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on Banking |
| By: | Gambacorta, Leonardo; Polizzi, Salvatore; Reghezza, Alessio; Scannella, Enzo |
| Abstract: | This study examines whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. Using granular credit register data and detailed information on firm-level greenhouse gas emission intensities, we find a negative relationship between environmental disclosure and brown lending. However, this effect is contingent on the tone of the financial report. Banks that express a negative tone, reflecting genuine concern and awareness of environmental risks, tend to lend less to more polluting firms. Conversely, banks that express a positive tone, indicating lower concern and awareness of environmental risks, tend to lend more to polluting firms. These findings highlight the importance of increasing awareness of environmental risks, so that banks perceive them as a critical and urgent pressing threat, leading to a genuine commitment to act as environmentally responsible lenders. JEL Classification: G20, G21, M41, Q56 |
| Keywords: | banking, brown lending, climate change, environmental disclosure, environmental risks, green banking |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232872&r=ban |
| By: | O'Connor, Fergal A.; Lucey, Brian M. |
| Abstract: | This paper presents and explains the newly rediscovered and transcribed daily market gold price from 1919-1968 for the world's main gold market during the period, the London Gold Fixing Auction. The paper highlights several novel features previously not discussed in the literature, such as gold prices fluctuating at the daily Gold Fixing even during the two Gold Standard periods when gold prices are often thought of as 'fixed'. It also describes key turning points during the evolution of the Gold Fixing such as its formation and the daily price reactions when Britain went on or came off the Gold Standard. This paper offers the first long-run examination of the weak form efficiency of the Gold Fixing from its inception, at a time when gold was the centre of the world's monetary system. We find that the Gold Fixing price was informationally efficient at its inception in 1919 but by the 1930s, when there was increased buying for speculation and investment (referred to as hoarding) the market became more predictable and inefficient. We also find that the market was inefficient during gold standard periods when central banks were limiting gold's ability to react to new information. |
| Keywords: | Daily Gold Price Data, London Market, Market Efficiency, Gold Fixing, Hoarding |
| JEL: | F3 G1 G2 N2 Q3 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eabhps:279905&r=ban |
| By: | Bouabdallah, Othman; Jacquinot, Pascal; Patella, Valeria |
| Abstract: | In most euro area countries, the monetary/fiscal policy mix is responsible for the changing history of debt and inflation facts. Using a Dynamic Stochastic General Equilibrium model with Markov-switching policy rules, we identify three distinct monetary/fiscal regimes in France and Italy: a Passive Monetary-Active Fiscal regime (PM/AF) before the late 80s/early 90s; an Active Monetary-Passive Fiscal regime (AM/PF) with central bank independence and EMU convergence; a third regime with policy rates at the effective lower bound combined with fiscal active behavior to sustain the recovery. Our simulations reveal that the PM/AF regime in France led to price volatility and debt stabilisation, while the AM/PF regime resulted in disinflation and rising debt trajectory. Meanwhile, Italy’s procyclical fiscal policy in downturns contributed to persisting imbalances, high aggregate volatility, and low growth. JEL Classification: E63, E62, E32, E52, C32 |
| Keywords: | debt, euro area, inflation, Markov-switching, Monetary-fiscal policy mix |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232871&r=ban |
| By: | Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Belicia Rodriguez; Joelle Scally; Wilbert Van der Klaauw; Crystal Wang |
| Abstract: | This morning, the New York Fed’s Center for Microeconomic Data released the 2023:Q3 Quarterly Report on Household Debt and Credit. After only moderate growth in the second quarter, total household debt balances grew $228 billion in the third quarter across all types, especially credit cards and student loans. Credit card balances grew $48 billion this quarter and marked the eighth quarter of consecutive year-over year increases. The $154 billion nominal year-over-year increase in credit card balances marks the largest such increase since the beginning of our time series in 1999. The increase in balances is consistent with strong nominal spending and real GDP growth over the same time frame. But credit card delinquencies continue to rise from their historical lows seen during the pandemic and have now surpassed pre-pandemic levels. In this post, we focus on which groups have fallen behind on debt payments and discuss whether rising delinquencies are narrowly concentrated or broad based. |
| Keywords: | household finance; Consumer Credit Panel (CCP) |
| JEL: | D14 |
| Date: | 2023–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97310&r=ban |
| By: | Tanya Livermore (Reserve Bank of Australia); Jack Mulqueeney (Reserve Bank of Australia); Thuong Nguyen (Reserve Bank of Australia); Benjamin Watson (Reserve Bank of Australia) |
