardo Melosi; Matthias Rottner
    Abstract: Central banks around the world have revised their operating frameworks in an attempt to counter the challenges presented by the effective lower bound (ELB) on policy rates. We examine how private sector agents might learn such a new regime and the effect of future shocks on that process. In our model agents use Bayesian updating to learn the parameters of an asymmetric average inflation targeting rule that is adopted while at the ELB. Little can be discovered until the economy improves enough that rates would be near liftoff under the old policy regime; learning then proceeds until either the new parameters are learned or the average inflation target is reached. Recessionary shocks forcing a return to the ELB would thus delay learning while large inflationary shocks could outright stop it and so inhibit the ability of the new rule to address future ELB episodes. We show the central bank can offset some of the inflation-induced learning loss by deviating from its new rule, but it must weigh the benefits of doing so against the costs of higher near-term inflation and greater uncertainty about the policy function.
    Keywords: new framework; central bank's communications; Deflationary Bias; asymmetric average inflation targeting; imperfect credibility; liftoff; Bayesian Learning
    JEL: E52 C63 E31
    Date: 2023–06–07
  13. By: Dräger, Lena; Nghiem, Giang
    Abstract: This paper studies the causal effect of inflation literacy on inflation expectations and trust in the central bank using a randomized control trial (RCT) on a representative sample of the German population. In an experiment with two steps, we first test the effect of non-numerical information about inflation and monetary policy, the \textitliteracy treatment. In the second step, we randomly treat respondents with quantitative information and measure whether those who previously received the \textitliteracy treatment, incorporate quantitative information differently into their inflation forecasts. We find that the \textitliteracy treatment improves respondents' knowledge about monetary policy and inflation and raises their trust in the central bank. It also causes a higher likelihood that respondents provide inflation predictions, but does not affect the level of expected inflation. Similarly, those who received the initial \textitliteracy treatment do not react differently to the quantitative information in terms of the level of their inflation forecasts, but they react more strongly to some treatments regarding their reported forecast uncertainty and trust in the central bank.
    Keywords: Inflation literacy; inflation expectations; trust in the central bank; survey experiment; randomized control trial (RCT)
    JEL: E52 E31 D84
    Date: 2023–06
  14. By: Drago, Carlo; Di Nallo, Loris; Russotto, Maria Lucetta
    Abstract: Promoting social information reporting and disclosure can promote sustainable banking. The paper aims to measure banking social sustainability by constructing a new interval-based composite indicator using the Thomson Reuters database. In this work, we propose an approach to constructing interval-based composite indicators that enhance the composite indicator’s construction sensibly, allowing us to measure the uncertainty due to the choices in the composite indicator design. The methodological approach employed is based on a Monte-Carlo simulation and allows for improving the information the composite indicators can obtain. So, we measure the value of the social indicator and its subcomponents and the value’s uncertainty due to the different possible weights. The results show that the best international ESG practices in European banks relate to French and United Kingdom Banks, primarily than Italian banks. Finally, we analyze innovative perspectives and propose policy recommendations, considering the growing attention to the issue of ESG disclosure and its adherence to reality, to support sustainable banking ecosystems.
    Keywords: Financial Economics, Research Methods/ Statistical Methods
    Date: 2023–06–28
  15. By: Kalsi, Harkeerit (University of Cambridge); Vause, Nicholas (Bank of England); Wegner, Nora (Bank of England)
    Abstract: Motivated by the March 2020 ‘dash for cash’, we build a model in which a potential liquidity shock to bond funds can prompt a self-fulfilling fire sale in the presence of a dealer with limited trading capacity. Following the global games literature, we derive the probability of a self-fulfilling fire sale. Introducing a central bank market backstop policy, we show that if the central bank can credibly commit to (i) set the size of its potential asset purchases high enough and (ii) its price discount low enough, then it can eliminate self-fulfilling fire sales without having to purchase any bonds. If the central bank acts less aggressively, it can still reduce the probability of a self-fulfilling fire sale. However, in response to the policy, funds choose to hold more bonds, which increases the probability of a self-fulfilling fire sale and reduces the effectiveness of the market backstop.
