|
on Banking |
| By: | Saleem Bahaj (UCL); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used, but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar. |
| Keywords: | Chinese monetary policy, Gresham’s law, Goodhart’s law, Money markets, RMB |
| JEL: | F31 F33 E51 G15 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:240&r=ban |
| By: | Helena Chuliá (Riskcenter- IREA and Department of Econometrics and Statistics, University of Barcelona.); Sabuhi Khalili (Department of Econometrics and Statistics, University of Barcelona.); Jorge M. Uribe (Faculty of Economics and Business Studies, Open University of Catalonia.) |
| Abstract: | SWe propose generative artificial intelligence to measure systemic risk in the global markets of sovereign debt and foreign exchange. Through a comparative analysis, we explore three novel models to the economics literature and integrate them with traditional factor models. These models are: Time Variational Autoencoders, Time Generative Adversarial Networks, and Transformer-based Time-series Generative Adversarial Networks. Our empirical results provide evidence in support of the Variational Autoencoder. Results here indicate that both the Credit Default Swaps and foreign exchange markets are susceptible to systemic risk, with a historically high probability of distress observed by the end of 2022, as measured by both the Joint Probability of Distress and the Expected Proportion of Markets in Distress. Our results provide insights for governments in both developed and developing countries, since the realistic counterfactual scenarios generated by the AI, yet to occur in global markets, underscore the potential worst-case scenarios that may unfold if systemic risk materializes. Considering such scenarios is crucial when designing macroprudential policies aimed at preserving financial stability and when measuring the effectiveness of the implemented policies. |
| Keywords: | Twin Ds, Sovereign Debt, Credit Risk, TimeGANs, Transformers, TimeVAEs, Autoencoders, Variational Inference. JEL classification: C45, C53, F31, F37. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202402&r=ban |
| By: | Dorinel Bastide (LaMME); St\'ephane Cr\'epey (LPSM) |
| Abstract: | Based on supermodularity ordering properties, we show that convex risk measures of credit losses are nondecreasing w.r.t. credit-credit and, in a wrong-way risk setup, credit-market, covariances of elliptically distributed latent factors. These results support the use of such setups for computing credit provisions and economic capital or for conducting stress test exercises and risk management analysis. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.07728&r=ban |
| By: | Busetto, Filippo (Bank of England) |
| Abstract: | We study the determinants of the asymmetric behaviour of monetary policy expectations in the United States, Germany and the United Kingdom. A common factor based on macroeconomic data and survey variables has predictive ability above and beyond yield based factors for negative changes in expected rates during an easing cycle, but not for increases in expected rates during a tightening in monetary policy. At the same time, macroeconomic information does not have any asymmetric effect on the conditional distribution of term premia. We complement previous findings on the asymmetric predictability of expected rates by showing that monetary policy easing during crises is predictable. This is also relevant for policymakers, as the yield curve does not always provide an accurate picture of the expected future stance of monetary policy at turning points. |
| Keywords: | Interest rates; monetary policy; macro-finance; quantile regressions |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1058&r=ban |
| By: | Muñoz, Manuel A.; Soons, Oscar |
| Abstract: | The bulk of cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty and only a fraction of the population choosing to hoard cash. We develop a Diamond and Dybvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Only consumers who are sufficiently pessimistic about bank stability hold cash. The introduction of a central bank digital currency (CBDC) as a store of value lowers the storage cost of public money and induces partial bank disintermediation, which is nevertheless mitigated by an increase in relative maturity transformation. This has heterogeneous welfare consequences across the population. While cash holders always benefit by switching to CBDC, each of all other consumers may be better off or not depending on the probability of a bank run, her (and all others’) belief about such probability and the degree of technological superiority of CBDC. JEL Classification: E41, E58, G11, G21 |
| Keywords: | bank stability, cash hoarding, central bank digital currency, disagreement, uncertainty shocks, welfare, flight-to-safety |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2024146&r=ban |
| By: | Jules H. van Binsbergen; Marco Grotteria |
