nep-ban New Economics Papers
on Banking
Issue of 2023‒10‒16
thirty-six papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Open banking, shadow banking and regulation By Eccles, Peter; Grout, Paul; Zalewska, Anna; Siciliani, Paolo
  2. FinTech-Issued Personal Loans in the U.S. By Jessica N. Flagg; Simona Hannon
  3. Measuring the link between cyclical systemic risk and capital adequacy for Ukrainian banking sector By Alona Shmygel
  4. An Overview of Personal Loans in the U.S. By Jessica N. Flagg; Simona Hannon
  5. Margins, debt capacity, and systemic risk By Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
  6. Nonbank Lenders as Global Shock Absorbers: Evidence from US Monetary Policy Spillovers By David Elliott; Ralf R. Meisenzahl; José-Luis Peydró
  7. Bank expectations and prudential outcomes By Suss, Joel; Hughes, Adam
  8. Central Bank Mandates and Communication about Climate Change: Evidence from A Large Dataset of Central Bank Speeches By David M. Arseneau; Mitsuhiro Osada
  9. Assessing targeted longer-term refinancing operations: Identification through search intensity By Laine, Olli-Matti; Nelimarkka, Jaakko
  10. The European significant risk transfer securitisation market By González, Fernando; Triandafil, Cristina Morar
  11. Corporate credit growth determinants in Ukraine: bank lending survey data application By Anatolii Hlazunov
  12. Banks’ portfolio of government debt and sovereign risk By António Afonso; José Alves; Sofia Monteiro
  13. Does Social Identity Constrain Rural Entrepreneurship? The Role of Financial Inclusion By Sandhya Garg; Samarth Gupta; Sushanta Mallick
  14. A safe core mandate By Perotti, Enrico C.
  15. A Theory of Safe Asset Creation, Systemic Risk, and Aggregate Demand By Levent Altinoglu
  16. Tokenization: Overview and Financial Stability Implications By Francesca Carapella; Grace Chuan; Jacob Gerszten; Nathan Swem
  17. An Early Form of European Champions? Banking Clubs between European Integration and Global Banking (1960s-1990s) By Alexis Drach
  18. Asymmetric Interest Rate Pass-through and Its Effects on Macroeconomic Variables: Evidence from Thailand By THOSAPON TONGHUI; JIN SEO CHO
  19. Macroprudential stress‑test models: a survey By Aikman, David; Beale, Daniel; Brinley-Codd, Adam; Covi, Giovanni; Hüser, Anne‑Caroline; Lepore, Caterina
  20. Climate policies, macroprudential regulation, and the welfare cost of business cycles By Annicchiarico, Barbara; Carli, Marco; Diluiso, Francesca
  21. Households’ Response to the Wealth Effects of Inflation By Philip Schnorpfeil; Michael Weber; Andreas Hackethal; Michael Weber
  22. Searching for Smurfs: Testing if Money Launderers Know Alert Thresholds By Rasmus Ingemann Tuffveson Jensen; Joras Ferwerda; Christian Remi Wewer
  23. Traditions and Innovations: The Rise and Decline of the Shanxi Piaohao (Banks) in the Context of Growing Sino-Foreign Economic Interaction, the 1840s to 1910s By Meng Wu
  24. Default Forecasting and Credit Valuation Adjustment By Lee, David
  25. Mortgage Debt Limits and Buy-to-Let Investors: A Structural Model of Housing with an Endogenous Rental Sector By Jurre Thiel; Henrik Zaunbrecher
  26. Credit Supply Shocks and Firm Dynamics: Evidence from Brazil By Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James E. Rauch
  27. Financial Exclusion and Inflation Costs By Diogo Baerlocher
  28. Permanent and Transitory Monetary Shocks around the World By Javier Garcia Cicco; Patricio Goldstein; Federico Sturzenegger
  29. Default Process Modeling and Credit Valuation Adjustment By David Xiao
  30. Probability of Default modelling with L\'evy-driven Ornstein-Uhlenbeck processes and applications in credit risk under the IFRS 9 By Kyriakos Georgiou; Athanasios N. Yannacopoulos
  31. A Bayesian DSGE Approach to Modelling Cryptocurrency By Stylianos Asimakopoulos; Marco Lorusso; Francesco Ravazzolo
  32. On the benefits of robo-advice in financial markets By Lambrecht, Marco; Oechssler, Jörg; Weidenholzer, Simon
  33. Monetary policy rules: model uncertainty meets design limits By Dück, Alexander; Verona, Fabio
  34. Financial Integration, Excess Consumption Volatility, and the World Real Interest Rate By YAMADA, Haruna
  35. Essays in housing, credit, remittances, and taxes: How remittances affect credit demand and housing in Colombia and how transfer taxes influence Belgian housing By Esteban Callejas Perez
  36. Topology-Agnostic Detection of Temporal Money Laundering Flows in Billion-Scale Transactions By Haseeb Tariq; Marwan Hassani

  1. By: Eccles, Peter (Bank of England); Grout, Paul (Bank of England); Zalewska, Anna (University of Leicester School of Business); Siciliani, Paolo (Bank of England)
