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on Banking |
| By: | Hüttl, Pia; Kaldorf, Matthias |
| Abstract: | How does a shock to the liquidity of bank assets affect credit supply, cross-border lending, and real activity at the firm level? We exploit that, in 2007, the European Central Bank replaced national collateral frameworks by a single list. This collateral framework shock added loans to non-domestic euro area firms to the pool of eligible assets. Using loan level data, we show that banks holding a large share of newly eligible cross-border loans increase loan supply by 14% and reduce spreads by 16 basis points, compared to banks with smaller holdings of such loans. The additional credit is mainly extended to (previously eligible) domestic borrowers, suggesting only a limited cross-border effect of the collateral framework shock. However, the shock had real effects: firms highly exposed to affected banks increase their total debt, employment, and investment. |
| Keywords: | Bank Liquidity Shocks, Bank Lending Channel, Financial Integration, Real Effects, Eligibility Premia |
| JEL: | E44 E58 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:283006&r=ban |
| By: | Neryvia Pillay; Konstantin Makrelov |
| Abstract: | Banks hold capital above microprudential and macroprudential regulatory requirements for a variety of reasons, including as a risk mitigation measure. In this study, we assess how decisions around the size of excess capital as well as monetary and financial stability actions impact sectoral lending in South Africa. Using a unique set of micro data for the South African banking sector for the period 2008 to 2020, provided by South Africas Prudential Authority, our analysis controls for bank characteristics such as bank size, profitability and liquidity. Our results suggest that banks decisions around holding additional capital affect their lending. As expected, monetary policy actions have a strong impact on bank lending and so do regulatory changes to bank capital requirements. These impacts tend to be smaller for larger banks, in line with results published in the global literature. Our results highlight the difficulties of thinking about policy in a Tinbergen rule type of world. Fiscal, microprudential, macroprudential and monetary policy actions can affect price and financial stability goals through their impact on credit extension. When policies work at cross purposes, they can easily undermine each others goals. |
| Date: | 2024–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11056&r=ban |
| By: | Ozili, Peterson K |
| Abstract: | Artificial intelligence (AI) is a topic of interest in the finance literature. However, its role and implications for central banks have not received much attention in the literature. Using discourse analysis method, this article identifies the benefits and risks of artificial intelligence in central banking. The benefits of artificial intelligence for central banks are that deploying artificial intelligence systems will encourage central banks to develop information technology (IT) and data science capabilities, it will assist central banks in detecting financial stability risks, it will aid the search for granular micro economic/non-economic data from the internet so that the data can support central banks in making policy decisions, it enables the use of AI-generated synthetic data, and it enables task automation in central banking operations. However, the use of artificial intelligence in central banking poses some risks which include data privacy risk, the risk that using synthetic data could lead to false positives, high risk of embedded bias, difficulty of central banks to explain AI-based policy decisions, and cybersecurity risk. The article also offers some considerations for responsible use of artificial intelligence in central banking. |
| Keywords: | central bank, artificial intelligence, financial stability, responsible AI, artificial intelligence model. |
| JEL: | E51 E52 E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120151&r=ban |
| By: | Isil Erel; Eduard Inozemtsev |
| Abstract: | Nonbank lenders have been playing an increasing role in supplying debt, especially after the Great Recession. How important are the distortions in the greater regulation of banks that differentially limit risk-taking across alternative providers of credit? How might the growing role of nonbanks in credit markets affect financial stability? This selective review addresses these questions and discusses how banks and nonbanks helped provide liquidity to the nonfinancial sector during the COVID-19 pandemic shock. We argue that tighter bank regulation has created incentives for nonbanks to increase their participation in credit markets, a trend that creates concerns about financial stability. |
| JEL: | G21 G22 G23 G24 G28 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32114&r=ban |
| By: | Xisong Jin |