| Abstract: | We examine the transmission of monetary policy shocks to the long-duration liabilities of households and firms using high-frequency variation in 10-year swap rates around FOMC announcements. We find that four weeks after the announcement mortgage rates move one-for-one with 10-year swap rates, leaving little explanatory power for mortgage concentration, bank market power, or credit risk. Variation in credit risk does materially affect monetary policy transmission to corporate bonds. Expected future short rates and term premia play a significant role in driving both mortgage rates and corporate bond yields, which explains the Federal Reserve’s increased focus on these quantities. |
| JEL: | E40 E43 E44 E5 E50 E52 E58 G21 G51 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32137&r=ban |
| By: | Berdell, John; Menudo, José M. |
| Abstract: | Standard models of the price specie flow do not consider credit. Yet Hume and preceding authors were reacting to the implosion of Law’s financial bubble. We delineate the anti-credit thesis contained within the evolution of eighteenth century balance of payments analyses. A string of eighteenth century authors argued over whether the balance of payments constituted a binding constraint on credit creation. As part of their analysis they considered how changes in the money supply might alter output, prices, employment, capital, and population. How new money entered the economy was often critical. We start with Law and then consider Melon, Gervaise, Vanderlint, Cantillon, Montesquieu, Hume, Steuart, Forbonnais, and Smith. In closing we pay particular attention to the idea that Hume and Smith effectively displaced preceding, often ‘mercantilist’, analyses of credit and the balance of payments. |
| Date: | 2024–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:apbkm&r=ban |
| By: | Yuliana Loginova (National Research University Higher School of Economics); Maria Semenova (National Research University Higher School of Economics) |
| Abstract: | This paper explores the impact of board gender diversity on bank performance during the COVID-19 crisis. Using data from 87 European banks from 2015 to 2021, we show that the presence of women on bank boards had a positive impact on bank profitability during the COVID-19 crisis. This effect is more pronounced in countries where the morbidity rate is higher. Our results suggest a negative relationship between the women on bank boards and bank credit risk during the pandemic. The impact of women on insolvency risk, however, appears only for banks with relatively large boards. |
| Keywords: | board gender diversity, COVID-19, bank profitability, credit risk |
| JEL: | G21 G34 O16 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:94/fe/2024&r=ban |
| By: | Amberg, Niklas (Research Department, Central Bank of Sweden); Becker, Bo (Stockholm School of Economics, CEPR and ECGI) |
| Abstract: | The decline in cash use and growing use of digital distribution for retail banking leads to a reduced need for bank branches. Lending to small and medium sized firms (SMEs) has not benefited as much from a digital transformation, and widespread branch closures may reduce their supply of credit. Using the closing of two thirds of Swedish branches as a laboratory, we document that corporate lending declines rapidly following branch closures, mainly via reduced lending to small and young firms. The reduced credit supply has real effects: local firms experience a decline in employment and sales and an increase in exit risk after branch closures. Our results thus suggest that the disappearance of bank branches have far-reaching implications for the economy |
| Keywords: | Banks; branch closures; credit supply |
| JEL: | D22 G21 G32 R12 R32 |
| Date: | 2024–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0430&r=ban |
| By: | Sarah Arndt; Zeno Enders |
| Abstract: | We show that the impact of supply and monetary policy shocks on consumer prices is state-dependent. First, we let the data determine two inflation regimes and find that they are characterized by high and low inflation volatility. We then identify upstream supply shocks using instrumental variables based on data outliers in the producer price series. Such shocks exhibit a more substantial and more persistent effect on downstream prices during periods of elevated inflation volatility (State 2) compared to phases of more stable consumer price growth (State 1). Similarly, monetary policy shocks are more effective in State 2. Differenti-ating regimes by the level of inflation or the shock size does not reveal state dependency. The evidence supports a model in which producers optimally invest in price flexibility. This model predicts that stricter inflation targeting reduces price flexibility and, consequently, the pass-through of all shocks to inflation, beyond the standard demand channel. |
| Keywords: | Inflation Regimes, Supply Shocks, Monetary Policy, Cost Pass-Through, Producer Prices |
| JEL: | E31 E52 E32 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:938&r=ban |
| By: | Felix Aidala; Daniel Mangrum; Wilbert Van der Klaauw |
