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on Banking |
| By: | Giraldo, Iader (FLAR); Giraldo, Iader (FLAR); Gomez-Gonzalez, Jose E (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College, Bronx); Uribe, Jorge M (Faculty of Economics and Business, Universitat Oberta de Catalunya) |
| Abstract: | In this study, we revisit the debate regarding the effects of financial openness on financial stability. In contrast to previous studies, our approach involves measuring the direct influences of openness on stability through a varied set of proxies used to capture the diverse dimensions of both of these concepts within a unified estimation framework. Employing state-of-the-art machine learning techniques, our estimates enable us to isolate the focal effects while controlling for a comprehensive set of macroeconomic, political, and institutional variables. Covering the period spanning 2010 to 2020 across 45 countries, our results indicate that, in the majority of cases, increased financial openness is beneficial for financial stability. Greater levels of integration tends to reduce the ratio of nonperforming loans to total loans, concurrently improving capital adequacy ratios and the ratio of provisions to nonperforming loans. Additionally, heightened openness leads to an increase in the levels of bank liquidity. Importantly, these enhancements to financial stability occur without any adverse effects on bank profitability. This suggests that policies aimed at fostering greater integration with global financial markets and promoting increased bank competition can exert positive impacts on financial stability without compromising bank profitability. |
| Keywords: | Openness; integration; Financial stability; Double-Debiased Machine Learning |
| JEL: | F21 F32 G21 G28 |
| Date: | 2024–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:col:000566:020926&r=ban |
| By: | Matteo Crosignani; Hanh Le |
| Abstract: | In the second quarter of 2022, the homeownership rate for white households was 75 percent, compared to 45 percent for Black households and 48 percent for Hispanic households. One reason for these differences, virtually unchanged in the last few decades, is uneven access to credit. Studies have documented that minorities are more likely to be denied credit, pay higher rates, be charged higher fees, and face longer turnaround times compared to similar non-minority borrowers. In this post, which is based on a related Staff Report, we show that banks vary substantially in their lending to minorities, and we document an overlooked factor in this difference—the inequality aversion of banks’ stakeholders. |
| Keywords: | inflation; inflation expectations; markups; market power; euro area; supply chain; inequality |
| JEL: | G21 D63 |
| Date: | 2024–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97557&r=ban |
| By: | William A. Allen (National Institute of Economic and Social Research) |
| Abstract: | The history of ‘money doctors’ despatched to give financial advice to countries thought to be in need of it has mainly concentrated on American advisers (e.g. Flandreau 2003). This paper gives an account of a British mission to Poland in 1923 – 1924, a period which coincided with the ending of Poland’s hyper-inflation. It describes how the mission contributed to Poland’s monetary stabilisation in 1924, and explores the tensions that arose about the scope and functions of the mission, and of foreign advisers more generally, both between the mission and the Polish authorities, and within the mission. |
| Keywords: | Poland, money doctors, inflation, Hilton Young, Grabski, monetary reform |
| JEL: | N14 N24 N44 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:366&r=ban |
| By: | Mishra, Mukesh Kumar |
| Abstract: | Big data has become a crucial asset for the modern Indian banking sector, driving innovation, improving decision-making, and ultimately enhancing the overall banking experience for customers. As technology continues to advance, the role of big data in banking is likely to evolve, bringing about further improvements in efficiency, security, and customer-centric services. The integration of big data analytics in banking operations has brought about several changes, enhancing efficiency, customer experience, risk management, and decision-making processes. This paper explores the transformative role of big data as a service (BDaaS) and its applications in the Indian banking sector. The study highlights how BDaaS serves as a robust and innovative instrument, contributing significantly to the identification and prevention of security issues and fraudulent behavior within the industry. The experimental results suggest that deploying big data technology is crucial for various aspects, particularly in handling financial risks and managing operational workflows within the banking sector. |
| Keywords: | Big Data, Banking System |
| JEL: | G1 G21 O33 G28 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:280834&r=ban |
| By: | Shah, Anand; Bahri, Anu |
| Abstract: | This study proposes a new risk measure for stablecoins, that is based on the probability of the stablecoin’s price hitting a threshold exchange rate post which the stablecoin is subjected to the risk of “break the buck/ death spiral”. We also juxtapose the risk measure computed using different models - Vasicek, CIR, ARMA+GARCH and Vasicek+GARCH and suggest the policy implication of the estimated model parameters - rate of reversion (a) and long term mean exchange rate (b) for stablecoin issuers. The study compares the volatility behaviour of the stablecoins with that of the traditional cryptocurrency, Bitcoin, equity index, NASDAQ composite and fiat currency, EURO. Stablecoins tend to be “stable” barring the events such as Terra – Luna crisis, FTX Bankruptcy and Silicon Valley Bank crisis. Traditional asset backed stablecoins – Tether, USD Coin, Binance USD and True USD are less risky than the decentralized algorithmic stablecoin, FRAX and decentralized cryptoasset backed stablecoin, DAI. The proposed risk measure could be of utility to the stablecoin issuers of algorithmic and cryptoasset backed stablecoins and the regulators for setting the capital requirement to guard against the break the buck/ death spiral risk. |
| Keywords: | Cryptocurrency, Stablecoins, Terra – Luna crisis, FTX Bankruptcy, Silicon Valley Bank crisis, Risk Measure, VaR, Vasicek, CIR, GARCH, Bitcoin, Tether, USD Coin, Binance USD, True USD, DAI, FRAX |
| JEL: | F31 G01 G11 G15 G23 G28 |
| Date: | 2023–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119646&r=ban |