| Abstract: | The Reserve Bank conducted its sixth triennial Consumer Payments Survey (CPS), which provides detailed information on how Australians make their payments. The 2022 CPS provides the first comprehensive snapshot of consumer payment behaviour following the changes brought on by the COVID-19 pandemic. The survey shows that most in-person payments are made by tapping cards or mobile devices, even for small purchases. This means the share of in-person transactions made with cash halved, from 32 per cent to 16 per cent, over the three years to 2022. The demographic groups that traditionally used cash more frequently for payments – such as the elderly, those on lower incomes and those in regional areas – saw the largest declines in cash use. Cash usage has generally been replaced with card payments. While Australians are aware of and use a range of other newer payment methods, such as digital wallets and buy now, pay later services, they still make up a small share of payments. |
| Keywords: | consumer payment choice; consumer survey; dual network debit cards; method of payment; payment systems |
| JEL: | D12 D14 E42 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2023-08&r=ban |
| By: | Xolani Sibande |
| Abstract: | This paper investigates the presence of herding and its interactions with monetary policy in the ZAR market. We use both the standard herding tests and Sim and Zhous (2015) quantile-on-quantile regressions. Similar to previous results in other markets, we found that extreme market events mainly drove herding behaviour in the ZAR market. This result is significant in the presence of monetary policy announcements. However, herding in the ZAR markets was not related to market fads. It therefore was, in the main, a rational response to public information, indicating central bank credibility. This credibility gives scope to the central bank to improve communication in periods of market crisis to dampen potential volatility. Further studies on the herding of specific ZAR market participants can be invaluable. |
| Date: | 2023–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11053&r=ban |
| By: | Bochmann, Paul; Dieckelmann, Daniel; Fahr, Stephan; Ruzicka, Josef |
| Abstract: | We empirically analyze the interaction of monetary policy with financial stability and the real economy in the euro area. For this, we apply a quantile vector autoregressive model and two alternative estimation approaches: simulation and local projections. Our specifications include monetary policy surprises, real GDP, inflation, financial vulnerabilities and systemic financial stress. We disentangle conventional and unconventional monetary policy by separating interest rate surprises into two factors that move the yield curve either at the short end or at the long end. Our results show that a build-up of financial vulnerabilities tends to be accompanied initially by subdued financial stress which resurges, however, over a medium-term horizon, harming economic growth. Tighter conventional monetary policy reduces inflationary pressures but increases the risk of financial stress. [...] JEL Classification: E31, E52, G01, G10 |
| Keywords: | macroprudential policy, monetary policy, monetary policy identification, quantile regressions, financial stability |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232870&r=ban |
| By: | Andreas Fuster (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Stephanie Lo (NDVR); Paul Willen (Federal Reserve Bank of Boston; NBER) |
| Abstract: | We introduce a new measure of the price charged by financial intermediaries for connecting mortgage borrowers with capital market investors. Based on administrative lender pricing data, we document that the price of intermediation is strongly driven by variation in demand, reflecting capacity constraints of mortgage originators. This positive co-movement of price with quantity reduced the pass-through of quantitative easing. We also find a notable upward trend in this price over 2008- 2014, likely due to an increased legal and regulatory burden in the mortgage market. The trend led to an implicit cost to borrowers of nearly $100 billion over this period. |
| Keywords: | mortgage finance, financial intermediation, monetary policy transmission, QE |
| JEL: | E44 E52 G21 L11 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp23103&r=ban |
| By: | Jung, Alexander |
| Abstract: | The Federal Reserve’s (Fed) monetary policy announcements have created massive spillovers to global financial markets. Based on daily data for the sample from 1999 to 2019, this study finds that the Fed’s monetary policy announcements created significant international spillovers to bond yields and stock prices of European banks and non-financial corporations (NFCs), while changes in uncertainty around the expected Fed policy path and Fed information effects constituted critical additional dimensions of these spillover effects. International spillovers to bond yields of banks and NFCs were similar, while stock prices of European banks responded somewhat stronger than those of NFCs. The significant spillovers from the Fed’s forward guidance to European bond yields show that central bank communication is very relevant for international transmission. In relation to earlier studies emphasizing strong QE-related spillovers, this study suggests that Fed QE announcements created only small spillovers on bond yields and stock prices of European banks and NFCs. JEL Classification: E44, E52, F42, G14, G21 |
| Keywords: | high-frequency event study, instrumental variables, local projections, monetary policy shocks, monetary policy uncertainty |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232876&r=ban |
| By: | Matteo Crosignani; Thomas M. Eisenbach; Fulvia Fringuellotti |
| Abstract: | The bank failures that occurred in March 2023 highlighted how unrealized losses on securities can make banks vulnerable to a sudden loss of funding. This risk, which materialized following the rapid rise in interest rates that began in early 2022, underscores the importance of monitoring the vulnerabilities of the banking system. In this post, as in previous years, we provide an update of four analytical models aimed at capturing different aspects of vulnerability of the U.S. banking system, with data through the second quarter of 2023. In addition, we discuss changes made to the methodology based on the lessons from March 2023 and assess how the system-level vulnerability has evolved. |