| Abstract: | In a previous post, we highlighted that financially fragile households are disproportionately likely to use “buy now, pay later” (BNPL) payment plans. In this post, we shed further light on BNPL’s place in its users’ household finances, with a particular focus on how use varies by a household’s level of financial fragility. Our results reveal substantially different use patterns, as more-fragile households tend to use the service to make frequent, relatively small, purchases that they might have trouble affording otherwise. In contrast, financially stable households tend to not use BNPL as frequently and are more likely to emphasize that BNPL allows them to avoid paying interest on credit-finance purchases. We explore below what drives these differences and consider the implications for future BNPL use. |
| Keywords: | Buy Now Pay Later (BNPL); credit; consumer finance; household borrowing; inequality; financial inclusion |
| JEL: | D14 |
| Date: | 2024–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97750&r=ban |
| By: | Dimitrios Kanelis; Pierre L. Siklos |
| Abstract: | We analyze the introductory statements of the ECB president and derive new sentiment indicators for the euro area based on a novel approach. To evaluate sentiment, we utilize a Large Language Model, namely FinBERT, which classifies the verbal sentiment of economics and finance-related textual data. We find that the ECB's conveyed sentiment about monetary policy, which is influenced by the economic outlook and the state of the euro area macroeconomy as expressed in speeches, plays a significant role in shaping the content of press conferences following a Governing Council decision. In contrast, speech sentiment regarding financial stability does not significantly influence introductory statements. |
| Keywords: | ECB, communication, financial stability, FinBERT, monetary policy, sentiment analysis |
| JEL: | E50 E58 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-10&r=ban |
| By: | Heidorn, Thomas; Meier, Rebecca |
| Abstract: | The main focus of this paper is a comprehensive overview of the US$ reference rate reform, with a particular focus on its implications for USD interest rate swaps (IRS). This paper aims to shed light on the current situation and future developments in a changing financial landscape. This paper discusses the change from US$-LIBOR to the Secured Overnight Financing Rate (SOFR) and the Chicago Mercantile Exchange (CME) Term SOFR as new reference rates. Main changes for US$ IRS against SOFR is a fixing-in-arrears, a loss in the money market term structure, and a change of implicit credit spreads. As only clients are allowed to use CME Term SOFR, banks face basis risk in hedging in the interbank market. As the SOFR is linked to treasuries instead of bank risk, in a crisis the difficulties of banks will increase. Corporate treasuries face a less efficient IRS market, wider ask-bid-spreads, changes in credit spreads, and an increase in complexity as the US money market now differs considerably from the EURO world. |
| Keywords: | LIBOR Reform, LIBOR, Secured Overnight Financing Rate, SOFR, Term SOFR, CME Term SOFR, RFRs, US$ overnight rate, interest rate swaps, US$ interest rate swaps, Bank Treasury, Corporate Treasury |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:283009&r=ban |
| By: | Edouard Cottin-Euziol (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Hassan Bougrine (Laurentian University); Louis-Philippe Rochon (Laurentian University) |
| Abstract: | Stock–flow consistent (SFC) modelling and monetary circuit theory (MCT) have many similarities. However, an important difference concerns the reflux phase, during which the credits issued by banks are repaid. This phase is constitutive of MCT models, but does not generally appear explicitly in SFC models. The authors propose here to develop an SFC model in which the bank loans issued at the beginning of a period are explicitly repaid at the end of it. The repayment of long-term bank loans financing investments will then represent a leakage outside the monetary circuit and affect the level of aggregate demand and the dynamics of the model. The authors show that considering these repayments could have a lasting effect on corporate profits, corporate indebtedness, and growth of production. This result suggests that it could be interesting to focus more on the reflux phase within SFC models, taking inspiration from MCT. |
| Keywords: | monetary circuit, stock–flow consistency, reflux, bank loans |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04420693&r=ban |
| By: | Felipe Alves; Sushant Acharya |
| Abstract: | We measure how the change in the share of constrained households in Canada following the COVID-19 recession has impacted the effectiveness of monetary policy. |
| Keywords: | Coronavirus disease (COVID-19); Monetary policy transmission |
| JEL: | E21 E40 E50 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:24-3&r=ban |
| By: | John Beshears; Matthew Blakstad; James J. Choi; Christopher Firth; John Gathergood; David Laibson; Richard Notley; Jesal D. Sheth; Will Sandbrook; Neil Stewart |