| Abstract: | This paper introduces a forward-looking bank-level stress testing framework for a large-scale system to assess three forms of banking system vulnerability– bank capital fragility, bank capital adequacy and bank solvency. Results for Luxembourg are provided with a decomposition by bank business model and domicile type. The paper goes on to assess how these systemic risk indicators are linked to macroeconomic variables, and investigates their predictive power for Luxembourg’s nominal GDP growth one year ahead. Several important findings are documented over 2003Q2 to 2023Q3. First, the systemic risk indicators responded to the main stock market crashes in a timely manner. However, contributions from different bank business models and domicile types varied over time. Second, association with key macroeconomic variables (interest rates, liquidity flow, euro area consumer confidence and business climate) depended on the different characteristics of systemic risk across bank business models. Third, the systemic risk indicators contributed to explaining nominal GDP growth one year ahead. However, the systemic risk component associated with search-for-yield behavior and fee & commission generating activities could also explain nominal GDP growth, suggesting that if banks became more dependent on these income sources, they could create financial stability issues in the long run. Overall, the framework provides a useful monitoring toolkit that tracks changes in forward-looking systemic risk and risk spillovers in the Luxembourg banking sector. |
| Keywords: | Financial stability, systemic risk, macro-prudential policy, dynamic dependence, banking business model, financial stress index, coronavirus COVID-19, macro-financial linkages. |
| JEL: | C1 E5 F3 G1 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp182&r=ban |
| By: | Katrin Assenmacher; Massimo Ferrari Minesso; Arnaud Mehl; Maria Sole Pagliari |
| Abstract: | We develop a two-country DSGE model with financial frictions to study the transi- tion from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost- free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution meth- ods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand. |
| Keywords: | Central bank digital currency, open-economy DSGE models, steady- state transition, occasionally binding constraints |
| JEL: | E50 E58 F30 F41 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:803&r=ban |
| By: | Böhnke, Victoria; Ongena, Steven; Paraschiv, Florentina; Reite, Endre J. |
| Abstract: | The internal ratings-based (IRB) approach maps bank risk profiles more adequately than the standardized approach. After switching to IRB, banks' risk-weighted asset (RWA) densities are thus expected to diverge, especially across countries with different supervisory strictness and risk levels. However, when examining 52 listed banks headquartered in 14 European countries that adopted the IRB approach, we observe a downward convergence of their RWA densities over time. We test whether this convergence can be entirely explained by differences in the size of the banks, loss levels, country risk, and/or time of IRB implementation. Our findings indicate that this is not the case. Whereas banks in high-risk countries with less strict regulation and/or supervision, reduce their RWA densities, banks elsewhere increase theirs. Especially for banks in high-risk countries, RWA densities seem to underestimate banks' economic risk. Hence, the IRB approach enables regulatory arbitrage, whereby authorities may only enforce strict supervision on capital requirements if they do not jeopardize bank existence. |
| Keywords: | Capital regulation, credit risk, internal ratings-based approach, regulatory arbitrage, risk-weighted assets |
| JEL: | G21 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:283007&r=ban |
| By: | Tania Babina; Saleem A. Bahaj; Greg Buchak; Filippo De Marco; Angus K. Foulis; Will Gornall; Francesco Mazzola; Tong Yu |
| 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; ii) SMEs 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. |
| JEL: | G21 G23 G24 G28 G5 G50 K21 L10 L51 O31 O36 O38 O50 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32089&r=ban |
| By: | Miguel Fernandes (University of Surrey); Mario Pascoa (University of Surrey) |
| Abstract: | The repo market played an important role in the 2007-2008 crisis and its aftermath. The “run on repo†started in 2007 when cash lenders withdrew their repo funding due to concerns over securitized mortgages as collateral and haircuts rose dramatically as described in Gorton and Metrick (2012). The combination of very large, unprecedented haircuts with declining asset values, helped fuel the insolvency problems in the banking sector, which would eventually lead to massive bailouts throughout 2008 and the bankruptcy of some major banks. In the following years, the repo market recovered most of its influence and size, but the Basel III regulations that were imposed to prevent future banking crises and limit leverage would create new frictions in the repo market. The “leverage ratio†in particular has perverse effect on the repo markets. The “leverage ratio†demands that banks hold Tier 1 capital as a percentage of their total assets. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0224&r=ban |