| By: | Polina Popova (National Research University Higher School of Economics) |
| Abstract: | The COVID-19 pandemic had an extremely negative impact on the corporate sector across many economies. This study examines the relationship between the spread of the COVID-19 virus and the quality of corporate loan portfolios and the volume of corporate loans in Russian regions. Using cross-regional variation in the number of COVID-19 cases in Russia from April 2020 to February 2022, we document lower corporate loan portfolio quality among banks operating in regions with higher COVID-19 rates, as well as an inverse relationship between corporate non-performing loans and the volume of corporate loans issued by Russian banks. We conclude that Russian banks adjusted their credit policy, observing a decrease in the quality of corporate loan portfolios. We also quantitatively analyze specific business support measures introduced in Russian regions during the COVID-19 crisis |
| Keywords: | COVID-19, Policy interventions, Company loans, Banks, Russia, Regions |
| JEL: | Z |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:93/fe/2024&r=ban |
| By: | Quick, Reiner; Sayar, Sanjar |
| Abstract: | Numerous corporate scandals, in conjunction with managerial misbehavior, demonstrate the need for compliance management systems (CMS) and the relevance of CMS assurance. This study investigates the impact of CMS assurance on German bank directors' perceptions and decisions, and analyzes whether the type of assurer and the level of provided assurance are relevant. For this purpose, we conducted an experiment with 105 bank directors and used ANOVA to analyze their reliance on the hypothetical company's CMS, and their decisions regarding credit granting, purchase, and recommendation of shares. We chose a 2 × 2 + 1 between‐subjects design, manipulating the assurance provider (audit firm vs. third party) and the level of assurance (limited vs. reasonable), and adding a control condition without any assurance. Our results suggest that assured CMS positively affect bank directors' perceptions and decisions, compared to CMS without assurance. Furthermore, we find that our perception measure and all three of our decision measures are strongly associated with the choice of assurance provider, but only two decision measures are associated with the assurance level. Bank directors prefer assurance provision by an audit firm, whereas the findings regarding the impact of the assurance level are inconclusive. The study's results, which confirm the decision‐usefulness of CMS assurance, are of interest for managers, in particular compliance officers, auditors, creditors, regulators, and academics. |
| Date: | 2024–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:142108&r=ban |
| By: | Marc-André Gosselin; Sharon Kozicki |
| Abstract: | This paper aims to bridge the gap between models in research and models used to support policy decisions in central banks. Models used in central bank projection environments overlap with research models and benefit from lessons learned in research, but they differ from research models in important ways. For example, to deal with real-world macroeconomic projection issues, central bank models may have a broader scope. To inform policy decision-making, models generally need both a theoretical basis and an ability to “fit” the data. For repeated projection exercises, forecasters need models that can be adapted to deal with data flows, including historical revisions. And, to provide valuable advice, forecasters must incorporate judgement into their projections to address issues outside the scope of the model. If all these challenges are met, then central bank models and projections will also inform the economic narrative that helps the public understand the policy decisions. In this context, this paper is organized around four main themes: 1) model requirements for central bank purposes; 2) overview of the Bank of Canada’s main policy models—ToTEM and LENS; 3) challenges in meeting those modelling requirements; and 4) practical approaches to addressing some challenges under time constraints. The paper concludes with a description of how lessons learned from research and practice set the stage for the Bank’s future modelling agenda, as discussed in Coletti (2023). |
| Keywords: | Economic models; Monetary policy |
| JEL: | C32 C51 E37 E47 E52 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-29&r=ban |
| By: | Vojtech Bartos (University of Milan); Silvia Castro (LMU Munich); Kristina Czura (University of Groningen); Timm Opitz (Max Planck Institute for Innovation and Competition) |
| Abstract: | We analyze gender discrimination in entrepreneurship finance. Access to finance is crucial for entrepreneurial success, yet constraints for women are particularly pronounced. We structurally unpack whether loan officers evaluate business ideas and implementation constraints differently for male and female entrepreneurs, both as individual entrepreneurs or in entrepreneurial teams. In a lab-in-the-field experiment with Ugandan loan officers, we document gender discrimination of individual female entrepreneurs, but no gender bias in the evaluation of entrepreneurial teams. Our results suggest that the observed bias is not driven by animus against female entrepreneurs but rather by differential beliefs about women’s entrepreneurial ability or implementation constraints in running a business. Policies aimed at team creation for start-up enterprises may have an additional benefit of equalizing access to finance and ultimately stimulating growth. |
| Keywords: | access to finance; gender bias; entrepreneurship; lab-in-the-field; |
| JEL: | C93 G21 J16 L25 L26 O16 |
| Date: | 2023–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:473&r=ban |
| By: | Baron, Hervé |
| Abstract: | In the following paper, we shall focus on the Italian branch of the monetary circuit (or monetary theory of production). In particular, we shall attempt a methodical exploration of the theoretical production of the one who may rightly be considered the founding father of this branch: Augusto Graziani. We shall do this along three lines. Firstly, in the wake of Lunghini and Bianchi (2003), we shall argue that that of Graziani, far from being a complete model, is presented as a historically “open” scheme, which therefore needs “closure”. Secondly, we shall argue that this scheme should be considered as a logical, not historical, re-construction of the functioning of the capitalist economy. Finally, we shall illustrate how such a scheme stands at the highest possible level of abstraction. |