| Abstract: | Does automatic enrollment into retirement saving increase household debt? We study the randomized roll-out of automatic enrollment pensions to ~160, 000 employers in the United Kingdom with 2-29 employees. We find that the additional savings generated through automatic enrollment are partially offset by increases in unsecured debt. Over the first 41 months after enrollment, each additional month increases the average automatically enrolled employee’s pension savings by £32-£38, unsecured debt (such as personal loans and bank overdrafts) by £7, the likelihood of having a mortgage by 0.05 percentage points, and mortgage balances by £118. Automatic enrollment causes loan defaults to fall and credit scores to rise modestly. |
| JEL: | D14 D15 D90 G51 J32 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32100&r=ban |
| By: | Hyeongwoo Kim; Jisoo Son |
| Abstract: | Charge-offs signal critical information regarding the risk level of loan portfolios in the banking system, and they indicate the potential for systemic risk towards deep recessions. Utilizing consolidated financial statements, we have compiled the net charge-off rate (COR) data from the 10 largest U.S. bank holding companies (BHCs) for disaggregated loans, including business loans, real estate loans, and consumer loans, as well as the average top 10 COR for each loan category. We propose factor-augmented forecasting models for CORs that incorporate latent common factor estimates, including targeted factors, via an array of data dimensionality reduction methods for a large panel of macroeconomic predictors. Our models have demonstrated superior performance compared with benchmark forecasting models especially well for business loan and real estate loan CORs, while predicting consumer loan CORs remains challenging especially at short horizons. Notably, real activity factors improve the out-of-sample predictability over the benchmarks for business loan CORs even when financial sector factors are excluded. |
| Keywords: | Net Charge-Off Rate; Top 10 Bank Holding Companies; Disaggregated Loan CORs; Principal Component Analysis; Partial Least Squares; Out-of-Sample Forecast |
| JEL: | C38 C53 C55 G01 G17 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2024-01&r=ban |
| By: | Fisnik Bajrami (Charles University, Institute of Economic Studies, Faculty of Social Sciences, Prague, Czech Republic.) |
| Abstract: | Macroprudential policy has gained prominence for promoting financial stability. In this paper, we assess the effectiveness of macroprudential policy in reducing credit growth over a 22-year period across 129 countries. Additionally, we investigate the interaction between macroprudential policy, dollarisation, and various exchange rate regimes, examining their impact on different financial stability indicators. Our findings indicate that macroprudential policy significantly reduces credit growth within a quarter of implementation, though this is not evident in the case of soft peg exchange rate regimes. Furthermore, our analysis reveals that dollarised countries exhibit superior outcomes in financial stability when compared to alternative exchange rate regimes. |
| Keywords: | macroprudential policy, dollarisation, exchange rate, credit growth, non-performing loans, inflation, interest rates, empirical evaluation |
| JEL: | E42 E52 E58 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_07&r=ban |
| By: | Brierley, Peter (Bank of England) |
| Abstract: | This paper is published as a tribute to Peter Brierley, who served as a Bank of England official for four decades before his retirement in 2017. Peter, very sadly, passed away last year. The paper was written before the Global Financial Crisis and considers in detail the main techniques for resolving large banks and containing the systemic consequences that could arise from their failure. This paper highlights a number of issues that are of crucial importance in resolving large banks, notably the need as far as possible to avoid insolvency or – if that cannot be done – liquidation, the ways in which certain activities of a large bank may be wound down while those bank functions of systemic importance are preserved, and finally the trade-off between preserving financial stability on the one hand and limiting moral hazard on the other. Peter and his team would later work closely with HM Treasury to design the emergency legislation and special powers to address the failure of Northern Rock. |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1056&r=ban |
| By: | Taburet, Arthur (Duke’s Fuqua School of Business); Polo, Alberto (Bank of England); Vo, Quynh-Anh (Bank of England) |
| Abstract: | When lenders screen borrowers using a menu of contracts, they generate a contractual externality by making the composition of their competitors’ borrowers worse. Using data from the UK mortgage market and a structural model of screening with endogenous menus, this paper quantifies the impact of asymmetric information on equilibrium contracts and welfare. Counterfactual simulations show that, because of the externality, there is too much screening along the loan to value dimension. The deadweight loss, expressed in borrowers’ utility, is equivalent to an interest rate increase of 30 basis points (a 15% increase) on all loans. |
| Keywords: | Adverse selection; screening; structural model |