| By: | Camilo Gómez (Central Bank of Colombia); Daniela Rodríguez-Novoa (Central Bank of Colombia) |
| Abstract: | This paper examines the relationship between three government support measures (debt moratorium, credit guarantee programs, and payroll subsidies) and the firm's payment behavior on loans in Colombia. To do so, we take advantage of the COVID-19 pandemic and use it as a case study. Using highly granular data at the bank-firm level and a difference-in-difference approach, we find that firms subject to debt reliefs and government guarantee programs experienced a lower probability of default while these policies were in force. Subsequently, once the programs ended, the dynamic of the payment behavior of these firms was similar to that of those untreated. On the contrary, payroll subsidies did not affect firms' payment behavior. Regarding the effect on banks' risk assessment, our results suggest that participation in relief programs provided banks with new information about debtors' risk, which could indicate unintended consequences of government support programs. |
| Keywords: | firm support; credit default; credit risk |
| JEL: | G18 G21 G38 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp03-2024&r=ban |
| By: | Heckmann, Lotta; Memmel, Christoph |
| Abstract: | We analyse the ftnancial forecasts small and medium-sized German banks provided in several waves of a quantitative survey, called LIRES, and compare them with the results the banks actually realized. Based on this unique data set, we ftnd that the predictions are relevant, especially concerning the net interest income for the next year, and persistent, but neither unbiased nor rational. We also ftnd slight evidence for a positive relationship between planning and performance, i.e. banks whose predictions are more accurate tend to have a higher return on assets. Looking at the forecasts made just before the end of the low-interest rate environment, we observe that the explanatory power of predictions went down. |
| Keywords: | Forecasts, Banks, Quantitative Survey (LIRES) |
| JEL: | G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:283008&r=ban |
| By: | Jose J. Canals-Cerda |
| Abstract: | I examine the challenges of economic forecasting and model misspecification errors confronted by financial institutions implementing the novel current expected credit loss (CECL) allowance methodology and its impact on model risk and bias in CECL projections. We document the increased sensitivity to model and macroeconomic forecasting error of the CECL framework with respect to the incurred loss framework that it replaces. An empirical application illustrates how to leverage simple machine learning (ML) strategies and statistical principles in the design of a nimble and flexible CECL modeling framework. We show that, even in consumer loan portfolios with tens of millions of loans, like mortgage, auto, or credit card portfolios, one can develop, estimate, and deploy an array of models quickly and efficiently, and without a forecasting performance penalty. Drawing on more than 20 years of auto loans data and the experience from the Great Recession and the COVID-19 pandemic, we leverage basic econometric principles to identify strategies to deal with biased model projections in times of high economic uncertainty. We advocate for a focus on resiliency and adaptability of models and model infrastructures to novel shocks and uncertain economic conditions. |
| Keywords: | CECL; Allowance for Loan and Lease Losses; Accounting Regulations; Model Risk |
| JEL: | G01 G21 G28 G50 M41 |
| Date: | 2024–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97748&r=ban |
| By: | Schilling, Linda |
| Abstract: | Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as Emergency Liquidity Assistance, and redemption (withdrawal) fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective. |
| Keywords: | financial regulation, bank runs, global games, policy effectiveness, bank resolution, withdrawal fees, emergency liquidity assistance, lender of last resort policies, money market mutual fund gates, suspension of convertibility |
| JEL: | D81 D82 G21 G28 G33 G38 |
| Date: | 2024–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120041&r=ban |
| By: | Celene Ancalle (Central Reserve Bank of Peru); Maria Gracia Garcia (Central Reserve Bank of Peru) |