| Keywords: | Monetary Circuit, Graziani, Methodology. |
| JEL: | B31 B41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119511&r=ban |
| By: | Mustaqim Adamrah; Yos Sunitiyoso |
| Abstract: | The growing population of older people in Indonesia--the world's fourth-most populous country--makes a larger cake for the pension business, including in the banking sector. PT Bank Jaya Artha is one of the Indonesian banks that provide products and services for people who are set to enter retirement age. In the wake of tight competition in the pension business market, Bank Jaya Artha has since 2019 imposed a fine of three times of installments in addition to 5% of outstanding debt on customers planning to repay their debt in a mission to prevent them from leaving for competitors. While the clause is not included in loan agreements signed before the implementation, it applies to past loan agreements as well. This, in turn, has led to customer complaints. The research is meant to find out how the implementation of the unconsented clause has affected customer satisfaction and willingness to recommend the bank and what the bank should do to become more customer-centric, according to customers. Using a design thinking framework, the research collects quantitative and qualitative data from the bank's pension customers through questionnaires and forum group discussions. Statistical analysis is utilized on quantitative data from questionnaires, and content analysis is utilized on qualitative data from questionnaires. A narrative analysis is also used to explain qualitative data from forum group discussions. The result shows that there are problems in the way the bank communicates information to customers, particularly information about the loan repayment fine. Lack of transparency, a reactive approach instead of a proactive one, the obscurity of the information, and the time the information is delivered have affected customers' satisfaction toward the bank. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.04605&r=ban |
| By: | Tao Wang |
| Abstract: | Models of microeconomic consumption (including those used in heterogeneous-agent macroeconomic models) typically calibrate the size of income risk to match panel data on household income dynamics. But, for several reasons, what is measured as risk from such data may not correspond to the risk perceived by the agent. This paper instead uses data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations to directly calibrate perceived income risks. One of several examples of the implications of heterogeneity in perceived income risks is increased wealth inequality stemming from differential precautionary saving motives. I also explore the implications of the fact that the perceived risk is lower than the calibrated level of risk either because of unobserved heterogeneity by researchers or because of overconfidence by the agents. |
| Keywords: | Monetary policy; Monetary Policy and Uncertainty; Business Fluctuations and Cycles |
| JEL: | D14 E21 E71 G51 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-59&r=ban |
| By: | J. Carter Braxton; Nisha Chikhale; Kyle F. Herkenhoff; Gordon M. Phillips |
| Abstract: | We combine the Decennial Census, credit reports, and administrative earnings to create the first panel dataset linking parent’s credit access to the labor market outcomes of children in the U.S. We find that a 10% increase in parent’s unused revolving credit during their children’s adolescence (13 to 18 years old) is associated with 0.28% to 0.37% greater labor earnings of their children during early adulthood (25 to 30 years old). Using these empirical elasticities, we estimate a dynastic, defaultable debt model to examine how the democratization of credit since the 1970s – modeled as both greater credit limits and more lenient bankruptcy – affected intergenerational mobility. Surprisingly, we find that the democratization of credit led to less intergenerational mobility and greater inequality. Two offsetting forces underlie this result: (1) greater credit limits raise mobility by facilitating borrowing and investment among low-income households; (2) however, more lenient bankruptcy policy lowers mobility since low-income households dissave, hit their constraints more often, and reduce investments in their children. Quantitatively, the democratization of credit is dominated by more lenient bankruptcy policy and so mobility declines between the 1970s and 2000s. |
| JEL: | D14 E21 J13 J24 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32031&r=ban |
| By: | Kaufmann, Christoph; Leyva, Jaime; Storz, Manuela |
| Abstract: | The euro area insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio re-balancing consistent with the risk-taking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries. JEL Classification: E52, G11, G22, G23 |
| Keywords: | monetary policy transmission, non-bank financial intermediation, portfolio re-balancing, risk-taking |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242892&r=ban |
| By: | Roncalli, Thierry |
| Abstract: | This handbook in Sustainable Finance corresponds to the lecture notes of the course given at University Paris-Saclay, ENSAE, Sorbonne University and Paris Cité University. It covers the following chapters: 1. Introduction, 2. ESG Scoring, 3. Financial Performance of ESG Investing, 4. Sustainable Financial Products, 5. Impact Investing, 6. Voting Policy & Engagement, 7. Extra-financial Accounting, 8. Economic Modeling of Climate Change, 9. Climate Risk Measures, 10. Transition Risk Modeling, 11. Portfolio Optimization, 12. Physical Risk Modeling, 13. Climate Stress Testing, 14. Conclusion, 15. Appendix A Technical Appendix, 16. Appendix B Solutions to the Tutorial Exercises. |
| Keywords: | Sustainable finance, ESG investing, climate risk |
| JEL: | G1 Q5 |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119642&r=ban |
| By: | Asano, Koji |
| Abstract: | We examine liquidity policies in an environment in which banks can cover liquidity needs by hoarding liquidity or selling legacy assets to expert investors. They can acquire costly information regarding asset quality and deprive banks with bad assets from accessing the asset market. To prevent expert scrutiny, banks must accept fire sale prices for their assets. These depressed prices induce banks to hoard inefficiently low (high) amounts of liquidity when the likelihood of a liquidity shock is relatively low (high). We show that policy interventions aimed at maintaining opacity in the asset market encourage (discourage) liquidity hoarding when there is underhoarding (overhoarding) of liquidity. This suggests that ex-post interventions can serve as substitutes for ex-ante liquidity regulations. |