| JEL: | D82 G21 L13 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1057&r=ban |
| By: | Céline Baud; Nathalie Lallemand-Stempak (GREGOR - Groupe de Recherche en Gestion des Organisations - UP1 - Université Paris 1 Panthéon-Sorbonne - IAE Paris - Sorbonne Business School) |
| Abstract: | The development of quantitative technologies is increasingly challenging professional practices and raises questions about whether and how organizations may foster plural and reflexive practices. In this paper, we outline the role played by tools and their layouts in this process. Tools can sustain the enactment of plural views, logics and evaluative principles. However, it is not clear why, in some cases, designing or using these tools triggers intractable conflicts instead of helping to sustain reflexivity in a "productive" way. To address this issue, we explore the case of a French bank that introduced in its credit management processes a new statistical approach of risk management, which conflicted with the professional approach that prevailed at the time. Relying on Boltanski's (2011) work on critique, we highlight how "productive" reflexivity emerges, not only from critique, but from a dynamic relationship between critique, confirmation and practical action. This framework allows us to bring a fresh look at the layouts identified in the literature as able to sustain pluralism by exposing their differences regarding whether and how they may contribute to trigger reflexivity. We especially show that, when quantitative technologies are involved, the creation of compromising accounts may prompt dynamics of escalating conflict, while combinations may help organising a pluralism of modes of evaluation that nurtures reflexivity without inhibiting action. Moreover, our study shows how, in credit risk management, quantitative technologies can be implemented, even in the most operational processes, without bringing about an unreflexive "illusion" of control. |
| Keywords: | Quantitative technologies, Reflexivity, Risk management, Tools, Compromises, Combinations |
| Date: | 2024–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04419872&r=ban |
| By: | Jorge Abad; Galo Nuño; Carlos Thomas |
| Abstract: | We analyze the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. To this end, we develop a New Keynesian model with heterogeneous banks, a frictional interbank market, a central bank with deposit and lending facilities, and household preferences for different liquid assets. The model is calibrated to replicate the main monetary and financial aggregates in the euro area. Our analysis predicts that CBDC adoption implies a roughly equivalent reduction in banks’ deposit funding. However, this ‘deposit crunch’ has a rather small effect on bank lending to the real economy, and hence on aggregate investment and GDP. This result reflects the parallel impact of CBDC on the central bank’s operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a ‘floor’ system –with ample reserves– to a ‘corridor’ one. For larger CBCD adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a ‘ceiling’ one with scarce reserves. |
| Keywords: | central bank digital currency, interbank market, search and matching frictions, excess reserves |
| JEL: | E42 E44 E52 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10896&r=ban |
| By: | Omer Majeed (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Robert Breunig (Crawford School of Public Policy, Australian National University) |
| Abstract: | Recent papers have argued that monetary policy and economic conditions can influence the amount of innovative activity in the economy, and therefore productivity and living standards in the future. This paper examines whether this is the case for Australia, a small open economy that tends to import innovation from overseas. We find that contractionary (expansionary) monetary policy reduces (increases) aggregate research and development (R&D) spending, and that lower (higher) R&D spending reduces (increases) future productivity. However, using firm-level data and a broader survey measure of innovation that also captures adoption, we find heterogeneous responses across different firm types. Small firms decrease innovation in response to contractionary monetary policy shocks whereas large firms increase innovation. This heterogeneity appears to reflect differing exposure to the channels through which monetary policy affects innovation. These channels include affecting demand or affecting financial conditions and constraints. We also find that US monetary policy spills over and affects Australian firms' innovation. Overall, our results suggest that monetary policy and economic conditions have medium-run effects on productivity, though the effects are more heterogeneous than previously documented. While the effects may cancel out over a cycle, this finding highlights the importance of stabilisation policy in preventing medium-run economic scarring. |
| Keywords: | innovation; monetary policy; firm-level data |
| JEL: | E52 O30 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-01&r=ban |