| Keywords: | banks; capital; fire sales; liquiditiy; runs |
| JEL: | G2 |
| Date: | 2023–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97313&r=ban |
| By: | Jan K. Brueckner; James N. Conklin; N. Edward Coulson; Moussa Diop |
| Abstract: | This paper explores an overlooked phenomenon in mortgage markets: repayment of underwater mortgages. Since repayment in this case requires the borrower to use out-of-pocket funds along with the proceeds from the house sale to settle the loan, it may appear unattractive and even irrational. But if the borrower’s negative equity is less than the cost of default, which includes credit impairment and possible guilt, repayment of an underwater mortgage is a wealth-maximizing strategy. The paper shows that such repayment indeed occurs, and that it is affected by the same factors commonly used in previous studies of default: the magnitude of home equity and the borrower’s credit score, which captures default cost. An increase in either variable raises the likelihood that the underwater loan is terminated by repayment rather than by default. In addition, the paper also generates an estimate of the magnitude of default cost, showing that it rises with borrower credit worthiness, a finding that is new to the literature. |
| Keywords: | default prepayment mortgages |
| JEL: | G51 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10755&r=ban |
| By: | Eunkyung Lee |
| Abstract: | I construct a novel dataset comprising over 100, 000 loan observations from U.S. firms and estimate that renegotiating existing loans — rather than originating new loans — significantly contributes to the corporate investment response to monetary policy shocks, accounting for half of the aggregate effect. Expansionary monetary policy shocks increase bank credit predominantly through renegotiations, and in turn, firms that renegotiate boost investment the most. By contrast, new loan issuance is driven by the firm’s investment growth prior to the shocks, consequently contributing only a tenth to the overall investment response. Notably, renegotiations amplify investment responses for financially constrained firms. These findings unveil novel dimensions of the channels through which monetary policy affects corporate investment. |
| Keywords: | monetary policy transmission; bank debt; investment; financial constraints; renegotiation; text analysis |
| JEL: | E22 E32 E52 G21 G32 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:2310&r=ban |
| By: | Francis OSEI-TUTU (Paris School of Business (PSB)); Laurent WEILL (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | We examine the effect of regional favoritism on the access of firms to credit. Using firm-level data on a large sample of 29, 000 firms covering 47 countries, we investigate the hypothesis that firms in the birth regions of national political leaders have better access to credit. Our evidence suggests that firms located in birth regions of political leaders are less likely to be credit constrained. The effect takes place through the demand channel: firms in leader regions feel less discouraged in applying for loans. We find no evidence, however, of preferential lending from banks to firms in leader regions. Thus, regional favoritism affects access to credit through differences in perceptions of firm managers, not deliberate changes in the allocation of resources by political leaders. |
| Keywords: | regional favoritism, access to credit, borrower discouragement. |
| JEL: | D72 G21 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2023-04&r=ban |
| By: | Craig, Ben; Karamysheva, Madina; Salakhova, Dilyara |
| Abstract: | We compare networks constructed using five commonly used methods and publicly available daily market data to networks based on reported exposures along several dimensions of the balance sheet, i.e., loans, bonds, equity. Our findings suggest that while the global network structure remains stable, individual exposures are more dynamic. The main message from the regression analysis is that the market-based networks do their job relatively well, however, various market-based networks capture different types of exposures. All the measures reflect common portfolios of bonds and loans. Equity-based measures match better direct and indirect equity, while credit-risk measures capture direct bonds. None of the measures robustly identify direct interbank lending. JEL Classification: G20, L14, D85, C63 |
| Keywords: | banking regulation, interconnections, market-based networks, true-exposure networks, financial networks |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232867&r=ban |
| By: | Anas Azzabi; Younes Lahrichi |
| Abstract: | Banks' performance is an important topic for both professionals and researchers. Given the important literature on this subject, this paper aims to bring an up-to-date and organized review of literature on the determinants of banks performance. This paper discusses the main approaches that molded the debate on banks performance and their main determinants. An in-depth understanding of these latter may allow on the one hand, bank managers and regulators to improve the sector efficiency and to deal with the new trends shaping the future of their industry and on the other hand, academicians to enrich research and knowledge on this field. Through the analysis of 54 studies published in 42 peer-reviewed journals, we show that despite the importance of the existent literature, the subject of bank performance factors did not reveal all its secrets and still constitute a fertile field for critical debates, especially since the COVID-19 and the increasingly pressing rise in power of digital transformation and artificial intelligence in general and FinTechs in particular. The study concludes by suggesting new promising research avenues. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2311.08617&r=ban |