| Keywords: | liquidity, information acquisition, financial crisis, liquidity regulation |
| JEL: | D82 G01 G21 |
| Date: | 2023–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119531&r=ban |
| By: | Gabriel Bruneau; Javier Ojea Ferreiro; Andrew Plummer; Marie-Christine Tremblay; Aidan Witts |
| Abstract: | Our study aims to gain insight on financial stability and climate transition risk. We develop a methodological framework that captures the direct effects of a stressful climate transition shock as well as the indirect—or systemic—implications of these direct effects. We apply this framework using data from the Canadian financial system. To capture the direct effects, we leverage the climate transition scenarios and financial risk assessment methods developed for the Bank of Canada and the Office of the Superintendent of Financial Institutions climate scenario analysis pilot project. We examine the direct effects—in the form of credit, market and liquidity risks—of the climate transition shock on financial system entities within the scope of our study. Specifically, we look at the public and private assets and derivatives portfolios of deposit-taking institutions, life insurance companies, pension funds and investment funds. To assess the indirect effects from the potential spread of the climate transition shock across an interconnected financial system, we extend an agent-based model to explore shock transmission channels such as cross-holding positions, business similarities, common exposures and fire sales. This model considers behavioural assumptions and rules, allowing us to understand the interconnectedness of the financial system. This work strengthens our understanding of how distinct entities within the financial system could be impacted by and respond to climate transition risks and opportunities, and of the potential channels through which those risks and opportunities may spread. More generally, this work contributes to building standardized systemic risk assessment and monitoring tools. |
| Keywords: | Climate change; Financial stability; Financial institutions; Financial markets; Economic models |
| JEL: | Q54 C63 G01 G10 G20 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-32&r=ban |
| By: | Lioba Heimbach; Vabuk Pahari; Eric Schertenleib |
| Abstract: | The prevalence of maximal extractable value (MEV) in the Ethereum ecosystem has led to a characterization of the latter as a dark forest. Studies of MEV have thus far largely been restricted to purely on-chain MEV, i.e., sandwich attacks, cyclic arbitrage, and liquidations. In this work, we shed light on the prevalence of non-atomic arbitrage on decentralized exchanges (DEXes) on the Ethereum blockchain. Importantly, non-atomic arbitrage exploits price differences between DEXes on the Ethereum blockchain as well as exchanges outside the Ethereum blockchain (i.e., centralized exchanges or DEXes on other blockchains). Thus, non-atomic arbitrage is a type of MEV that involves actions on and off the Ethereum blockchain. In our study of non-atomic arbitrage, we uncover that more than a fourth of the volume on Ethereum's biggest five DEXes from the merge until 31 October 2023 can likely be attributed to this type of MEV. We further highlight that only eleven searchers are responsible for more than 80% of the identified non-atomic arbitrage volume sitting at a staggering 137 billion US$ and draw a connection between the centralization of the block construction market and non-atomic arbitrage. Finally, we discuss the security implications of these high-value transactions that account for more than 10% of Ethereum's total block value and outline possible mitigations. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.01622&r=ban |
| By: | Craig Johnston; Geneviève Vallée; Hossein Hosseini Jebeli; Brett Lindsay; Miguel Molico; Marie-Christine Tremblay; Aidan Witts |
| Abstract: | We assess the potential financial risks of current and projected flooding caused by extreme weather events in Canada. We focus on the residential real estate secured lending (RESL) portfolios of Canadian financial institutions (FIs) because RESL portfolios are an important component of FIs’ balance sheets and because the assets used to secure such loans are immobile and susceptible to climate-related extreme weather events. We build a loan-level dataset from the residential RESL portfolios of some federally and provincially regulated FIs. We use current and projected flood events under different climate scenarios to apply shocks to these portfolios. We then control for private flood insurance using data from a variety of property and casualty insurers based in Canada. We find that the direct damages of flooding have modest impacts on the FIs’ loss given default on their residential RESL portfolios. This is partly due to rising homeowner equity and the recent rapid increase in house prices across Canada. Nevertheless, some risk channels have emerged. Notably, the combined influence of high household leverage and lending in flood zones can exacerbate the risk that lenders face from extreme weather events. Our analysis also shows that other disaster-related risk channels may increase risk to lenders. These channels include climate change, price adjustment of the salvage value and time to settlement. However, this analysis has several limitations. Specifically, the lack of granular flood data may have led to an underestimation and smoothing of financial risks across households. As a result, the analysis potentially smoothed what could be more acute shocks to specific properties. |
| Keywords: | Climate change; Central bank research; Credit risk management; Econometric and statistical methods; Financial institutions; Financial stability |
| JEL: | C81 G21 Q54 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-33&r=ban |
| By: | Marco Del Negro; Keshav Dogra; Aidan Gleich; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula |
| Abstract: | We document the real-time forecasting performance for output and inflation of the New York Fed dynamic stochastic general equilibrium (DSGE) model since 2011. We find the DSGE's accuracy to be comparable to that of private forecasters before Covid, but somewhat worse thereafter. |
| Keywords: | DSGE models; real-time forecasts; inflation |
| JEL: | E3 E43 E44 C32 C11 C54 |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97565&r=ban |
| By: | Josef Sveda; Jiri Panos; Vojtech Siuda |