| By: | Sewon Hur (Federal Reserve Bank of Dallas); César Sosa-Padilla (University of Notre Dame and NBER); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University) |
| Abstract: | We study optimal bailout policies amidst banking and sovereign crises. Our model features sovereign borrowing with limited commitment, where domestic banks hold government debt and extend credit to the private sector. Bank capital shocks can trigger banking crises, prompting the government to consider extending guarantees over bank assets. This poses a trade-off: Larger bailouts relax financial frictions and increase output, but increase fiscal needs and default risk (creating a Ôdiabolic loopÕ). Optimal bailouts exhibit clear properties. The fraction of banking losses the bailouts cover is (i) decreasing in government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of banking crises. Even though bailouts mitigate the adverse effects of banking crises, the economy is ex ante better off without bailouts: Having access to bailouts lowers the cost of defaults, which in turn increases the default frequency, and reduces the levels of debt, output, and consumption. |
| Keywords: | Bailouts; Sovereign Defaults; Banking Crises; Conditional Transfers; Sovereign-bank diabolic loop |
| JEL: | E32 E62 F34 F41 G01 G15 G28 H63 H81 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:60&r=ban |
| By: | Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Joelle Scally; Wilbert Van der Klaauw; Crystal Wang |
| Abstract: | The New York Fed’s Center for Microeconomic Data released the Quarterly Report on Household Debt and Credit for the fourth quarter of 2023 this morning. Household debt balances grew by $212 billion over the last quarter. Although there was growth across most loan types, it was moderate compared to the fourth-quarter changes seen in the past few years. Mortgage balances grew by $112 billion and home equity line of credit (HELOC) balances saw an $11 billion bump as borrowers tapped home equity in lieu of refinancing first mortgages. Credit card balances, which typically see substantial increases in the fourth quarter coinciding with holiday spending, grew by $50 billion, and are now 14.5 percent higher than in the fourth quarter of 2022. Auto loan balances saw a $12 billion increase from the previous quarter, continuing the steady growth that has been in place since 2011. In this post, we revisit our analysis on credit cards and examine which groups are struggling with their auto loan payments. The Quarterly Report and this analysis are based on the New York Fed Consumer Credit Panel (CCP), a panel which is drawn from Equifax credit reports. |
| Keywords: | household finance; auto loans; Consumer Credit Panel (CCP); consumer credit |
| JEL: | D14 |
| Date: | 2024–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97733&r=ban |
| By: | Kathryn M.E. Dominguez; Andrea Foschi |
| Abstract: | Central banks across the globe introduced large-scale asset purchase programs to address the unprecedented circumstances experienced during the pandemic. Many of these programs were announced as open-ended to shock-and-awe market participants and restore confidence in financial markets. This paper examines whether these whatever-it-takes announcements had larger effects than announcements with explicit limits on scale. We use a narrative approach to categorize announcements made by twenty-two central banks, and event study, propensity-score-matching, and local projection methods to measure the short-term effects of policy announcements on exchange rates and sovereign bond yields. We find that on average a central bank's first whatever-it-takes announcement lowers 10-year bond yields by an additional 25 basis points relative to size-limited announcements, suggesting that communication of potential policy scale matters. Our results for yields hold for both advanced and emerging economies, while exchange rates go in opposing directions, muting their response when we group all countries together. |
| JEL: | E44 E58 F42 G14 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32115&r=ban |
| By: | Kho, Stephen |
| Abstract: | I study the transmission of monetary policy to deposit rates in the euro area with a focus on asymmetries and the role of banking sector concentration. Using a local projections framework with 2003-2023 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to an unexpected tightening or easing of monetary policy. However, more concentrated domestic banking sectors do pass-on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy to deposit rates, which in turn may affect banking sector profitability. JEL Classification: D40, E43, E52, G21 |
| Keywords: | banking sector, deposit rates, market power, monetary policy |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242896&r=ban |
| By: | Nadezhda Ivanova (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation) |