    Keywords: Market backstops; fire sales; bond purchases
    JEL: G12
    Date: 2023–06–22
  16. By: Carlo Drago (University of Niccolò Cusano); Loris Di Nallo (University of Cassino e del Lazio Meridionale); Maria Lucetta Russotto (University of Firenze)
    Abstract: Promoting social information reporting and disclosure can promote sustainable banking. The paper aims to measure banking social sustainability by constructing a new interval-based composite indicator using the Thomson Reuters database. In this work, we propose an approach to constructing interval-based composite indicators that enhance the composite indicator’s construction sensibly, allowing us to measure the uncertainty due to the choices in the composite indicator design. The methodological approach employed is based on a Monte-Carlo simulation and allows for improving the information the composite indicators can obtain. So, we measure the value of the social indicator and its subcomponents and the value’s uncertainty due to the different possible weights. The results show that the best international ESG practices in European banks relate to French and United Kingdom Banks, primarily than Italian banks. Finally, we analyze innovative perspectives and propose policy recommendations, considering the growing attention to the issue of ESG disclosure and its adherence to reality, to support sustainable banking ecosystems.
    Keywords: Social Index, Sustainable Banking, ESG, Monte-Carlo Simulation, Machine Learning, Interval-based Composite Indicators
    JEL: G21 Q5 C02 C15 C43 C63
    Date: 2023–06
  17. By: Luca Casolaro; Francesco Suppressa
    Abstract: During the Covid-19 economic shock the Italian Government implemented several measures aimed at facilitating the access to guaranteed loans, enhancing the role of the Fondo Centrale di Garanzia (FCG) in the financial support of the SME. In this work, we analyse various effects of these policies with a particular focus on the case of Tuscany, that exhibit a double reason for interest. Firstly, it has been interested in the first months of the 2020 by a change in regional rules that significantly enlarged the access to the Fund. Secondly, Tuscany experienced an expansion of FCG operations higher than other Italian regions. By using data from the credits register and company information, we provide evidence on the characteristics of the firms that benefited from FCG loans in terms of economic sectors, firm size and default risk. In the final section, we conduct an econometric analysis to isolate the key determinants of firms' utilization of the Fund, highlighting the importance of pre-existing banking relationships in obtaining loans backed by the Government.
    Keywords: credit, Covid-19, public credit guarantee schemes, SMEs; liquidity shock
    JEL: L25 H81 G32
    Date: 2023–06–01
  18. 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.
    JEL: E44 F30 F36 F38 F40 G15 G18 G23
    Date: 2023–06
  19. By: Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
    Abstract: Technocracy has come to be increasingly regarded as a threat to representative democracy. Significant attention has thus been recently devoted to exploring public preferences towards technocratic institutions. Elected policymakers’ attitudes have instead not been investigated as systematically. This paper fills this gap by examining politicians’ views on central banks. Based on an original elite survey of the Members of the European Parliament, we gauge elected policymakers’ attitudes towards the mandate and policy conduct of the European Central Bank. Our findings show that the political orientation of politicians largely drives attitudes towards the ECB’s institutional mandate. Interestingly, the findings from two experiments embedded in the survey also show that the attitudes of MEPs are not as static as ideological orientations would lead us to expect. The information set to which politicians are exposed significantly shapes their views on both the ECB’s mandate and its policy conduct, but less on ECB independence
    Keywords: accountability, central banks, ECB, independence, political attitudes, technocracy, trust
    Date: 2023
  20. By: Diego Scalise (Bank of Italy)
    Abstract: This paper analyses the segment of the financial industry that comprises the set of digital applications designed to support the process of decarbonization and transition to environmental sustainability, which is known as Climate Fintech. Italy's special focus is on green equity crowdfunding and digital green lending solutions; however, automated applications for measuring environmental profiles are used to a lesser extent than in the rest of the sample.