| Abstract: | We propose an improved methodology for modelling potential scenario paths of banks' risk-weighted assets, which drive the denominator of capital adequacy ratios. Our approach centres on modelling the internal risk structure of bank portfolios and thus aims to provide more accurate estimations than the common portfolio level approaches used in top-down stress testing frameworks. This should reduce the likelihood of significant misestimation of risk-weighted assets, which can lead to unjustifiably high or low solvency measures and induce false perceptions about banks' financial health. The proposed methodology is easy to replicate and suitable for various applications, including stress testing and calibration of macroprudential tools. After the methodology is introduced, we show how our proposed approach compares favourably to the methods typically used. Subsequently, we use our approach to estimate the potential increase in risk weights due to a cyclical deterioration in credit parameters and the corresponding setup of the countercyclical capital buffer for the Czech banking sector. Finally, an illustrative, hands-on example is provided in the Appendix. |
| Keywords: | Countercyclical capital buffer, credit portfolio structure, risk weighted exposure, stress-testing |
| JEL: | E58 G21 G28 G29 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2023/15&r=ban |
| By: | Bindseil, Ulrich; Senner, Richard |
| Abstract: | Rapid and large deposit outflows from banks have regained attention in the context of the March 2023 demises of Credit Suisse, SVB and other regional US banks. Moreover, the possible introduction of CBDC or a marked success of stablecoins are perceived as additional clouds over the future of deposit funding. While the bank run literature rarely pays attention to where bank deposits can flow to, this paper distinguishes the different flow of funds mechanics across all possible destinations and reviews for each the current and prospective future factors that may contribute to the observed increase of the speed and size of bank runs. While some of these factors can be contained through policy measures, others, like the intensified competition between banks will inevitably stay, and bank balance sheet management and liquidity regulation need to accept the new normal of somewhat less stable and more expensive sight deposits. JEL Classification: E42, E51, G21, G23 |
| Keywords: | bank funding, bank runs, financial stability, flows of funds, liquidity crisis |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242887&r=ban |
| By: | Schmidt, Sebastian |
| Abstract: | What are the macroeconomic consequences of a government that is limited in its willingness or ability to raise primary surpluses, and a central bank that accommodates its interest-rate policy to the fiscal conditions? I address this question in a dynamic stochastic sticky-price model with endogenous shifts between an “orthodox” and a “fiscally-dominant” policy regime. The risk of future regime shifts has encompassing effects on equilibrium. Inflation is systematically higher than it would be if fiscal policy always adjusted its primary surplus sufficiently and monetary policy was solely concerned with price stability. This inflation bias is increasing in the real value of government debt. Regime-switching probabilities are not invariant to policy. The central bank can attenuate the risk of a shift to the fiscally-dominant regime by raising the real interest rate sufficiently moderately when inflation increases. Lower fiscal dominance risk, in turn, mitigates the inflation bias. JEL Classification: E31, E52, E62, E63 |
| Keywords: | endogenous regime shifts, fiscal dominance, fiscal policy, inflation bias, monetary policy |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242889&r=ban |
| By: | Patrick Aldridge; David Cimon; Rishi Vala |
| Abstract: | Central banks may engage in large-scale lending and asset purchases to stabilize financial markets and implement monetary policy during crises. The ability of these actions to restore financial market functioning is well documented; however, they come with costs. We provide a literature review of the costs associated with these central bank actions, without commenting on the net benefits they provide. We find support for the premise that crisis actions may negatively impact market liquidity, distort asset prices, create conflicts between monetary and financial stability objectives and increase rent seeking and unproductive uses of the liquidity provided by the central bank. We discuss measures that may mitigate the negative impacts of crisis actions. |
| Keywords: | Central bank research; Financial institutions; Financial markets; Financial stability, Lender of last resort |
| JEL: | E5 E58 G10 G20 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-30&r=ban |
| By: | Luis Ceballos; Jens H. E. Christensen; Damian Romero |
| Abstract: | We provide market-based estimates of the natural real rate, that is, the steady-state short-term real interest rate, for Brazil, Chile, and Mexico. Our approach uses a dynamic term structure finance model estimated directly on the prices of individual inflation indexed bonds with adjustments for bond-specific liquidity and real term premia. First, we find that inflation-indexed bond liquidity premia in all three countries are sizable with significant variation. Second, we find large differences in their estimated equilibrium real rates: Brazil’s is large and volatile, Mexico’s is stable but elevated, while Chile’s is low and has fallen persistently. Although uncertain, our estimates could have important implications for the conduct of monetary policy in these three countries. |
| Keywords: | affine arbitrage-free models; financial markets; frictions; monetary policy; rstar |
| JEL: | C32 E43 E52 G12 |
| Date: | 2023–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97578&r=ban |
| By: | Yossi Yakhin (Bank of Israel) |