| Abstract: | This paper asks the following questions. How does market structure reshape the transmission of monetary policy to bank lending? How are loan characteristics such as loan volume, maturity, lending rate, risk, and the extensive margin of lending affected? Is there a trade-off between financial stability and the strength of monetary transmission? We find that, on more concentrated markets, the effect of monetary policy on lending rate and risk taking is amplified whereas the effect on loan volume is muted. Our current findings may imply the existence of a trade-off between the strength of monetary policy transmission and financial stability, but are subject to further investigation. |
| Keywords: | Monetary policy transmission; Market concentration. |
| JEL: | E44 E52 G21 C14 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps123&r=ban |
| By: | Lorenzo Casaburi; Jack Willis |
| Abstract: | We study the provision of financial services to small firms, consumers, and workers in developing countries as part of value chain relationships: value chain microfinance (VCMF). We first explore how VCMF can both overcome barriers to financial access – including asymmetric information, enforcement, and behavioral biases – and strengthen value chains, but also how it can introduce new challenges. We then review a recent empirical literature at the intersection of value chains and microfinance studying the demand for and effects of VCMF in credit, insurance, and savings markets. We conclude by highlighting promising directions for future work. |
| JEL: | G20 L14 O16 O17 Q14 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32085&r=ban |
| By: | , Le Thanh Tung |
| Abstract: | In recent times, the notion of relationship quality has attracted a lot of interest in the domains of consumer behavior and marketing. This research aims to investigate the influence of service quality, intimacy, and ethics as antecedents on the elements of relationship quality (satisfaction, trust, and commitment) and loyalty in the Vietnamese banking business. Utilizing the mediating function of relationship quality, this research seeks to enhance the understanding of the factors influencing customer loyalty. A survey of 302 bank customers in Vietnam was conducted. The findings show that service quality and ethics have a substantial impact on customer trust, satisfaction, and commitment, resulting in greater loyalty. Furthermore, the study provides managerial implications for Vietnamese banks to improve their service quality and ethical standards to develop customer trust and commitment, resulting in increased customer loyalty in Vietnam's banking industry. |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:qzpxk&r=ban |
| By: | Babina, Tania (Columbia University); Bahaj, Saleem (Bank of England); Buchak, Greg (Stanford University); De Marco, Filippo (Bocconi University); Foulis, Angus (Bank of England); Gornall, Will (University of British Columbia); Mazzola, Francesco (ESCP Business School); Yu, Tong (Imperial College London and Financial Conduct Authority) |
| Abstract: | Open banking (OB) empowers bank customers to share transaction data with fintechs and other banks. 49 countries have adopted OB policies. Consumer trust in fintechs predicts OB policy adoption and adoption spurs investment in fintechs. UK microdata shows that OB enables: i) consumers to access both financial advice and credit; and ii) small and medium‑sized enterprises to establish new fintech lending relationships. In a calibrated model, OB universally improves welfare through entry and product improvements when used for advice. When used for credit, OB promotes entry and competition by reducing adverse selection, but higher prices for costlier or privacy-conscious consumers partially offset these benefits |
| Keywords: | Open banking; entrepreneurship; fintech; financial innovation; data access; data rights; data portability; Big Data; financial regulation; financial sector; banks |
| JEL: | G21 G28 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1059&r=ban |
| By: | Christian Keuschnigg (University of St.Gallen, Institute of Economics (FGN-HSG)); Michael Kogler (German Council of Economic Experts); Johannes Matt (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | How do banks’ lending decisions influence firm turnover and creative destruction? We develop a dynamic general equilibrium model in which banks restructure loans with high default risk, thereby releasing funds for new lending and forcing firms with poor prospects to close down. By reducing banks’ reliance on external funds, loan restructuring lowers the equilibrium interest rate, which stimulates firm creation. We derive analytical and quantitative results from the model calibrated to German data: A lower cost of loan liquidation (e.g., improved insolvency laws) accelerates firm entry and exit, and boosts aggregate capital productivity mainly by incentivizing more active credit reallocation. Restructuring also complements policies that aim at stimulating firm creation (e.g., R&D subsidies) as it mitigates a crowding-out of entry via the interest rate. |
| Keywords: | Creative destruction, reallocation, bank credit, productivity |