    Abstract: We argue that open banking will create diverse banking models: competitive banks (serving depositors who adopt open banking) and monopolistic banks (serving the other depositors). In equilibrium, at the margin, the profit of competitive and monopolistic banks should be equal. Hence, the system-wide impact of any policy change cannot be judged solely by the impact on a typical monopolistic or competitive bank, the impact on relative profitability also matters since this can lead banks to move from one banking type to another. For example, an increase in capital requirements bites less on the profits of competitive than monopolistic banks. Some banks thus move to the (riskier) competitive sector which we show can increase overall risk in the system. A deposit rate ceiling dampens the impact of Bertrand competition, making competitive banks more profitable, so the (riskier) competitive sector grows. Hence, rather than making the system more stable, a marginal lowering of a deposit rate ceiling can increase risk. We also show that, in many scenarios, the regulator must choose between banks funding private sector projects or all banks being safe, the regulator cannot have both. This has implications for the optimal risk weights of sovereign debt. In our model, none of these effects are driven by the presence of unregulated assets/sectors nor on impacts on charter value, as is the case in papers that find outcomes that are the opposite of what was intended. We then introduce an unregulated, shadow banking sector into the model and show that the growth in shadow banking benefits monopolistic banks relative to competitive banks. This increases the size of the (low-risk) monopolistic sector, reducing overall risk in the system. We discuss policy implications.
    Keywords: Capital requirements; banking; open banking; shadow banking; competition; FinTech
    JEL: D43 G21 G28
    Date: 2023–09–08
  2. By: Jessica N. Flagg; Simona Hannon
    Abstract: The financial technology advances of the past decade brought to prominence a new group of lenders active within the personal loan space—financial technology (FinTech) lenders. Although traditional lenders such as banks, thrifts, credit unions, and finance companies continue to play an important role in providing personal loans to consumers, FinTech lenders gained a notable market share.
    Keywords: fintech; financial technology; personal loans
    Date: 2023–08–30
  3. By: Alona Shmygel (National Bank of Ukraine)
    Abstract: In this paper we investigate the impact of cyclical systemic risk on future bank profitability for a large representative panel of Ukrainian banks between 2001 and 2023. Our framework relies on two general methods. The first method is based on linear local projections which allows us to study the estimated negative impact of cyclical systemic risk on bank profitability. The second method is based on the original IMF's Growth-at-Risk approach, utilizing quantile local projections to assess the impact of cyclical systemic risk on the tails of the future bank-level profitability distribution. Additionally, we enhance the macroprudential toolkit with a novel approach to calibrating the countercyclical capital buffer (CCyB). Furthermore, we develop the "Bank Capital-at-Risk" and "Share of vulnerable banks" indicators. These indicators are valuable tools for monitoring the build-up of systemic risk in the banking sector.
    Keywords: Systemic risk; Linear projections; Quantile regressions; Bank capital; Macroprudential policy
    JEL: E58 G21 G32
    Date: 2023–09–28
  4. By: Jessica N. Flagg; Simona Hannon
    Abstract: Personal loans used for a variety of purposes, such as debt consolidation, medical bills, vacations, or the payment of a large ticket item, reached $356 billion or about 10 percent of nonrevolving consumer credit at the end of 2022. Although depository institutions such as banks, thrifts, and credit unions dominate the personal loan market, finance companies, institutions that typically lend to nonprime consumers, hold nearly a fourth of these loans. This paper provides an overview of this nascent but relatively understudied sector of the United States credit market.
    Keywords: Consumer credit; Personal loans; Installment loans
    JEL: G21 G23
    Date: 2023–08–30
  5. By: Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
    Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.
    Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk
    JEL: G22 G23 G28
    Date: 2023–09
  6. By: David Elliott; Ralf R. Meisenzahl; José-Luis Peydró
    Abstract: We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. We exploit loan-level data from the global syndicated lending market and US monetary policy surprises. When US policy tightens, nonbanks increase dollar credit supply to non-US firms (relative to banks), mitigating the dollar credit reduction. This increase is stronger for riskier firms, proxied by emerging market firms, high-yield firms, or firms in countries with stronger capital inflow restrictions. However, firm-lender matching, zombie lending, fragile-nonbank lending, or periods of low vs higher local GDP growth do not drive these results. Furthermore, the substitution from bank to nonbank credit has firm-level real effects. Consistent with a funding-based mechanism, when US monetary policy tightens, non-US nonbanks increase short-term dollar debt funding, relative to banks. In sum, despite increased risk-taking by less regulated and more fragile nonbanks (relative to banks), access to nonbank credit reduces the volatility in capital flows—and associated economic activity—stemming from US monetary policy spillovers, with important implications for theory and policy.