| By: | John Cochran |
| Abstract: | Our central banks set interest rate targets, and do not even pretend to control money supplies. How do interest rates affect inflation? We finally have a complete theory of inflation under interest rate targets and unconstrained liquidity. Its long-run properties mirror those of monetary theory: Inflation can be stable and determinate under interest rate targets, including a peg, analogous to a k-percent rule. The zero bound era is confirmatory evidence. Uncomfortably, stability means that higher interest rates eventually raise inflation, just as higher money growth eventually raises inflation. Sticky prices generate some short-run non-neutrality as well: Higher nominal interest rates can raise real rates and lower output. A model in which higher nominal interest rates temporarily lower inflation, without a change in fiscal policy, is a harder task. I exhibit one such model, but it paints a much more limited picture than standard beliefs. We either need a model with a stronger effect, or to accept that higher interest rates have quite limited power to lower inflation. Empirical understanding of how interest rates affect inflation without fiscal help is also a wide-open question. |
| Keywords: | interest rates, inflation, neutrality, non-neutrality |
| JEL: | E4 E5 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1136&r=ban |
| By: | Waidelich, Paul; Krug, Joscha; Steffen, Bjarne |
| Abstract: | Policymakers regularly rely on public financial institutions and government bodies to provide loans to clean energy projects. However, the market failures that public loan provision addresses and the role it can play in a policy strategy that also features de-risking measures, such as interest rate subsidies, remain unclear. Here, we develop a model of banks providing loans to clean energy projects that use a novel technology. Early-stage loans build up financing experience that spills over to peers and hence is undersupplied by the market. In addition to this cooperation problem, bankability requirements can result in a coordination failure where the banking sector remains stuck in an equilibrium with no loans for the novel technology, although a preferable equilibrium with loans exists. Public provision of early-stage loans is inferior to de-risking instruments when solving the cooperation problem because it crowds out private banks' loan provision. However, public loan provision can more effectively resolve the coordination failure by pushing the banking sector to a better equilibrium, ideally in combination with additional de-risking measures to internalize learning spillovers. |
| Keywords: | Energy transition, state investment bank, government loans, credit guarantees, multiple equilibria |
| JEL: | G21 H81 Q48 Q55 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:279551&r=ban |
| By: | Yalin Gündüz (Deutsche Bundesbank); Steven Ongena (University of Zurich; KU Leuven; NTNU Business School; Swiss Finance Institute; CEPR); Gunseli Tumer-Alkan (VU University Amsterdam); Yuejuan Yu (Shandong University) |
| Abstract: | We assess the differential impact of the “Big Bang” and “Small Bang” contract and convention changes on market participants across CDS markets. We couple comprehensive bank-firm level CDS trading data from DTCC to the German credit register containing bilateral bank-firm credit exposures. We find that after the Bangs, the cost of buying CDS contracts becomes lower for non dealer banks, and that – because of this decrease in insurance cost – these banks extend relatively more credit to CDS traded and affected firms compared to dealers, and hedge more effectively. Hence, standardization lowers the cost of credit insurance and increases credit availability. |
| Keywords: | Credit default swaps, credit exposure, hedging, bank lending, Depository Trust and Clearing Corporation (DTCC) |
| JEL: | G21 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp23102&r=ban |
| By: | Alyssa G. Anderson; Manjola Tase |
| Abstract: | We document the existence of a regulatory premium in the federal funds market related to the implementation of the Liquidity Coverage Ratio (LCR). We use difference-in-differences analysis and confidential bank level data on borrowing in the fed funds and Eurodollar markets to compare the interest rates paid by banks subject to daily reporting of their liquidity profile (daily reporters) relative to other banks. We find that, after the implementation of LCR, daily reporters paid a higher rate compared to other banks when borrowing in the fed funds market given the LCR-favorability of many of the lenders in this market. In addition, on the days that banks borrowed in both the fed funds and Eurodollar markets, daily reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market. |
| Keywords: | Eurodollars; Liquidity Coverage Ratio; market segmentation |
| JEL: | E49 E52 G21 G28 |
| Date: | 2023–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-71&r=ban |
| By: | Wenxin Du; Alessandro Fontana; Petr Jakubik; Ralph S J Koijen; Hyun Song Shin |