| Abstract: | The paper introduces foreign exchange interventions (FXIs) to an otherwise standard new-Keynesian small open economy model. The paper studies the transmission mechanism of FXIs, solves for the optimal policy, suggests an implementable policy rule, and evaluates the welfare implications of different policies. Relying on the portfolio balance channel, a purchase of foreign reserves crowds out private holdings of foreign assets, thereby raising the UIP premium and the effective real return domestic agents face. As a result, a purchase of foreign reserves contracts domestic demand. At the same time, it depreciates the value of the domestic currency, which raises the price of foreign goods relative to domestic goods, thereby expanding foreign demand for home exports and contracting domestic imports. The effect on production depends on the wealth effect on labor supply. Optimal FXIs completely insulate the economy from the effect of financial shocks, such as capital flows and risk premium shocks. A policy rule that aims at stabilizing the UIP premium brings the economy close to its optimal allocation, regardless of the source of the shocks. The paper discusses the conditions under which strict targeting of the UIP premium is optimal. Calibrating the model to the Israeli economy, lifetime welfare gains from following optimal FXI policy, relative to maintaining a fixed level of foreign reserves, amount to 2.4% of annual steady state consumption. The results are robust to a variety of microstructures of the financial sector suggested in recent literature. |
| Keywords: | Foreign Exchange Interventions, UIP Premium, Monetary Policy, Open Economy Macroeconomics |
| JEL: | E44 E52 E58 F30 F31 F40 F41 G10 G15 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2024.01&r=ban |
| By: | Alper Odabasioglu |
| Abstract: | Central counterparty (CCP) initial margin models are procyclical by nature, and CCPs use anti-procyclicality (APC) tools to mitigate this. However, despite the widespread use of such tools, margin models of CCPs around the world reacted severely to the heightened volatility during the March 2020 market turmoil. This triggered a debate globally on the adequacy of APC tools. We offer potential explanations for why those tools were not sufficient. We highlight that, to effectively mitigate procyclicality, the focus should be on the key parameters for both the margin model and the APC tools. One widely adopted APC tool established by the European Market Infrastructure Regulation is the stress period. We show that, to mitigate procyclicality with this tool, the main focus should not be on the calibration of its stressed margin level, but rather on the weight used to add this to the margin model. Further, the stress period tool can be highly effective, but only when its weight parameter is calibrated adequately high. These insights are essential for regulators to provide effective guidance on margin procyclicality, and for CCPs to appropriately design and calibrate their margin systems and procyclicality frameworks. To further serve these needs, we provide a novel conceptual tool kit for regulators and CCPs. The tool kit allows them to see a margin system’s performance in procyclicality as well as in other competing objectives—such as margin coverage and cost of collateral—all in one place and for any combination of calibrations of the key procyclicality parameters. This feature lets regulators set outcomes-based procyclicality targets achievable by CCP margin models and APC tools. Moreover, it helps regulators design prescriptive procyclicality guidance in line with these desired outcomes-based targets. CCPs can use the tool kit to determine the set of parameter calibrations that satisfy the required procyclicality targets and perform sufficiently well in the other competing objectives. |
| Keywords: | Coronavirus disease (COVID-19); Credit risk management; Financial institutions; Financial markets; Financial stability; Financial system regulation and policies |
| JEL: | G G0 G01 G2 G23 G28 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-34&r=ban |
| By: | Lin William Cong; Shiyang Huang; Douglas Xu |
| Abstract: | We model financial innovations such as Exchange-Traded Funds, smart beta products, and many index-based vehicles as composite securities (CSs) that facilitate trading the common factors in assets' liquidation values. Through accessing a larger basket of assets in endogenously chosen proportions, CSs reduce investors' duplication of effort in trading multiple securities and attract more factor investors. We characterize analytically how competitive CS designers in equilibrium optimally select liquid underlying assets representative of the factors and find corroborating evidence in ETF data. CS trading entails investors' strategic and active decisions, consequently impounding more systematic information into prices. Their rise creates leads to greater informational efficiency, price variability, and co-movements in the underlying asset markets, as well as potentially heterogeneous effects on liquidity and asset-specific information acquisition/incorporation, depending on the importance of factors for asset value. The predictions explain and reconcile the rich (and often mixed) empirical observations about various types of CSs in the extant literature. |
| JEL: | D40 D82 G11 G14 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32016&r=ban |
| By: | Grossmann, Max; Hackethal, Andreas; Laudi, Marten; Pauls, Thomas |
| Abstract: | We conduct a field experiment with clients of a German universal bank to explore the impact of peer information on sustainable retail investments. Our results show that information about peers' inclination towards sustainable investing raises the amount allocated to stock funds labeled sustainable, when communicated during a buying decision. This effect is primarily driven by participants initially underestimating peers' propensity to invest sustainably. Further, treated individuals indicate an increased interest in additional information on sustainable investments, primarily on risk and return expectations. However, when analyzing account-level portfolio holding data over time, we detect no spillover effects of peer information on later sustainable investment decisions. |
| Keywords: | Household Finance, Sustainable Finance, Experimental Finance, Financial Advice |
| JEL: | D14 G11 C93 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:280963&r=ban |
| By: | David W. Berger; Konstantin Milbradt; Fabrice Tourre; Joseph S. Vavra |
| Abstract: | There are large cross-sectional differences in how often US borrowers refinance mortgages. In this paper, we develop an equilibrium mortgage pricing model with heterogeneous borrowers and use it to show that equilibrium forces imply important cross-subsidies from borrowers who rarely refinance to those who refinance often. Mortgage reforms can potentially reduce these regressive cross-subsidies, but the equilibrium effects of these reforms can also have important distributional consequences. For example, many policies that lead to more frequent refinancing also increase equilibrium mortgage rates and thus reduce residential mortgage credit access for a large number of borrowers. |