    Keywords: Climate Fintech, green transition
    JEL: Q4 O16
    Date: 2023–06
  21. By: Florian Schuster (University of Cologne and ECONtribute); Marco Wysietzki (University of Cologne and ECONtribute); Jonas Zdrzalek (University of Cologne and ECONtribute)
    Abstract: We present a theoretical framework to characterize how financial market participants contribute to systemic risk, allowing us to derive optimal corrective policy interventions. To that end, we embed belief heterogeneity in a model of frictional financial markets. We document the asymmetry that, by their behavior, relatively more optimistic agents contribute more strongly to financial distress than more pessimistic agents do. We further show that financial distress is generally more likely in an economy whose agents hold heterogeneous rather than homogeneous beliefs. Based on these findings, we propose a system of non-linear Pigouvian taxes as the optimal corrective policy, which proves to generate considerable welfare gains over the linear policy advocated by former studies.
    Keywords: Financial amplification, pecuniary externalities, collateral constraint, financial crisis, belief heterogeneity, macroprudential policy
    JEL: D84 E44 G28 H23
    Date: 2023–06
  22. By: Van Roosebeke, Bert; Defina, Ryan; Wahyuni, Tri
    Abstract: This global stock-taking of deposit insurance coverage ratios may offer a good first proxy for estimating the relevance of uninsured deposits. However, it is important to realise that the IADI Core Principles for Effective Deposit Insurance Systems (Core Principles) as global standards for deposit insurance focus on aggregated coverage ratios. Despite overall compliance with these standards by a jurisdiction, the share of deposits not covered by deposit insurance at a number of individual banks within this jurisdiction may be very high, which may give rise to increased bank-run risks. Deposit insurance standards currently do not explicitly account for this risk, which is implicitly assumed to be dealt with by prudential regulation and/or supervision. Ongoing research may offer further insights. Building on this stock-taking exercise, ongoing research will look into measures applied across the globe by deposit insurers that may help manage the risk of sudden and massive withdrawals by uninsured depositors. These will include the use of differentiated coverage levels, including temporary high balances, high and/or blanket coverage for payment and settlement accounts and voluntary top-up coverage levels.
    Keywords: deposit insurance; bank resolution
    JEL: G21 G33
    Date: 2023–06–12
  23. By: Brian Fabo (National Bank of Slovakia); Martina Jancokova (European Central Bank); Elisabeth Kempf (Booth School of Business, University of Chicago); Lubos Pastor
    Abstract: Fabo, Jancokova, Kempf, and Pastor (2021) show that papers written by central bank researchers find quantitative easing (QE) to be more effective than papers written by academics. Weale and Wieladek (2022) show that a subset of these results lose statistical significance when OLS regressions are replaced by regressions that downweight outliers. We examine those outliers and find no reason to downweight them. Most of them represent estimates from influential central bank papers published in respectable academic journals. For example, among the five papers finding the largest peak effect of QE on output, all five are published in high-quality journals (Journal of Monetary Economics, Journal of Money, Credit and Banking, and Applied Economics Letters), and their average number of citations is well over 200. Moreover, we show that these papers have supported policy communication by the world’s leading central banks and shaped the public perception of the effectiveness of QE. New evidence based on quantile regressions further supports the results in Fabo et al. (2021).
    JEL: A11 E52 E58 G28
    Date: 2023–06
  24. By: Ander Pérez-Orive; Yannick Timmer
    Abstract: The stance of U.S. monetary policy has tightened significantly starting in March 2022. At the same time, the share of firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s.
    Date: 2023–06–23
  25. By: Fernández-Gallardo, Álvaro (Universidad Alicante); Lloyd, Simon (Bank of England); Manuel, Ed (Bank of England)
    Abstract: We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth by incorporating a narrative-identification strategy within a quantile-regression framework. Exploiting a data set covering a range of macroprudential policy actions across advanced European economies, we identify unanticipated and exogenous macroprudential policy ‘shocks’ and employ them within a quantile-regression setup. While macroprudential policy has near-zero effects on the centre of the GDP-growth distribution, we find that tighter macroprudential policy brings benefits by reducing the variance of future GDP growth, significantly and robustly boosting the left tail while simultaneously reducing the right. Assessing a range of potential channels through which these effects could materialise, we find that macroprudential policy operates through opposing tails of GDP and credit. Tighter macroprudential policy reduces the right tail of the future credit-growth distribution (both household and corporate) which, in turn, is particularly important for mitigating the left tail of GDP growth (ie, GDP-at-risk).