| Abstract: | We study patterns and implications of global asset allocations of European insurers and banks using newly available supervisory data. We show that the total assets of insurance companies and pension funds (ICPF) far exceed the amount of government bonds outstanding in Europe, and that countries with a large ICPF sector tend to have a large corporate bond market. Despite high levels of international investments, the characteristics of domestic financial markets still loom large in insurers’ and banks’ portfolio allocation, with two newly documented international portfolio frictions playing a prominent role. First, when investing abroad, insurers and banks do not offset attributes of the domestic markets (such as the composition of fixed-income markets, interest rates, and sovereign credit risk), which we label “domestic projection bias.” Second, subsidiaries of multinational groups act like local entities, which we label the “going native bias.” We propose a theoretical framework to explain our empirical findings and discuss the broader policy implications for European capital market deepening and integration, monetary policy transmission and financial stability, and a multi-sectoral approach to regulatory design. |
| Keywords: | Banks, insurance companies, pension funds, portfolio choice, fixed income, home bias |
| JEL: | G2 G11 G15 G21 G22 G28 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1137&r=ban |
| By: | Di Casola, Paola; Habib, Maurizio Michael; Tercero-Lucas, David |
| Abstract: | We analyse the drivers of Bitcoin transactions against 44 fiat currencies in the largest peer-to-peer crypto exchanges. Momentum and volatility in the cryptoasset market, as well as volatility and liquidity in global financial markets do matter for Bitcoin trading. There is suggestive evidence of a global crypto cycle driven by speculative motives. However, in emerging and developing economies (EMDEs), Bitcoin seems to offer also transactional benefits, since trading increases when the value of the domestic currency is unstable. Proxies of banking depth and digitalisation are negatively correlated with the currency loadings on the global factor, indicating that crypto-assets may offer a speculative alternative to traditional finance when this is not available, especially in EMDEs where the share of younger risk-prone population is higher. Our results clearly point to potential financial stability risks from cryptoisation in EMDEs with low levels of financial development and unstable fiat currencies. JEL Classification: E42, F21, F24, F32, F38, G15, O33 |
| Keywords: | Bitcoin, digital currencies, financial development, peer-to-peer exchanges |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232868&r=ban |
| By: | Eric Fischer; Rebecca McCaughrin; Saketh Prazad; Mark Vandergon |
| Abstract: | This paper seeks to estimate the extent to which market-implied policy expectations could be improved with further information disclosure from the FOMC. Using text analysis methods based on large language models, we show that if FOMC meeting materials with five-year lagged release dates—like meeting transcripts and Tealbooks—were accessible to the public in real time, market policy expectations could substantially improve forecasting accuracy. Most of this improvement occurs during easing cycles. For instance, at the six-month forecasting horizon, the market could have predicted as much as 125 basis points of additional easing during the 2001 and 2008 recessions, equivalent to a 40-50 percent reduction in mean squared error. This potential forecasting improvement appears to be related to incomplete information about the Fed’s reaction function, particularly with respect to financial stability concerns in 2008. In contrast, having enhanced access to meeting materials would not have improved the market’s policy rate forecasting during tightening cycles. |
| Keywords: | interest rates; monetary policy; central banks and their policies; sentiment analysis |
| JEL: | E43 E52 E58 C80 |
| Date: | 2023–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97356&r=ban |
| By: | Zico Dasgupta |
| Abstract: | This paper compares three theoretical frameworks that attempt to explain the phenomenon of weak relationship between foreign and domestic interest rate under fixed or manage-float exchange rate regimes - the Mundell-Fleming (MF) model without sterilization and the Mundell-Fleming model with sterilization (MFS) and the Compensation view. It argues for the theoretical superiority of the Compensation view as it can explain monetary policy autonomy under less restrictive assumptions. The paper outlines the underlying models of these frameworks and highlights the centrality of commercial bank loans in the Compensation view. I discuss the trend in India’s interest rates which is consistent with the Compensation view. |
| Keywords: | Monetary Policy, Endogenous money, Mundell-Fleming, Compensation view, Sterilization |
| JEL: | E43 E51 E52 E58 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2315&r=ban |
| By: | Oliver Zain Hannaoui; Hyeyoon Jung; João A. C. Santos; Lee Seltzer |
| Abstract: | The intensity, duration, and frequency of flooding have increased over the past few decades. According to the Federal Emergency Management Agency (FEMA), 99 percent of U.S. counties have been impacted by a flooding event since 1999. As the frequency of flood events continues to increase, the number of people, buildings, and agriculture exposed to flood risk is only likely to grow. As a previous post points out, measuring the geographical accuracy of such risk is important and may impact bank lending. In this post, we focus on the distribution of flood risk within the Federal Reserve’s Second District and examine its effect on establishment location decisions over the last two decades. |
| Keywords: | climate risk; flood risk; firm location |
| JEL: | G3 Q54 R10 |
| Date: | 2023–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97304&r=ban |