| JEL: | E23 E44 G21 O4 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2404&r=ban |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | We analyze how trust affects the transmission of negative demand and supply shocks using a behavioural macroeconomic model. We define trust to have two dimensions: trust in the central bank’s inflation target and trust in the central bank’s capacity to stabilize the business cycle. We find, first, that when large negative shocks occur the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories trust collapses, in the good trajectories it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions, in particular the initial state of inflation and output expectations matters. Unfavorable initial expectations drive the economy into a bad trajectory, favorable initial expectations produce good trajectories. Fourth, we analyze the sensitivity of our results with respect to the size of the shocks. Fifth, we derive implications of our results for our capacity of making forecasts about the effects of large demand and supply shocks. |
| Keywords: | behavioral macroeconomics; monetary policy; trust; Wiley deal |
| JEL: | E32 E52 |
| Date: | 2024–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120871&r=ban |
| By: | Georgarakos, Dimitris; Popov, Alexander |
| Abstract: | Using microdata from a U.S. household survey, we document that immigrants who lived through a sovereign default episode are 6% less likely to hold debt relative to otherwise similar immigrants who reside in the same U.S. state and come from the same foreign country but who did not experience a default. Conditional on holding debt, consumers in the former group borrow less and service lower debt burdens. The negative effect on borrowing behavior of having experienced a sovereign default increases with family size and declines with education. These findings highlight the role of personal experience in shaping households’ financial decisions. JEL Classification: G11, G51, H63, D83 |
| Keywords: | experiences, household borrowing, immigrant, sovereign default |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242893&r=ban |
| By: | Ortiz, Marco; Inca, Arthur; Solf, Fabrizio |
| Abstract: | Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy. |
| Keywords: | Nominal GDP targeting, optimal monetary policy, General equilibrium, open economy macroeconomics. |
| JEL: | E31 E32 E52 F41 |
| Date: | 2024–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119999&r=ban |
| By: | Mario Sanz-Guerrero; Javier Arroyo |
| Abstract: | Peer-to-peer (P2P) lending has emerged as a distinctive financing mechanism, linking borrowers with lenders through online platforms. However, P2P lending faces the challenge of information asymmetry, as lenders often lack sufficient data to assess the creditworthiness of borrowers. This paper proposes a novel approach to address this issue by leveraging the textual descriptions provided by borrowers during the loan application process. Our methodology involves processing these textual descriptions using a Large Language Model (LLM), a powerful tool capable of discerning patterns and semantics within the text. Transfer learning is applied to adapt the LLM to the specific task at hand. Our results derived from the analysis of the Lending Club dataset show that the risk score generated by BERT, a widely used LLM, significantly improves the performance of credit risk classifiers. However, the inherent opacity of LLM-based systems, coupled with uncertainties about potential biases, underscores critical considerations for regulatory frameworks and engenders trust-related concerns among end-users, opening new avenues for future research in the dynamic landscape of P2P lending and artificial intelligence. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.16458&r=ban |
| By: | Ganapati Kumar Biswas |
| Abstract: | Financial inclusion is touted one of the principal drivers for economic growth for an economy. The study aims to explore the impact of financial inclusion on economic growth in Bangladesh. In my study, I used the number of loan accounts as the proxy for financial inclusion. Using time series data from spans from 2004-2021, the study revealed that there exists a long-run relationship between GDP, financial inclusion, and other macroeconomic variables in Bangladesh. The study also found that financial inclusion had a positive impact on economic growth of Bangladesh during the study period. Therefore, the policymakers and the central bank of Bangladesh as the apex authority of financial system should promote financial inclusion activities to achieve sustainable economic growth. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.11585&r=ban |
| By: | Demeulemeester, Samuel |
| Abstract: | This paper aims to show how the 100% money proposal, which Irving Fisher came to support in 1935, connects to the rest of his work on monetary instability—in particular, to his credit cycle analysis of 1911, and his debt-deflation theory of 1932-33. Behind these respective analyses, we identify a common explanatory pattern of monetary fluctuations, the “debt-money-prices” triangle, which we use to show how Fisher’s explanations evolved over time, and how his advocacy of 100% money came as a logical conclusion. |
| Date: | 2024–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:tfm6v&r=ban |