    Keywords: Growth-at-risk; macroprudential policy; narrative identification; quantile local projections
    JEL: E32 E58 G28
    Date: 2023–06–16
  26. By: George J. Bratsiotis; Kasun D. Pathirage
    Abstract: We examine the social and agent-specific welfare effects of monetary and macroprudential policy in a four-agent estimated macroeconomic model, consisting of 'banked simple households', 'underbanked simple households', 'firm owners', and 'bank owners'. Optimal capital requirement and loan loss provisions ratios, are shown to improve all agent-specific and social welfare, but imply smaller gains for simple households and firm owners that rely on credit. Countercyclical capital buffers support firm owners and bank owners, with smaller gains for the two simple households. Countercyclical loan loss provisions improve social welfare only for specific shocks and benefit the 'simple underbanked household' and 'firm-owners' at the expense of 'bank-owners' and 'banked simple households'. Coordination between monetary and macroprudential policies yields higher social welfare than no coordination.
    Keywords: monetary policy; macroprudential policy; financial frictions; risk of default; welfare
    JEL: E31 E32 E44 E52 E58 G28
    Date: 2023–06
  27. By: Pia Hüttl; Simon Baumgartner
    Abstract: This paper provides causal evidence on the effect of credit crunches on political polarization. We combine data on bank-firm connections and electoral outcomes at the city-level during the 2008-2014 Spanish Financial Crisis. First, we show that firms in a relationship with weak banks experience a reduction in their loan supply and employment growth. Next, we estimate the effects of unemployment on voting behaviour. We construct an instrument for unemployment based on the city-level exposure to foreign weak banks. We find that a one standard deviation increase in instrumented unemployment translates into a 7 percentage increase in the polarisation of voters.
    Keywords: Polarization, financial crisis, instrumental variable strategy, Spanish elections, credit supply shock, real effects, unemployment risk
    JEL: G01 P16 D72 D43
    Date: 2023
  28. By: Hyeongwoo Kim; Jisoo Son
    Abstract: Charge-offs signal critical information regarding the risk level of loan portfolios in the banking system, and they indicate the potential for systemic risk towards deep recessions. Utilizing consolidated financial statements, we have compiled the net charge-off rate (COR) data from the 10 largest U.S. bank holding companies (BHCs) for disaggregated loans, including business loans, real estate loans, and consumer loans, as well as the average top 10 COR for each loan categoy. We propose factor-augmented forecasting models for CORs that incorporate latent common factor estimates, including targeted factors, via an array of data dimensionality reduction methods for a large panel of macroeconomic predictors. Our models have demonstrated superior performance compared with benchmark forecasting models especially well for business loan and real estate loan CORs, while predicting consumer loan CORs remains challenging especially at short horizons. Notably, real activity factors improve the out-of-sample predictability over the benchmarks for business loan CORs even when financial sector factors are excluded.
    Keywords: Net Charge-Off Rate; Top 10 Bank Holding Companies; Disaggregated Loan CORs; Principal Component Analysis; Partial Least Squares; Out-of-Sample Forecast
    JEL: C38 C53 C55 G01 G17
    Date: 2023–07
  29. By: Atkinson, Sarah A.; Dodson, Charles B.
    Keywords: Agricultural Finance, Agribusiness, Agricultural and Food Policy
    Date: 2023
  30. By: Sander Lammers (CPB Netherlands Bureau for Economic Policy Analysis); Massimo Giuliodori (UVA); Robert Schmitz; Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: European companies heavily rely on bank credit to finance their operations and investments. Therefore, it is crucial for banks to take risks on corporate loans, although excessive risk-taking can have negative consequences for banks. There are indications in the literature that the financing structure used by banks plays a role in determining the risks they take. However, the economic literature does not provide clear consensus on how different elements of a bank's financing structure are related to risk. In this exploratory study, we investigated this relationship specifically focusing on corporate loans. This contributes to a better understanding of which companies receive funding and how a bank's financing structure itself can become a risk, particularly when riskier companies face bankruptcy. The financing structure of banks primarily consists of equity (capital buffer), deposits (savings from households and businesses), market financing (funds raised from international investors), and interbank loans (loans between banks, including central bank loans). We analyzed the extent to which these individual financing elements contribute to the risks banks take on loans to companies.