| By: | Viktor Skyrman |
| Abstract: | This article advances the analysis on how the covered bond, a financial instrument specialized for mortgage lending, contributes to household financialization. By providing financial systems with relatively safe debt instruments and letting banks to efficaciously draw credit on international debt markets, ‘…covered bonds allow banks to lend not only more, but also more safely’ (European Commission, 2018). Zooming in on Sweden, one of Europe’s most financialized economies, the article explores why and how covered bonds were institutionalized and how the instrument has affected mortgage lending, securitization and Sweden’s overall financial system. The covered bond concept was imported by Swedish lobbyists via a European banking forum in the late 1980s. While covered bond legislation were temporarily vetoed by central bankers, instead preferring an advanced securitization industry to develop, lengthy bank lobbying and overall developments in Europe’s political economy convinced policymakers that covered bond legislation was essential to avoid deteriorating financial market competition vis-à-vis other EU member states. All in all, covered bonds have on the one hand halted securitization to develop in Sweden. Meanwhile, by increasing the credit supply, covered bonds have on the other hand proved to be an efficient instrument for household financialization. |
| Keywords: | household financialization, European financial integration, banking, debt finance, regulation, covered bonds, securitization |
| JEL: | E02 G18 G23 O52 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2314&r=ban |
| By: | Rojas, Luis E.; Thaler, Dominik |
| Abstract: | The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bond aka. ESBies). A backstop by the central bank (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated. JEL Classification: E44, E6, F34 |
| Keywords: | bailout, doom loop, ESBies, self-fulfilling crises, sovereign default, transmission protection instrument |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232869&r=ban |
| By: | Howard Bodenhorn |
| Abstract: | How far did antebellum bank notes travel? Up to now, we did not know. Using previously overlooked data on interbank holdings of bank notes and the records of a small-time note broker, I find that most bank notes circulated within about 50 miles of the issuing banks. Few notes were observed from as far as 200 miles away. Several studies of secondary markets for privately issued currencies assume that notes moved across vast geographic space, but these new findings suggest that we may need new models of bank note pricing and the efficiency of relatively unfettered markets in private currencies. |
| JEL: | N21 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31886&r=ban |
| By: | Bekaert, Geert; Hoerova, Marie; Xu, Nancy R. |
| Abstract: | We study how monetary policy and risk shocks affect asset prices in the US, the euro area, and Japan, differentiating between “traditional” monetary policy and communication events, each decomposed into “pure” and information shocks. Communication shocks from the US spill over to risk in the euro area and vice versa, but traditional US shocks show no spillover effects to risk. Both monetary policy and communication shocks spill over to stocks, with euro area information spillovers being particularly strong. US spillovers are consistent with global CAPM intuition whereas euro area spillovers are larger. Importantly, we document a strong global component of risk shocks which is not driven by monetary policy. JEL Classification: E44, E52, G12, G20, E32 |
| Keywords: | central bank communications, global financial cycle, interest rate, international spillovers, monetary policy, risk, stock returns, trilemma |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232879&r=ban |
| By: | Christopher J. Gust; Kyungmin Kim; Romina Ruprecht |
| Abstract: | We propose a parsimonious framework to understand how the issuance of central bank digital currency (CBDC) might affect the financial system, the Federal Reserve's balance sheet, and the implementation of monetary policy. We show that there is a wide range of outcomes on the financial system and the Federal Reserve's balance sheet that could reasonably occur following CBDC issuance. Our analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the spread of the federal funds rate and other wholesale funding rates over the interest rate on reserves unless the Fed expanded its balance sheet to accommodate CBDC issuance. |
| Keywords: | Central bank digital currency; Monetary policy implementation; Bank disintermediation; Central bank balance sheet |
| JEL: | E50 E51 E52 E58 |
| Date: | 2023–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-68&r=ban |
| By: | Lialiouti, Georgia; Poignet, Raphael; Di Maio, Carlo; Dimitropoulou, Maria; Farkas, Zoe Lola; Houben, Sem; Plavec, Katharina; Verhoeff, Eline Elisabeth Maria |
| Abstract: | We examined the net-zero commitments made by Global Systemically Important Banks (G-SIBs). In recent years, large banks have significantly increased their ambition and now disclose more details regarding their net-zero targets. There is also growing convergence, with the vast majority of G-SIBs now being part of net-zero alliances. Despite this progress, some practices should be further improved. We assessed climate-related risks disclosures publicly available for G-SIBs in 2022. The paper gives an overview about potentially problematic disclosure practices with regards to their net-zero commitments. It identifies and discusses a number of observations, such as the significant differences in sectoral targets used despite many banks sharing the same goal, the widespread use of caveats, the missing clarity regarding exposures to carbon-intensive sectors, the lack of clarity of “green financing” goals, and the reliance on carbon offsets by some institutions. The identified issues may impact banks’ reputation and litigation risk and risk management. The paper explains how the introduction of comparable international rules on climate disclosure and the introduction of transition plans, as envisaged and partly already in place in the European Union, could help mitigate these risks. JEL Classification: G2, G21, G28, Q5, Q54 |