    Keywords: nonbank lending; international monetary policy; Global financial cycle; Banks
    JEL: E5 F34 F42 G21 G23 G28
    Date: 2023–08
  7. By: Suss, Joel (Bank of England); Hughes, Adam (Bank of England)
    Abstract: We study bank expectations using a unique and rich data set derived from regulatory returns. The data covers key bank-level variables, including profitability, capital, and loan impairments. We find that banks tend to be optimistic, expecting higher returns, higher capital ratios and fewer impairments than are subsequently realised. However, there is substantial variation in forecasting performance across banks, and banks with better quality governance and management tend to also have smaller forecast errors. We go on to examine the relationship between forecast performance and bank outcomes, finding that forecast errors are associated with greater prudential risk, even after controlling for bank and time fixed effects. Importantly, forecast errors have an asymmetric effect on bank outcomes – errors of optimism drive our findings. We find that forecast errors are also associated with lending – banks that have higher errors tend to have significantly lower subsequent loan growth.
    Keywords: Banks; forecasts; prudential risk
    JEL: G21 L20 M20
    Date: 2023–08–04
  8. By: David M. Arseneau (Federal Reserve Board); Mitsuhiro Osada (Bank of Japan)
    Abstract: We compare alternative methodologies to identify central banks speeches that focus on climate change and argue a supervised word scoring method produces the most comprehensive set. Using these climate-related speeches, we empirically examine the role of the mandate in shaping central bank communication about climate change. Central banks differ considerably in the extent to which their mandates support a sustainability objective -- it can be explicit, indirect whereby the central bank is mandated to support broader government policies, or it may not be supported at all. Our results show that these differences are important in determining the frequency of climate-related communication as well as context in which central banks address climate-related issues. All told, these findings suggest that mandate considerations play an important role in shaping central bank communication about climate change.
    Keywords: Central bank speeches; Mandates; Climate change; Natural language processing
    JEL: E58 E61 Q54
    Date: 2023–09–29
  9. By: Laine, Olli-Matti; Nelimarkka, Jaakko
    Abstract: We evaluate the effects of targeted credit injections of the central bank in the euro area. The aggregate policy impacts of credit easing on financial markets, bank lending and key macroeconomic variables are measured with a novel identification approach based on high-frequency web search data. Our results suggest that the targeted longer-term refinancing operations of the European Central Bank between 2014 and 2021 eased credit conditions in financial markets and had economically and statistically significant positive effects on GDP growth, bank lending and firm investment.
    Keywords: Monetary policy, High-frequency identification, TLTRO, Bank lending
    JEL: C36 E42 E51 E52 E58 G31
    Date: 2023
  10. By: González, Fernando; Triandafil, Cristina Morar
    Abstract: The European significant risk transfer (SRT) securitisation market is increasingly being used by major EU banks to manage risk and capital, but is not well known. SRT can provide an extra source of capital, flexibly and at a reasonable cost. Despite the bespoke nature of transactions, the SRT market has expanded significantly in the recent past to the point where it has now become a dependable way for banks to release capital, manage their balance sheets and improve their capital ratios. Banking supervisors assess SRT transactions to evaluate the degree of risk transfer from banks to investors, allowing institutions to achieve capital relief when this is considered sufficient. The market has become a permanent feature in European banks’ capital management toolkit, alongside other standard but better-known instruments. Drawing on the ECB’s unique and comprehensive database of SRT securitisations issued by large European banks supervised by the Single Supervisory Mechanism (SSM), we provide an overview of the main features of the European SRT market, a typology of the structures currently in use and an account of the market’s evolution over the past five years. In so doing, we attempt to shed light on the main conceptual features of SRT securitisations in relation to non-SRT securitisation structures, as well as the regulatory processes behind capital relief that have been instrumental in supporting their increased use by European banks. JEL Classification: G21, G28, G29
    Keywords: asset quality, capital requirements, government policy and regulation, guarantees, lending conditions, Securitisations, significant risk transfer
    Date: 2023–10
  11. By: Anatolii Hlazunov (National Bank of Ukraine)
    Abstract: This study investigates the determinants of corporate lending in Ukraine with a focus on distinguishing between supply and demand factors. I use a two-step process to build a credit standards index (CSI) based on disaggregated data from the Ukrainian bank lending survey (BLS). This paper describes factors that are significant for corporate lending development in Ukraine. It contributes to the existing literature by developing a measure of corporate loan supply and analyzing its ability to explain corporate credit growth in Ukraine by using bank-level BLS data. First, I employ a panel ordered logit model to transform categorical data into a continuous index that measures the likelihood of credit standards tightening. Second, I examine how this index affects new corporate lending in both national and foreign currencies. I find that the credit standard index is influenced by exchange rate movements (with depreciations leading to tighter standards), bank liquidity, and bank competition. I also demonstrate that the CSI has a negative impact on corporate loans in national currency, with a more pronounced effect for smaller banks
    Keywords: Supply and demand of corporate lending; bank lending survey data
    JEL: G22 E44 C33
    Date: 2023–09–14
  12. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
    Keywords: Banking; Sovereign Debt; Sovereign risk; Financial crisis; Ratings.