| Abstract: | Interoperability is the characteristic of a payment service (e.g. digital wallets) to allow its users to pay any person or company, regardless of the financial institution providing services to the payer or payee. On October 7, 2022, the Central Reserve Bank of Peru (BCRP) issued the Payment Services Interoperability Regulation to massify digital payments in the country. The main objective of this research is to study the impact of interoperability, promoted through regulation, on the use of digital payments. We analyzed transactional data provided daily by market participants in the interoperability regulation, and data obtained from digital wallet users through a survey. The results suggest that interoperability has contributed to increase the use of digital payments, but there are other factors such as fees, user experience and quality of service that can impact the adoption and use of interoperable payment services. Furthermore, our analysis shows that interoperability benefited more individuals in regions with a higher degree of financial inclusion, i.e. financial inclusion is key to benefiting from interoperability. These results serve as a basis for validating, adjusting, and reorienting the future regulatory strategies of the BCRP, aimed at fostering greater adoption and use of digital payments; as well as to guide other payment authorities seeking to implement effective digital payments regulations, drawing lessons from the Peruvian experience. |
| Keywords: | Interoperability; regulation; digital payments; financial inclusion; Peru |
| JEL: | E42 E58 E61 E65 G28 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp02-2024&r=ban |
| By: | Saul Estrin (Lucas College and Graduate School of Management, San José State University, London School of Economics); Susanna Khavul (London School of Economics); Alexander S. Kritikos (DIW Berlin, CEPA, University of Potsdam, IZA, IAB); Jonas Löher (Institut für Mittelstandsforschung Bonn) |
| Abstract: | Financing entrepreneurship spurs innovation and economic growth. Digital financial platforms that crowdfund equity for entrepreneurs have emerged globally, yet they remain poorly understood. We model equity crowdfunding in terms of the relationship between the number of investors and the amount of money raised per pitch. We examine heterogeneity in the average amount raised per pitch that is associated with differences across three countries and seven platforms. Using a novel dataset of successful fundraising on the most prominent platforms in the UK, Germany, and the USA, we find the underlying relationship between the number of investors and the amount of money raised for entrepreneurs is loglinear, with a coefficient less than one and concave to the origin. We identify significant variation in the average amount invested in each pitch across countries and platforms. Our findings have implications for market actors as well as regulators who set competitive frameworks. |
| Keywords: | Equity crowdfunding, Soft information, Entrepreneurship, Finance, Financial access and inclusion |
| JEL: | D26 G23 G41 L26 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:pot:cepadp:72&r=ban |
| By: | Audrius Jukonis; Elisa Letizia; Linda Rousova |
| Abstract: | Stricter derivative margin requirements have increased the demand for liquid collateral, but euro area investment funds, which use derivatives extensively, have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, we assess whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives under a range of stress scenarios. The estimates indicate that between 13 percent and 33 percent of euro area funds with sizeable derivatives exposures may not have sufficient liquidity buffers to meet the calls under adverse market shocks. As a result, they are likely to redeem money market fund (MMF) shares, procyclically sell assets, and draw on credit lines, thus amplifying the market dynamics under such stress scenarios. Our findings highlight the importance of further work to assess the potential role of macroprudential policies for nonbanks, particularly regarding liquidity risk in funds. |
| Keywords: | variation margin; EMIR data; market stress; big data; nonbank financial intermediaries |
| Date: | 2024–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/026&r=ban |
| By: | Bruno Albuquerque; Martin Iseringhausen; Frederic Opitz |
| Abstract: | We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates. |
| Keywords: | Credit conditions; FAVAR; house prices; monetary policy; regional data; supply elasticities |
| Date: | 2024–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/023&r=ban |
| By: | Richard Bofinger; Simon Cornée; Ariane Szafarz |
| Abstract: | In 2019, the Sustainable Finance Disclosure Regulation (SFDR) introduced new transparency rules for the investment fund industry to combat greenwashing. This paper compares the sustainability performance of ESG funds marketed by social and conventional banks, before and after the SFDR came into force. Its contribution is twofold. First, the results suggest that the sustainability performance of ESG funds marketed by social banks was not affected by the SFDR. The intuition is that social banks are protected from greenwashing because sustainability and transparency are embedded in their founding principles. Second, and in contrast, the results suggest that the SFDR has successfully reduced greenwashing in the ESG funds of conventional banks. |
| Keywords: | ESG; Investment funds; Social banks; Sustainable Finance Disclosure Regulation (SFDR); Greenwashing; Transparency |