| Keywords: | climate scenarios, disclosures, greenwashing, litigation risk, net-zero commitments, transition plans |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023334&r=ban |
| By: | Morteza Alaeddini (AUT - Amirkabir University of Technology, UGA - Université Grenoble Alpes, CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes); Julie Dugdale (LIG - Laboratoire d'Informatique de Grenoble - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes); Paul Reaidy (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes); Philippe Madiès (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes) |
| Abstract: | Trust is crucial in economic complex adaptive systems, where agents frequently change the other side of their interactions, which often leads to changes in the system's structure. In such a system, agents who seek as much as possible to build lasting trust relationships for long-term confident interactions with their counterparts decide whom to interact with based on their level of trust in existing partners. A trust crisis refers to the time when the level of trust between agents drops so much that there is no incentive to interact, a situation that ultimately leads to the collapse of the system. This paper presents an agent-based model of the interbank market and evaluates the effects of using a voting-based consensus mechanism embedded in a blockchain-based loan system on maintaining trust between agents and system stability. In this paper, we rely on the fact that blockchain as a distributed system only manages the existing trust and does not create it on its own. Furthermore, this study uses actual blockchain technology in its simulation rather than simply presenting an abstraction. |
| Keywords: | Agent-based simulation, Asymmetric information, Confidence, Distributed ledger, Interbank call loan market, Uncertainty |
| Date: | 2023–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04266077&r=ban |
| By: | Leonardo Gambacorta; Leonardo Madio; Bruno Maria Parigi |
| Abstract: | We analyse the impact of platform lending on innovation and e-commerce vendors' surplus. The platform generates revenues from both lending and marketplace fees, and can use lending to price discriminate vendors, thereby leading to higher marketplace fees and below-market interest rates. While platform lending can encourage innovation by providing access to subsidised credit, it can harm vendors who do not have financial needs. A sufficient condition for platform lending to be welfare-enhancing is that innovators would not receive funding from banks otherwise. However, if innovators would receive funding from banks, platform lending may reduce the overall vendor surplus. Cream skimming arises when the platform has better information than the bank about the prospects of the innovators' projects. To address the potential negative effects of platform lending on vendors' surplus, we also explore the impact of different regulatory instruments. |
| Keywords: | platform lending, big tech, online platforms, credit, innovation |
| JEL: | G20 L86 O31 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1142&r=ban |
| By: | Tobias Boos; Juan Grigera |
| Abstract: | This paper provides a contextual analysis of the adoption of Bitcoin as legal tender in El Salvador. First, we outline the historical context and the political situation of the period 2019-24 that serve as context for the passage and implementation of the Bitcoin law (Decree No. 57). We identify the institutional and political context and the main areas of contention. Next, we delve into the macroeconomic context of El Salvador, outlining the fundamental features of its economy and highlighting how they relate to currency issues. |
| Keywords: | El Salvador, Political economy, Finance |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2023-136&r=ban |
| By: | Ajay Shah (xKDR Forum) |
| Abstract: | Indian finance went through a first phase of central planning (1947-1992) and a second phase (1992-2016) with conflicting themes of liberalisation and enhanced state control. In the first phase, the financial system was a handmaiden for state control of the economy, directing resources in harmony with the wishes of the government. State control was achieved through government ownership. In many areas, private financial firms are now important. The full ecosystem of modern finance, with information processing and risk-taking by private persons, blossomed in the equity market. For two decades there was a remarkable policy process that yielded gains in fields such as the equity market, pension reforms, bankruptcy code, etc. But alongside this there was the expansion of 'the administrativestate' in the form of financial regulators. Regulators engage in micromanagement of products and processes. While there is isomorphic mimicry with many things that look like a financial system, officials retain substantial control over how finance works. In a functional perspective, Indian finance today resembles the environment of the 1980s more than meets the eye. |
| JEL: | N25 N45 G38 O53 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:anf:wpaper:25&r=ban |
| By: | Zuzana Gric; Jan Janku; Simona Malovana |