    JEL: C21 E58 G24 G32 H63
    Date: 2023–10
  13. By: Sandhya Garg; Samarth Gupta; Sushanta Mallick (Institute of Economic Growth, Delhi)
    Abstract: This paper examines whether better financial access can mitigate the impact of social identity on entrepreneurship. Using a novel dataset of Indian villages and distance to bank branches, we find that proximity to a bank branch improves non-agricultural entrepreneurship of underprivileged caste groups in India, with a significant entry occurring in sectors which were dominated by the privileged caste groups. We find that this effect is mediated by the uptake of institutional credit by under-privileged groups. Our results show that the financial inclusion can break rigid social norms around caste and occupation in India.
    Date: 2023
  14. By: Perotti, Enrico C.
    Abstract: Central banks have vastly expanded their footprint on capital markets. At a time of extraordinary pressure by many sides, a simple benchmark for the scale and scope of their core mandate of price and financial stability may be useful. We make a case for a narrow mandate to maintain and safeguard the border between safe and quasi safe assets. This ex-ante definition minimizes ambiguity and discourages risk creation and limit panic runs, primarily by separating market demand for reliable liquidity from risk-intolerant, price-insensitive demand for a safe store of value. The central bank may be occasionally forced to intervene beyond the safe core but should not be bound by any such ex-ante mandate, unless directed to specific goals set by legislation with explicit fiscal support. We review distinct features of liquidity and safety demand, seeking a definition of the safety border, and discuss LOLR support for borderline safe assets such as MMF or uninsured deposits. A safe core formulation is close to the historical focus on regulated entities, collateralized lending and attention to the public debt market, but its specific framing offers some context on controversial issues such as the extent of LOLR responsibilities. It also justifies a persistently large scale for central bank liabilities (Greenwood, Hansom and Stein 2016), as safety demand is related to financial wealth rather than GDP. Finally, it is consistent with an active central bank role in supporting liquidity in government debt markets trading and clearing (Duffie 2020, 2021).
    Keywords: Lender of Last Resort, Central Banks, Money Market Funds
    Date: 2023
  15. By: Levent Altinoglu
    Abstract: This paper presents a theory of safe asset creation and the interactions between systemic risk and aggregate demand. The creation of private safe assets by financial intermediaries requires them to take leverage, which generates a risk of future crisis (systemic risk) in which intermediaries liquidate assets to service their debt. In contrast, the creation of public safe assets by the government does not generate systemic risk as the government's power to tax allows it to better absorb losses. The level of systemic risk determines the neutral rate of interest through households' precautionary saving and aggregate demand. The model features a two-way interaction between systemic risk and aggregate demand. Monetary and fiscal policy can stabilize aggregate demand and reduce systemic risk by altering the mix of private and public safe assets held by savers. When monetary policy is constrained, the economy can enter a risk-driven stagnation trap in which economic stagnation arises due to excessive systemic risk. Macroprudential policies which reduce systemic risk can stimulate aggregate demand.
    Keywords: Financial crises; Safe assets; Systemic risk; Fiscal policy; Macroprudential policy; Unconventional monetary policy; Demand-driven recession
    JEL: E44 G01 G21 E58 G28 G18
    Date: 2023–09–22
  16. By: Francesca Carapella; Grace Chuan; Jacob Gerszten; Nathan Swem
    Abstract: In this paper we outline tokenization, which is a new and rapidly growing financial innovation in crypto asset markets, and we discuss potential benefits and financial stability implications. Tokenization refers to the process of constructing digital representations (crypto tokens) for non-crypto assets (reference assets). As we discuss below, tokenizations create interconnections between the digital asset ecosystem and the traditional financial system. At sufficient scale, tokenized assets could transmit volatility from crypto asset markets to the markets for the crypto token's reference assets.
    Keywords: Tokenization; Crypto-assets; Blockchain; Decentralized finance; DeFi; Financial stability and risk; Financial innovations; Interconnections
    JEL: D49 D53 G00 G10 G20 G23
    Date: 2023–09–08
  17. By: Alexis Drach (IDHES - Institutions et Dynamiques Historiques de l'Économie et de la Société - UP1 - Université Paris 1 Panthéon-Sorbonne - UP8 - Université Paris 8 Vincennes-Saint-Denis - UPN - Université Paris Nanterre - UEVE - Université d'Évry-Val-d'Essonne - CNRS - Centre National de la Recherche Scientifique - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay)
    Abstract: Between the late 1950s and the mid-1970s, most large European commercial banks created European banking clubs, which were hybrid cooperative organisations meant to respond to American competition and to the progress of European integration. Based on the archives of several commercial banks from France and the UK, this article examines how the three main European clubs (EBIC, Europartners, and ABECOR) emerged and developed in the 1960s and 1970s, and continued to exist despite increasing challenges in the 1980s. The article argues that banking clubs were an early attempt at creating truly `European' banks, or European champions, even though their experience was abandoned. They also participated in European integration in a different way than the one the European Commission promoted. These clubs were an important institutional response of European banks to both globalisation and European integration.