| JEL: | G11 G18 G21 G38 K23 |
| Date: | 2024–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/368076&r=ban |
| By: | Coutinho, Mauricio C. |
| Abstract: | Review of “Money, Debt and Politics: The Bank of Lisbon and the Portuguese Liberal Revolution of 1820” by José Luís Cardoso. |
| Date: | 2024–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:dnmrw&r=ban |
| By: | Riccardo Zolea |
| Abstract: | The Classics and Marx, but also more recent contributions inspired by them, assume that the interest rate is a part of the profit rate. Over time, however, credit towards consumption and for the purchase of housing by workers has taken on greater and greater economic weight. This paper therefore aims to study this issue from a theoretical point of view, analysing its premises and implications. After investigating the necessary conditions on both the demand side (workers) and the supply side (banks), an attempt is made to analyse the distributional effects of a change in the interest rate. The results appear rather complex and difficult to interpret, suggesting a certain difficulty in identifying a simple dynamic that can be generalised to any economic context. |
| Keywords: | surplus approach; interest rate; mortgage |
| JEL: | E11 E40 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2403&r=ban |
| By: | Victor Budau; Herve Tourpe |
| Abstract: | This working paper inaugurates the "Technology Fundamentals for Digital Finance" series, concentrating on the technical aspects of financial Digital Assets. The series aims to facilitate the use of a clear terminology in a nascent platform-oriented paradigm of financial infrastructures, by laying the groundwork for technical discussions on digital asset standards. The paper introduces a conceptual model named ASAP (Access, Service, Asset, Platform) for Digital Asset Platforms (DAP), leveraging insights from IT industry practices and experiments by central banks. The ASAP model is illustrated through examples and use cases of tokenized assets, to demonstrate the possible usage and merits of modeling Digital Asset Platforms with four layers. Just as the utilization of a seven-layer model (often refered to as TCP/IP) has been fundamental to the interoperability of the internet, it is anticipated that the four-layer ASAP model for Digital Asset Platforms will similarly promote cross-platform interoperability, including across various jurisdictions, paving the way for a more cohesive digital asset ecosystem. |
| Keywords: | digital asset; platform; conceptual model; service; tokenization; tokenized asset; interoperability; technical standards; platform-enabled finance; fintech; CBDC; unbundling; open banking |
| Date: | 2024–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/019&r=ban |
| By: | Jonas Krampe; Luca Margaritella |
| Abstract: | We revisit the problem of estimating high-dimensional global bank network connectedness. Instead of directly regularizing the high-dimensional vector of realized volatilities as in Demirer et al. (2018), we estimate a dynamic factor model with sparse VAR idiosyncratic components. This allows to disentangle: (I) the part of system-wide connectedness (SWC) due to the common component shocks (what we call the "banking market"), and (II) the part due to the idiosyncratic shocks (the single banks). We employ both the original dataset as in Demirer et al. (2018) (daily data, 2003-2013), as well as a more recent vintage (2014-2023). For both, we compute SWC due to (I), (II), (I+II) and provide bootstrap confidence bands. In accordance with the literature, we find SWC to spike during global crises. However, our method minimizes the risk of SWC underestimation in high-dimensional datasets where episodes of systemic risk can be both pervasive and idiosyncratic. In fact, we are able to disentangle how in normal times $\approx$60-80% of SWC is due to idiosyncratic variation and only $\approx$20-40% to market variation. However, in crises periods such as the 2008 financial crisis and the Covid19 outbreak in 2019, the situation is completely reversed: SWC is comparatively more driven by a market dynamic and less by an idiosyncratic one. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.02482&r=ban |
| By: | Michelle W. Bowman |
| Date: | 2024–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:97745&r=ban |
| By: | Mr. Serhan Cevik |
| Abstract: | The rise of fintech is revolutionizing the financial landscape, with products and companies advancing innovative technologies to improve and automate financial services. In this paper, I use a novel dataset and implement a dynamic modelling to investigate the relationship between fintech and economic growth in a panel of 198 countries over the period 2012–2020. This cross-country approach—utilizing direct measures of fintech and dealing with potential endogeneity—provides interesting empirical insights. First, the impact magnitude and statistical significance of fintech on real GDP per capita growth depend on the type of instrument (digital lending vs. digital capital raising). While digital lending has a statistically significant positive effect on economic growth, digital capital raising has a large but insignificant effect. Second, the overall impact of fintech including all instruments is positive and statistically significant because of the overwhelming share of digital lending in total. Finally, while the positive relationship between fintech and growth is stronger in magnitude in advanced economies, the statistical significance of this effect is higher in developing countries. Taken as a whole, these results confirm Schumpeter’s prediction that financial innovation can promote growth, but not every type of fintech becomes an accelerator. |