    JEL: G21 G32 E52
    Date: 2023–07
  31. By: Ricardo Lagos; Gastón Navarro
    Abstract: We formulate a quantitative dynamic equilibrium theory of trade in the fed funds market, calibrate it to fit a comprehensive set of marketwide and micro-level cross-sectional observations, and use it to make two contributions to the operational side of monetary policy implementation. First, we produce global structural estimates of the aggregate demand for reserves—a crucial decision-making input for modern central banks. Second, we propose diagnostic tools to gauge the central bank's ability to track a given fed funds target, and the heterogeneous incidence of policy actions on the shadow cost of funding across banks.
    JEL: C78 D83 E44 E49 G1 G18 G2 G21 G23 G28
    Date: 2023–06
  32. By: Latzko, Jakob V.; Qaim, Matin
    Keywords: Agricultural Finance, Institutional and Behavioral Economics, Community/Rural/Urban Development
    Date: 2023
  33. By: Lauren Spits; Valerie Grossman; Enrique Martinez-Garcia
    Abstract: In this note we argue that asset pricing bubbles are an important source of financial instabilities. First, the literature has tended to overlook bubbles and their consequences under the premise that they are hard to detect in real time. We suggest that novel statistical techniques allow us to overcome those prejudices as they provide valuable signals of emerging exuberance in real‐time. Second, monetary policy has been slow to recognize that financial instability arising from bubbles can have adverse effects on the transmission mechanism of monetary policy itself and on the types of risks faced by policymakers. We argue that measuring and monitoring episodes of exuberance in housing—but also in other asset classes—can be useful not just for thinking about macroprudential strategies but also to conduct risk analysis for monetary policy.
    Keywords: monetary policy; real estate; banking; finance; COVID-19; financial stability
    JEL: D84 E52 E58 E61 G10 R31 R21
    Date: 2023–06–02
  34. By: Patrik Kupkovic (National Bank of Slovakia)
    Abstract: The Global Financial Crisis, the European Debt Crisis, and the recent COVID-19 Crisis have repeatedly demonstrated that disruptions in credit markets can have serious macroeconomic consequences. This paper aims to assess the structural drivers of the NFCs bank lending market, as bank lending dominates the credit markets in the euro area, and to determine its macroeconomic consequences. To study these effects, we use structural VAR methodology with a modified identification scheme and modified variable selection compared to what is usually found in the literature. As an empirical illustration, we analyze the importance of the bank lending market in a small, open and bank-based euro area economy - Slovakia. The results show that loan demand shocks (loans demanded by firms) are at least as important as credit supply shocks (loans supplied by banks) in the lending market and that this importance changes over the cycle. These findings have important policy implications, as responding to these shocks may require different policy measures. Contributions to the literature are (i) new empirical evidence on the macroeconomic importance of loan demand shocks compared to credit supply shocks and (ii) new country-specific modification of structural VAR methodology.
    JEL: C32 E51 G01
    Date: 2023–06
  35. By: Havemeister, Lea Katharina; Horn, Kristian
    Abstract: Zombie firms may adversely impact healthy firms through several transmission channels. Besides real spillover effects on productivity or investment, zombies may also cause negative financial spillover effects, where zombies receive credit at more favourable conditions than healthy firms. We investigate characteristics of zombie firms in the euro area and whether they cause spillovers on healthy firms’ credit conditions, focusing on two variables: new credit and interest rates. Contrary to existing findings, our results indicate that zombie firms pay higher interest rates and receive less new credit than healthy firms. The spillover effect of zombie firms on healthy firms’ new credit is not significant. For interest rates, the spillover effect is even reversed: Zombie existence significantly lowers healthy firms’ interest rates. Zombie firms across the euro area are smaller, less profitable, and more leveraged with lower credit quality than healthy firms. Yet, they do not seem to pose significant negative externalities on the credit conditions of healthy firms. Novel loan-by-loan data from the European credit registry (AnaCredit) allows our analysis to be over a broad set of countries and firms, on a new level of granularity. This may explain the divergence of our findings from the existing literature. JEL Classification: E43, E44, E51, G21, G32
    Keywords: financial spillovers, financial stability, interest rates, new credit, zombie firms
    Date: 2023–07

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