    Keywords: banking clubs, British banks, cartels, commercial banks, common banking market, competition law, consortium banks, cooperation, European banking, European champions, European enterprises, European integration, French banks, globalisation
    Date: 2023
  18. By: THOSAPON TONGHUI (Yonsei University); JIN SEO CHO (Yonsei University)
    Abstract: This study employs the two-step Nonlinear Autoregressive Distributed Lag estimation method proposed by Cho, Greenwood-Nimmo, and Shin (2019) to identify the asymmetric impact of monetary policy on economic variables using monthly data from Thailand between 2001 and 2023. The primary objective is to investigate the effects of policy rate shocks on the economy. This study examines three key aspects: (i) the asymmetric pass-through of policy rates to commercial bank deposits and loan rates; (ii) pass-through variations across bank sizes; and (iii) the asymmetric macroeconomic effects on output and inflation. The empirical findings reveal the presence of asymmetry within the relationships between the variables. First, the study identifies an incomplete interest rate pass-through with deposit rates ranging from 28.1% to 102.7% and loan rates ranging from 12.7% to 89.6%. Notably, long-term upward asymmetry is observed for loan rates, whereas the evidence for deposit rates is limited. Second, regarding bank size, large banks exhibit a greater pass-through effect on loan rates, whereas small and medium-sized banks display higher responsiveness to short-term deposits or savings rates. Finally, this study provides strong evidence of long-term asymmetric macroeconomic impacts. Quantitatively, rate hikes have a more substantial effect on output growth, being 1.4 times larger than the impact of rate cuts. Conversely, rate decreases exhibit a more pronounced effect on inflation, being 3.4 times larger than the impact of rate increases. These findings suggest the presence of downward price rigidity associated with monetary policy shocks in the context of Thailand.
    Keywords: Interest rate pass-through; asymmetric impact; macroeconomic effects; Nonlinear Autoregressive Distributed Lag model.
    JEL: E43 E51 E52
    Date: 2023–09
  19. By: Aikman, David (King’s College, London); Beale, Daniel (Bank of England); Brinley-Codd, Adam (Bank of England); Covi, Giovanni (Bank of England); Hüser, Anne‑Caroline (Bank of England); Lepore, Caterina (International Monetary Fund)
    Abstract: We survey the rapidly developing literature on macroprudential stress‑testing models. In scope are models of contagion between banks, models of contagion within the wider financial system including non‑bank financial institutions such as investment funds, and models that emphasise the two-way interaction between the financial sector and the real economy. Our aim is twofold: first, to provide a reference guide of the state of the art for those developing such models; second, to distil insights from this endeavour for policymakers using these models. In our view, the modelling frontier faces three main challenges: (a) our understanding of the potential for amplification in sectors of the non-bank financial system during periods of stress, (b) multi-sectoral models of the non-bank financial system to analyse the behaviour of the overall demand and supply of liquidity under stress and (c) stress‑testing models that incorporate comprehensive two-way interactions between the financial system and the real economy. Emerging lessons for policymakers are that, for a given-sized shock hitting the system, its eventual impact will depend on (a) the size of financial institutions’ capital and liquidity buffers, (b) the liquidation strategies financial institutions adopt when they need to raise cash and (c) the topology of the financial network.
    Keywords: Stress testing; system-wide models; contagion; systemic risk; market-based finance; real-financial linkages; sectoral interlinkages; macroprudential policy
    JEL: G21 G22 G23 G32
    Date: 2023–08–11
  20. By: Annicchiarico, Barbara (University of Rome ‘Tor Vergata’); Carli, Marco (University of Rome ‘Tor Vergata’); Diluiso, Francesca (Bank of England)
    Abstract: We compare the performance of a carbon tax and a cap-and-trade scheme in a dynamic stochastic general equilibrium model that includes an environmental externality and agency problems associated with financial intermediation. Heterogeneous polluting firms purchase capital by combining their resources with loans from banks and are hit by idiosyncratic shocks that can lead them to default. We find that financial market distortions strongly affect the performance of climate policy throughout the business cycle. The welfare cost of business cycles is substantially lower under a cap-and-trade system than under a carbon tax if financial frictions are stringent, firm leverage is high, and agents are sufficiently risk-averse. The difference in welfare costs shrinks significantly in the presence of simple macroprudential policy rules that weaken the strength of financial market distortions. These policies can go a long way in smoothing business-cycle fluctuations and aligning the performance of price and quantity pollution policies, reducing the uncertainty inherent to the Government’s chosen climate policy tool.