| Date: | 2024–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/020&r=ban |
| By: | Yunhan Zhang (Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China); David Gabauer (Academy of Data Science in Finance, Vienna, Austria; Institute of Corporate Finance, Johannes Kepler University, Linz, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | By introducing a new generalized forecast error variance decomposition (GFEVD) approach that splits the same into its contemporaneous and lagged components, we investigate the risk spillover effects of different order moments, derived from intraday data, for the top 10 banks and top 10 oil and gas companies in the U.S., covering the period from December 29, 2017 to December 30, 2022. The study finds that, first, the dynamic total connectedness of all order moments is heterogeneous over time and economic events. Second, except realized volatility spillovers, the vast majority of overall spillovers are attributable to contemporaneous spillovers, while only a tiny fraction is associated with lagged spillovers. Finally, realized skewness (crash risk) and realized kurtosis (extreme events) in banks and oil and gas companies originate mainly from intra-industry rather than inter-industry transmission. |
| Keywords: | Banking connectedness; TVP-VAR; higher moments; dynamic connectedness; GFEVD decomposition |
| JEL: | C50 F65 G15 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202405&r=ban |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness, and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission. |
| JEL: | E40 E5 F30 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32128&r=ban |
| By: | Mestiri, Sami |
| Abstract: | In the last years, the financial sector has seen an increase in the use of machine learning models in banking and insurance contexts. Advanced analytic teams in the financial community are implementing these models regularly. In this paper, we analyses the limitations of machine learning methods, and then provides some suggestions on the choice of methods in financial applications. We refer the reader to the R libraries that can be used to compute the Machine learning methods |
| Keywords: | Financial applications; Machine learning ; R software. |
| JEL: | C45 C5 G23 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119998&r=ban |
| By: | Kristy Jansen; Sven Klingler; Angelo Ranaldo; Patty Duijm |
| Abstract: | Pension funds rely on interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing unique data on Dutch pension funds, we show that this hedging behavior exposes pension funds to liquidity risk due to margin calls, which can be as large as 15% of their total assets. Our analysis uncovers three key findings: (i) pension funds with tighter regulatory constraints use swaps more aggressively; (ii) in response to rising interest rates, triggering margin calls, pension funds predominantly sell safe and short-term government bonds; (iii) we demonstrate that this procyclical selling adversely affects the prices of these bonds. |
| Keywords: | Pension funds; fixed income; interest rate swaps; liability hedging; liquidity risk; margin calls; price impact |
| JEL: | E43 G12 G18 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:801&r=ban |
| By: | Valentina Colombo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Alessia Paccagnini |
| Abstract: | This study assesses the impact of financial uncertainty shocks in the US and explores the influence of monetary policy. Using a nonlinear Vector Autoregressive model, incorporating short-term interest rates and the Federal Reserve’s balance sheet policy, we find that the reaction of the monetary policy is asymmetric across the business cycle. The state-dependent responses in consumption and investment significantly influence GDP fluctuations. A counterfactual analysis reveals that balance sheet-related monetary policy helps reduce both the duration and severity of the recessionary impacts caused by these shocks. |
| Keywords: | Uncertainty, Smooth Transition VAR, Nonlinearities, Monetary Policy. |
| JEL: | C50 E32 E52 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def131&r=ban |
| By: | Jean Lee; Nicholas Stevens; Soyeon Caren Han; Minseok Song |