| JEL: | D53 E1 E44 G5 G51 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32022&r=ban |
| By: | Karen McGuinness |
| Abstract: | While climate change was largely tackled by government policies in the past, central banks are increasingly grappling with the risks climate change poses. They are evaluating their operational policies to reflect these risks and the transition to a net-zero economy. This paper explores the trade-offs and considerations central banks face. |
| Keywords: | Central bank research; Climate change; Financial markets |
| JEL: | D53 E58 E63 G32 Q Q54 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-31&r=ban |
| By: | Eva Hromadkova; Ivana Kubicova; Branislav Saxa |
| Abstract: | We examine interest rate pass-through in the Czech Republic over the period of 2004-2022. We investigate the speed and completeness of the transmission of changes in reference market interest rates to lending rates on loans to non-financial companies and housing loans. The use of a rolling window approach enables us to examine changes in the pass-through over time. In the case of housing loans, the transmission of the 5-year interest rate swap rate to client rates is strong in the long term, although currently it is not complete. A 1 percentage point increase in the unemployment rate implies an approximately 0.2 percentage point increase in the risk premium for the interest rate on loans for house purchase. Our estimates for loans to non-financial companies confirm that changes in the 3M PRIBOR are passed on almost completely with minimal delay. A 1 percentage point reduction in the output gap implies an approximately 0.1 percentage point increase in the risk premium for the client interest rate on corporate loans. |
| Keywords: | ARDL model, credit premium, interest rate pass-through, rolling windows |
| JEL: | C2 E43 E52 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2023/02&r=ban |
| By: | Stefano Colonnello (Ca’ Foscari University of Venice; Halle Institute for Economic Research); Mariela Dal Borgo (Banco de México, Directorate General of Financial Stability) |
| Abstract: | We provide evidence on the terms and performance of a mortgage co-financed between banks and a Mexican housing provident fund (HPF). Relative to traditional bank mortgages, we find that borrowers take out larger loans under the co-financing scheme to lower down payments rather than to acquire more expensive properties. Default risk is mitigated by enhancing borrowers' liquidity and the HPF's secure repayment system. We also find that co-financing reduces income disparities in access to home financing but not to good quality properties. Our findings are relevant for the design of products that raise leverage in settings with pervasive borrowing constraints. |
| Keywords: | Residential Mortgages, Co-Financing, Housing Provident Fund, Household Leverage, Default |
| JEL: | D04 D14 G21 G51 H81 O16 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2024:01&r=ban |
| By: | Cobham, David |
| Abstract: | This short paper use the perspective of the assignment problem to examine the evolution of the workings of monetary policy and the Monetary Policy Committee (MPC) of the Bank of England over its first 25 years. It outlines how the Bank, and the MPC, came across additional possible objectives and searched for additional possible instruments. It then argues the need for some recasting of the role of the MPC and the way in which it operates. |
| Keywords: | assignment problem, monetary policy, inflation targeting, inflation, economic growth |
| JEL: | E42 E52 E58 F33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hwuaef:281088&r=ban |
| By: | Qi Li; Xu Zhang |
| Abstract: | This paper investigates the differential impact of monetary policy on homeownership and housing returns among Black, Hispanic and White households. Using data on 13 million repeat sales from 1993 to 2020, we construct and analyze race-specific entries and exits of homeownership and housing returns for 140 metropolitan areas in the United States. Our findings reveal significant heterogeneity: for minority households, one unit of monetary tightening leads to a 15% lower housing return and a 31% lower entry into homeownership than White households. This heterogeneity primarily stems from the less favorable labor market responses of minority groups to contractionary monetary policy. These findings emphasize the unintended consequences of monetary policy on racial inequality in the housing market. |
| Keywords: | Monetary policy; Housing; Central bank research |
| JEL: | E52 E40 R00 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-62&r=ban |
| By: | OGAWA Eiji; LUO Pengfei |
| Abstract: | The international finance trilemma represents the trade-off among exchange rate stability, monetary policy autonomy and free capital flows, resulting in varied reactions to global risk factors among Asian economies. This study explores how various monetary policy objectives shape the diverse responses of Asian interest rates and exchange rates to global risk factors. Using the Structural Vector Autoregressive Model with Exogenous Variables (SVARX), we analyze the impulse responses of short-term interest rates and exchange rates to global risk factors, including the US monetary policy changes, global economic policy and financial risks, and oil prices. The main findings are as follows: first, we found that most of the Asian monetary authorities except Japan mirror the US monetary policy changes, demonstrating that a key policy objective is to stabilize their cross-border capital flows and exchange rates. The magnitude of mirroring depends on countries’ exchange rate regimes. Furthermore, although global economic policy and financial risks trigger the depreciation of most of the Asian exchange rates, their influence on Asian short-term interest rates is relatively smaller, showing the limited influence of global risk appetite on monetary policy objectives. Last, we found the opposite responses of Asian interest rates and exchange rates to oil prices, showing the diverse economic effects of oil prices on oil export and import countries. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24006&r=ban |
| By: | Issiaka Coulibaly; Blaise Gnimassoun; Hamza Mighri; Jamel Saadaoui |