    Keywords: Business cycle; cap-and-trade; carbon tax; E-DSGE
    JEL: E32 E44 Q58
    Date: 2023–08–11
  21. By: Philip Schnorpfeil; Michael Weber; Andreas Hackethal; Michael Weber
    Abstract: We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
    Keywords: inflation beliefs, information treatment, consumption, monetary policy
    JEL: D12 D14 D83 D84 E21 E31 E52
    Date: 2023
  22. By: Rasmus Ingemann Tuffveson Jensen; Joras Ferwerda; Christian Remi Wewer
    Abstract: To combat money laundering, banks raise and review alerts on transactions that exceed confidential thresholds. This paper presents a data-driven approach to detect smurfing, i.e., money launderers seeking to evade detection by breaking up large transactions into amounts under the secret thresholds. The approach utilizes the notion of a counterfactual distribution and relies on two assumptions: (i) smurfing is unfeasible for the very largest financial transactions and (ii) money launderers have incentives to make smurfed transactions close to the thresholds. Simulations suggest that the approach can detect smurfing when as little as 0.1-0.5\% of all bank transactions are subject to smurfing. An application to real data from a systemically important Danish bank finds no evidence of smurfing and, thus, no evidence of leaked confidential thresholds. An implementation of our approach will be available online, providing a free and easy-to-use tool for banks.
    Date: 2023–09
  23. By: Meng Wu
    Abstract: Shanxi piaohao, also known as the Shanxi banks, were arguably China’s most important indigenous financial institutions in the nineteenth century. In a weak state with little legislation to regulate private enterprises, these privately owned banks established a nationwide remittance network by relying on its informal rules. Drawing on comprehensive primary sources, this paper is the first to examine piaohao's institutional arrangement. My study shows that by designing comprehensive rules on draft enforcement, piaohao prevented draft defaulting and fraud problems. A strict discipline mechanism and a performance-and-tenure-based incentive structure enabled them to overcome the commitment problems of distant employees. Piaohao performed well financially and dominated the Chinese remittance market for a century. However, with the blow of the Xinhai Revolution and the rise of modern Chinese banks, they declined and disappeared collectively from the Chinese financial market in the early twentieth century.
    Keywords: micro-business history; business enterprises in China; contract enforcement; remittance; commitment problem
    JEL: M51 N25 N85
    Date: 2023–09
  24. By: Lee, David
    Abstract: Credit valuation adjustment has acquired a great deal of attention from both theoreticians and practitioners in recent years. This paper presents a model for default forecasting and credit valuation adjustment. The model links distance-to-default, default probability, survival probability, default correlation, and risky valuation together. It captures default risk, credit migration, and wrong way risk simultaneously and naturally. The numerical study shows that the model implied credit spreads and default correlations are very close to the market observed ones, indicating that the model performs quite well. The results may be of interest to regulators, academics, and practitioners.
    Keywords: credit value adjustment (CVA), credit risk modeling, distance to default, default probability, survival probability, asset pricing involving credit risk.
    JEL: C15 C53 E37 G12 G13 G17 G24
    Date: 2023–09–12
  25. By: Jurre Thiel (CPB Netherlands Bureau for Economic Policy Analysis); Henrik Zaunbrecher (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Since the financial crisis, home ownership rates have decreased across the world. Also in the Netherlands, the size of the rental sector has increased. Decreased access to mortgage debt explains part of this development. We show that tightened mortgage debt limits explain a fifth of the increase in rentals between 2013 and 2019. Mortgage debt limits constrain the amount a household can borrow to purchase a home. When a household cannot buy a house, it might rent instead. As a result, investors purchase homes to let and houses shift into the rental sector. Based on a new model of the interaction between the owner-occupied and rental sectors of the housing market, we show that this distortion can be sizable. Taxing rents or imposing a cap on the number of rentals can partially counteract the effects of mortgage debt limits on the number of rentals. However, such measures tend to also push households that prefer to rent into owner-occupation. Hence, they are counterproductive when taken too far.
    JEL: C5
    Date: 2023–09
  26. By: Samuel Bazzi; Marc-Andreas Muendler; Raquel F. Oliveira; James E. Rauch
    Abstract: We explore how financial constraints distort the entry decisions among otherwise productive entrepreneurs and limit growth of promising young firms. A model of liquidity-constrained entrepreneurs suggests that the easing of credit constraints can induce more entry of firms with greater long-run growth potential than the easing of conventional entry barriers would bring about. We explore this growth mechanism using a large-scale program to expand the supply of credit to small and medium enterprises in Brazil. Local credit supply shocks generate greater firm entry but also greater exit with no effect on short-run employment growth in the formal sector. However, credit expansions increase average capability among entering firms, which enter at larger size, survive longer, and grow faster. These firm dynamics are more pronounced in areas with weaker credit markets ex ante and consistent with local bank branches using cheap targeted credit lines to expand lending more broadly. Our findings provide new evidence on the general equilibrium effects of credit supply expansions.