| Abstract: | Using a sample of nearly 980, 000 new derivative transactions from about 1, 700 unique institutions, we explore sectoral differences in currency derivatives usage in the Czech financial sector from 2020 to 2022. We find that larger financial institutions, institutions that are part of complex financial groups, and institutions with higher foreign exposure are more likely to engage in currency derivative transactions. Contrary to other studies, we find that financially stable institutions use currency derivatives more frequently, reflecting the long-term stability of the Czech financial system. However, the significance of key characteristics varies across financial segments. Banks are less sensitive to changes in leverage, while liquidity is crucial for investment funds. |
| Keywords: | Currency derivatives, EMIR, FX derivatives, GLEIF, market-based finance |
| JEL: | F30 G15 G23 G32 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2023/12&r=ban |
| By: | Singh, Rajesh; Hasan, Mohammad |
| Abstract: | Financially integrated economies observe a cross-country credit boom prior to financial recessions and a bust afterwards. This paper presents a two-country real business cycle model with banking sector where privately known intermediation efficiency of banks make them heterogeneous and gives rise to an interbank market. Overaccumulation of assets or low productivity in one country may lead to credit freeze in both financially integrated countries due to the existence of moral hazard and asymmetric information in the interbank market. A “sail together” financial integration may go into a “sink together” interbank credit freeze. |
| Date: | 2023–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202311011603320000&r=ban |
| By: | Susan M. Collins |
| Abstract: | Susan Collins emphasized that the two aspects of the Fed’s dual mandate are complementary. A challenge for the Fed, explored at this conference, is how to operationalize a broad concept of full employment when setting monetary policy. She emphasized the connection between the full employment goal and the Fed’s role in fostering a vibrant economy that works for everyone. A better understanding of the behavior of labor force participation is important if the Fed is to meet both its full-employment and price-stability goals. It is essential to examine factors that could limit people from participating in the economy, and to support research and collaborations that promote economic progress. |
| Keywords: | labor market; price stability; monetary policy; maximum employment; unemployment; dual mandate |
| Date: | 2023–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:97335&r=ban |
| By: | Kristian S. Blickle; Katherine Engelman; Theo Linnemann; João A. C. Santos |
| Abstract: | In our previous post, we identified the degree to which flood maps in the Federal Reserve’s Second District are inaccurate. In this post, we use our data on the accuracy of flood maps to examine how banks lend in “inaccurately mapped” areas, again focusing on the Second District in particular. We find that banks are seemingly aware of poor-quality flood maps and are generally less likely to lend in such regions, thereby demonstrating a degree of flood risk management or risk aversion. This propensity to avoid lending in inaccurately mapped areas can be seen in jumbo as well as non-jumbo loans, once we account for a series of confounding effects. The results for the Second District largely mirror those for the rest of the nation, with inaccuracies leading to similar reductions in lending, especially among non-jumbo loans. |
| Keywords: | FEMA; floods; flood insurance |
| JEL: | Q54 |
| Date: | 2023–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97305&r=ban |
| By: | Goutsmedt, Aurélien (UC Louvain - F.R.S-FNRS); Sergi, Francesco; Cherrier, Beatrice; Claveau, François; Fontan, Clément; Acosta, Juan |
| Abstract: | Why do policymakers and economists within a policymaking institution choose to throw away a model and to develop an alternative one? Why do they choose to stick to an existing model? This article contributes to the literature on the history and philosophy of modelling by answering these questions. It delves into the dynamics of persistence, change, and building practices of macroeconomic modelling, using the case of forecasting models at the Bank of England (1974-2014). Based on archives and interviews, we document the multiple factors at play in model building and model change. We identify three sets of factors: the agency of modellers, institutional factors, and the material factor. Our investigation shows the diversity of explanations behind the decision to change a model: each time, model replacement resulted from a different combination of the three types of factors. |
| Date: | 2023–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:m2cet&r=ban |
| By: | Nektarios A. Michail (Central Bank of Cyprus); Kyriaki G. LouKa (Central Bank of Cyprus) |
| Abstract: | We examine whether quantitative easing had an impact on output and inflation in the euro area. Using a BVAR model, over the March 2015 - December 2021 period, our results suggest that quantitative easing is an inefficient policy tool. In particular, following a shock that increases asset purchases by around 1% of euro area GDP, inflation increases by around 0.01%, while industrial production rises by 0.3%. The biggest beneficiary of quantitative easing is the stock market, rising more than 2% after the shock. Since only a very small share of the general populace holds stocks, this has adverse inequality effects. |
| Keywords: | quantitative easing; euro area; inequality; asset purchases |
| JEL: | E58 E52 C32 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2023-3&r=ban |