| Abstract: | The paper adds to the literature on the issue of public debt in African economies, by investigating the role foreign exchange reserves play in improving the level of indebtedness and as buffer of the negative effect of exchange rate depreciation while considering the exchange rate policy. Our results show a direct link between the level of foreign currency reserves and that of external debt in Africa. Particularly, we demonstrate that higher foreign currency reserves tend to decrease the public debt stock to GDP. This effect is even more significant when countries go through high exchange rate depreciation episodes (10% or higher). This impact, however, is not homogenous among country groups, as only countries with a floating exchange regime tend to benefit from this buffer effect compared to anchored regimes. In a time where most African economies face severe exchange rate depreciation episodes following the U.S. monetary tightening policy, central bankers and policy makers need to consider a plethora of policy issues including interventions in the FX market to mitigate depreciations and maintain a sustainable public debt stock. |
| Keywords: | Exchange Rate, International Reserves, Buffer Effect, Public Debt. |
| JEL: | F3 F31 F32 F34 H6 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2023-42&r=ban |
| By: | Carlos Esquivel Author-1-Name-First: Carlos Author-1-Name-Last: Esquivel (Rutgers University); Victor Almeida Author-2-Name-First: Victor Author-2-Name-Last: Almeida (Carleton College); Timothy Kehoe Author-3-Name-First: Timothy Author-3-Name-Last: Kehoe (University of Minnesota); Juan Pablo Nicolini Author-4-Name-First: Juan Pablo Author-4-Name-Last: Nicolini (Federal Reserve Bank of Minneapolis and Universidad Torcuato Di Tella) |
| Abstract: | We consider how size matters for banks in three size groups: small community banks with assets less than $1 billion, large community banks with assets between $1 billion and $10 billion, and midsize banks with assets between $10 billion and $50 billion. To illustrate the differences between these banks and larger banks whose business models are distinctly different, we examine large banks with assets between $50 billion and $250 billion and the largest banks with assets exceeding $250 billion. Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests several patterns: (1) while small community banks exhibit relatively more valuable investment opportunities, larger community banks, midsize banks, and larger banks exploit theirs more efficiently and achieve better financial performance; (2) average operating costs that include costs related to regulatory compliance and technology decrease with size; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, compared with small community banks, large community banks, midsize banks, and larger banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results. |
| Keywords: | Sovereign Default, Renegotiation, Interest Rate Shocks |
| JEL: | F34 F41 |
| Date: | 2024–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:202405&r=ban |
| By: | Jonas Becker; Maik Schmeling; Andreas Schrimpf |
| Abstract: | We estimate the impact of banks' cross-currency lending on exchange rates to shed light on the importance of flows as a major force affecting FX market outcomes. When non-US banks extend more loans in US dollars (USD) relative to US banks originating foreign currency-denominated loans, the USD appreciates significantly. When a foreign bank grants a cross-currency USD loan, it needs to obtain USD liquidity which puts pressure on funding markets and leads to an appreciation of USD. This effect – which we estimate via a granular instrumental variable approach – has greatly intensified since the global financial crisis and crucially depends on how banks fund the provision of cross-currency loans. In line with this mechanism, we show that cross-currency lending also affects the FX swap market (and deviations from covered interest parity), as well as other segments of the US short-term funding market. |
| Keywords: | cross-currency lending, exchange rates, granular instrumental variable, CIP deviation |
| JEL: | F31 E44 G21 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1161&r=ban |
| By: | Viral V. Acharya; V. Ravi Anshuman; S. Vish Viswanathan |
| Abstract: | We examine the desirability of granting “safe harbor” provisions to creditors of financial intermediaries in sale-and-repurchase (repo) contracts. Exemption from an automatic stay in bankruptcy enables financial intermediaries to raise greater liquidity and induces entry of intermediaries with higher leverage during normal times. This liquidity creation occurs, however, at the cost of ex-post inefficiency when there are adverse aggregate shocks to the fundamental quality of collateral underlying the contracts. When exempt from bankruptcy, creditors of highly leveraged financial intermediaries respond to such shocks by engaging in collateral liquidations. Financial arbitrage by less leveraged financial intermediaries equilibrates returns from acquiring collateral at fire-sale prices and returns from real-sector lending, inducing higher lending rates, a deterioration in endogenous asset quality, and in the extremis, a credit crunch for the real sector. Given this distributive externality, taming the leverage cycle by not granting safe harbors, i.e., requiring an automatic stay on repo contracts in bankruptcy, can be not only ex-post optimal, but also ex-ante optimal, especially for illiquid collateral with high exposure to aggregate risk. |
| JEL: | D62 G01 G21 G28 G33 K11 K12 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32027&r=ban |
| By: | Michl, Thomas R. (Department of Economics, Colgate University); Davis, Leila (Department of Economics, University of Massachusetts Boston) |
| Abstract: | The power of an inverted yield curve to predict recessions is widely discussed in the financial press, yet most undergraduate textbooks provide little discussion of this stylized fact. This paper fills this gap by extending a 3-equation textbook model to include an accessible treatment of a term structure of interest rates formed by the one-period policy rate and a two-period rate that obeys the Fisher Equation. The Phillips curve features partially anchored adaptive expectations, while financial markets and the central bank have perfect foresight. Using this framework, we show that raising the policy rate in response to an inflation shock inverts the yield curve. Whether this inversion foreshadows a recession, however, depends on the bank’s monetary policy rule, which we illustrate using numerical examples. In particular, we show that, with anchoring and an output-gap averse central bank, inflation can stabilize and the yield curve can invert without an ensuing recession. |
| JEL: | A22 E31 E43 E44 E52 |
| Date: | 2024–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:cgt:wpaper:2024-01&r=ban |