    JEL: D21 D22 D92 L25 L26 M13 O12
    Date: 2023–09
  27. By: Diogo Baerlocher (Department of Economics, University of South Florida)
    Abstract: This paper constructs two models of financial exclusion to assess the welfare costs of inflation. In the first, inflation costs are measured within a classical endowment economy. The second includes a production sector and costly credit. Both models are calibrated to account for inflation costs in a high-inflation economy (developing country) and in a low-inflation economy (developed economy). In an endowment economy, when inflation is reduced from 1.5% to zero in a developed economy, the welfare costs for agents with (without) financial access are 0.36% (1.1%) consumption equivalent variation (CEV). In a model with costly credit, the welfare costs for agents with (without) financial access are 0.7% (1.36%) CEV. For developing countries, when inflation is reduced from 6.2% to zero, the welfare costs for agents with (without) financial access are 1.3% (5%) in an endowment economy. In the costly-credit model, the welfare costs for agents with (without) financial access are 0.44% (6%) CEV. The main finding is that there is a substantial asymmetry in welfare costs between individuals with and without access to financial services, especially in developing countries.
    Keywords: Financial Exclusion, Inflation Costs, Costly Credit
    JEL: D53 E31 E51 G23
    Date: 2023–09
  28. By: Javier Garcia Cicco (Universidad de San Andrés); Patricio Goldstein (Columbia University); Federico Sturzenegger (Universidad de San Andrés)
    Abstract: The effects of monetary policy on output and inflation have been at the center of macroeconomic debate for decades. Uribe (2022) argues, by looking at the US, that a better characterization of these effects can be obtained by splitting monetary policy into transitory and permanent shocks. He finds that transitory monetary contractions reduce inflation and output as in traditional New Keynesian models, whereas long termincreases in the inflation rate increase output in the short run. In this paper we extend the analysis to other countries in the world and show that its conclusions can roughly be extended to this larger set. We also broaden the analysis by lifting the overidentifying assumption of superneutrality. We find that although superneutrality does not strictly hold, deviations from it are very small. An increase in long run inflation can slightly improve output but this effect quickly dwindles as inflation increases and eventually becomes negative. Our results provide new evidence to the standard tenets of monetary policy: monetary policy is unable to move output and has negative side effects if it is allowed to increase beyond the range typically defended by central banks.
    Date: 2023–09
  29. By: David Xiao
    Abstract: This paper presents a convenient framework for modeling default process and pricing derivative securities involving credit risk. The framework provides an integrated view of credit valuation adjustment by linking distance-to-default, default probability, survival probability, and default correlation together. We show that risky valuation is Martingale in our model. The framework reduces the technical issues of performing risky valuation to the same issues faced when performing the ordinary valuation. The numerical results show that the model prediction is consistent with the historical observations.
    Date: 2023–09
  30. By: Kyriakos Georgiou; Athanasios N. Yannacopoulos
    Abstract: In this paper we develop a framework for estimating Probability of Default (PD) based on stochastic models governing an appropriate asset value processes. In particular, we build upon a L\'evy-driven Ornstein-Uhlenbeck process and consider a generalized model that incorporates multiple latent variables affecting the evolution of the process. We obtain an Integral Equation (IE) formulation for the corresponding PD as a function of the initial position of the asset value process and the time until maturity, from which we then prove that the PD function satisfies an appropriate Partial Integro-Differential Equation (PIDE). These representations allow us to show that appropriate weak (viscosity) as well as strong solutions exist, and develop subsequent numerical schemes for the estimation of the PD function. Such a framework is necessary under the newly introduced International Financial Reporting Standards (IFRS) 9 regulation, which has imposed further requirements on the sophistication and rigor underlying credit modelling methodologies. We consider special cases of the generalized model that can be used for applications to credit risk modelling and provide examples specific to provisioning under IFRS 9, and more.
    Date: 2023–09
  31. By: Stylianos Asimakopoulos; Marco Lorusso; Francesco Ravazzolo
    Abstract: We develop and estimate a DSGE model to evaluate the economic repercussions of cryptocurrency. In our model, cryptocurrency offers an alternative currency option to government currency, with endogenous supply and demand. We uncover a substitution effect between the real balances of government currency and cryptocurrency in response to technology, preferences and monetary policy shocks. We find that an increase in cryptocurrency productivity induces a rise in the relative price of government currency with respect to cryptocurrency. Since cryptocurrency and government currency are highly substitutable, the demand for the former increases whereas it drops for the latter. Our historical decomposition analysis shows that fluctuations in the cryptocurrency price are mainly driven by shocks in cryptocurrency demand, whereas changes in the real balances for government currency are mainly attributed to government currency and cryptocurrency demand shocks.
    Date: 2023–09
  32. By: Lambrecht, Marco; Oechssler, Jörg; Weidenholzer, Simon
    Abstract: Robo-advisors are novel tools in financial markets that provide investors with low-cost financial advice, usually based on individual characteristics like risk attitudes. In a portfolio choice experiment running over 10 weeks, we study how much investors benefit from robo advice. We also study whether robos increase financial market participation. The treatments are whether investors just receive advice, have a robo making all decisions for them, or have to trade on their own. We find no effect on initial market participation. But robos help investors to avoid mistakes, make rebalancing more frequent, and overall yield portfolios much closer to the utility maximizing ones. Robo-advisors that implement the recommendations by default do significantly better than those that just give advice.
    Keywords: algorithmic trading; experiment; financial markets
    Date: 2023–09–22
  33. By: Dück, Alexander; Verona, Fabio
    Abstract: Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In our proposed approach, we take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, our results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.
    Keywords: monetary policy rules, policy evaluation, model comparison, model uncertainty, frequency domain, design limits, DSGE models
    JEL: C49 E32 E37 E52 E58
    Date: 2023
  34. By: YAMADA, Haruna
    Abstract: Contrary to classical macroeconomic theory, the volatility of consumption relative to income has risen in emerging markets despite the international financial integration. This study presents a theoretical mechanism of this phenomenon by developing a small open economy model with an occasionally binding borrowing constraint, named the Interest Coverage Ratio-based borrowing constraint. Calibration exercises show that financial integration improves consumption smoothing and mitigates income shocks. Meanwhile, the foreign debt limit is more sensitive to changes in the world real interest rate. An increase in the world real interest rate tightens the borrowing constraint and decreases consumption significantly for the repayment. Financial integration would make consumption more vulnerable to the world real interest rate changes, resulting the higher volatility in emerging markets.
    Keywords: Financial Integration, Excess Consumption Volatility, Emerging Market Economy, World Real Interest Rate, Occasionally Binding Borrowing Constraint
    JEL: E21 E41 E44 F62
    Date: 2023–09
  35. By: Esteban Callejas Perez
    Abstract: This doctoral dissertation explores three main questions related to household behaviour. The first question is: what is the effect of remittances on households’ demand for credit? This question is addressed using a representative Colombian survey, revealing a double role of remittances in the demand for credit. On one hand, remittances seem to relax the household’s budget constrain leading to a reduction in its demand for all types of credit; both formal and informal. However, on the other hand, for more expensive loans requiring mortgages as collateral, remittances seem to serve as endorsement for the future repayment of the loan instalments thus augmenting the household’s demand for credit. The effect of informality is also discussed in the analysis, showing that it restricts the access to formal credit. The second question explored is: how remittances affect the housing market in an emerging economy? This answered at the aggregate level using Colombia as a case study, showing evidence that remittances seem to increase the supply of housing, which leads to a decrease in prices both for sale as well as for rent. This effect seems to affect particularly housing in low-income areas. Finally, the third question explored in this work is: How real estate transfer taxes affect the housing market? This question is addressed using the Belgian housing market for the analysis. The analysis shows an increase in housing prices as a consequence of reductions in the transfer tax. Moreover, a substitution effect from apartments to houses is evidenced, favouring the more expensive houses in detriment of the more expensive apartments. However, this substitution effect is reversed after the establishment of a price limit under which the tax discount is dispensed, with the more expensive apartments and the cheaper houses appropriating the reduction in the tax. Inequality and population distribution is also analysed, concluding that the tax reduction reduced the mean age of the treated municipalities, favouring particularly individuals aged between 36 to 55 years, in detriment of younger (26-25) and older (more than 55 years old) individuals, as well as favouring married households with children at the expense of all other types of households. Moreover, evidence is shown that Brussels’ 2015 transfer tax modification increased both income and wealth inequality, whereas Flanders’ 2014 tax reform decreased both types of inequality.
    Keywords: Housing; Remittances; Housing supply; Housing demand; Credit; Households; Household credit demand; Migration; Taxes; Real estate; Transfer taxes; Credit demand; Development
    Date: 2023–08–29
  36. By: Haseeb Tariq; Marwan Hassani
    Abstract: Money launderers exploit the weaknesses in detection systems by purposefully placing their ill-gotten money into multiple accounts, at different banks. That money is then layered and moved around among mule accounts to obscure the origin and the flow of transactions. Consequently, the money is integrated into the financial system without raising suspicion. Path finding algorithms that aim at tracking suspicious flows of money usually struggle with scale and complexity. Existing community detection techniques also fail to properly capture the time-dependent relationships. This is particularly evident when performing analytics over massive transaction graphs. We propose a framework (called FaSTMAN), adapted for domain-specific constraints, to efficiently construct a temporal graph of sequential transactions. The framework includes a weighting method, using 2nd order graph representation, to quantify the significance of the edges. This method enables us to distribute complex queries on smaller and densely connected networks of flows. Finally, based on those queries, we can effectively identify networks of suspicious flows. We extensively evaluate the scalability and the effectiveness of our framework against two state-of-the-art solutions for detecting suspicious flows of transactions. For a dataset of over 1 Billion transactions from multiple large European banks, the results show a clear superiority of our framework both in efficiency and usefulness.
    Date: 2023–09

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