| Abstract: | Large Language Models (LLMs) have shown remarkable capabilities across a wide variety of Natural Language Processing (NLP) tasks and have attracted attention from multiple domains, including financial services. Despite the extensive research into general-domain LLMs, and their immense potential in finance, Financial LLM (FinLLM) research remains limited. This survey provides a comprehensive overview of FinLLMs, including their history, techniques, performance, and opportunities and challenges. Firstly, we present a chronological overview of general-domain Pre-trained Language Models (PLMs) through to current FinLLMs, including the GPT-series, selected open-source LLMs, and financial LMs. Secondly, we compare five techniques used across financial PLMs and FinLLMs, including training methods, training data, and fine-tuning methods. Thirdly, we summarize the performance evaluations of six benchmark tasks and datasets. In addition, we provide eight advanced financial NLP tasks and datasets for developing more sophisticated FinLLMs. Finally, we discuss the opportunities and the challenges facing FinLLMs, such as hallucination, privacy, and efficiency. To support AI research in finance, we compile a collection of accessible datasets and evaluation benchmarks on GitHub. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.02315&r=ban |
| By: | Guo, Qi; Huang, Shao'an; Wang, Gaowang |
| Abstract: | We develop a model of government intervention with information disclosure in which a government with two private signals trades directly in financial markets to stabilize asset prices. Government intervention through informed trading stabilizes financial markets and affects market quality (market liquidity and price efficiency) through a noise channel and an information channel. Information disclosure negatively affects financial stability by deteriorating the information advantages of the government, while its final effects on market quality hinge on the relative sizes of the noise effect and the information effect. Under different information disclosure scenarios, there exist potential tradeoffs between financial stability and price efficiency. |
| Keywords: | government intervention; information disclosure; financial stability; price efficiency; market liquidity |
| JEL: | D8 G1 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120072&r=ban |
| By: | Katerina Rigana; Ernst C. Wit; Samantha Cook |
| Abstract: | Accurately defining, measuring and mitigating risk is a cornerstone of financial risk management, especially in the presence of financial contagion. Traditional correlation-based risk assessment methods often struggle under volatile market conditions, particularly in the face of external shocks, highlighting the need for a more robust and invariant predictive approach. This paper introduces the Causal Network Contagion Value at Risk (Causal-NECO VaR), a novel methodology that significantly advances causal inference in financial risk analysis. Embracing a causal network framework, this method adeptly captures and analyses volatility and spillover effects, effectively setting it apart from conventional contagion-based VaR models. Causal-NECO VaR's key innovation lies in its ability to derive directional influences among assets from observational data, thereby offering robust risk predictions that remain invariant to market shocks and systemic changes. A comprehensive simulation study and the application to the Forex market show the robustness of the method. Causal-NECO VaR not only demonstrates predictive accuracy, but also maintains its reliability in unstable financial environments, offering clearer risk assessments even amidst unforeseen market disturbances. This research makes a significant contribution to the field of risk management and financial stability, presenting a causal approach to the computation of VaR. It emphasises the model's superior resilience and invariant predictive power, essential for navigating the complexities of today's ever-evolving financial markets. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.06032&r=ban |
| By: | Diogo Martins |
| Abstract: | This article provides a critical review of the post-pandemic inflation debate. The first part structures the debate through the classification of the arguments into two broad categories (the neoclassical view and the critical political economy view) along with several subcategories. The classification is informed by the positions assumed by debate participants regarding the origin and propagation mechanisms of inflation, together with the economic policy solutions advanced to face the current inflationary episode. The second part is focused on showing that the hegemony of contractionary monetary policy as a policy response to address contemporary inflation is based on weak foundations, whose theoretical and empirical arguments have been consistently and convincingly disputed in critical political economy circles over the last decades. |
| Keywords: | Inflation; pandemic; critical political economy; neoclassical economics; central banks; monetary policy. |
| JEL: | E12 E31 E32 E52 E61 E64 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03082024&r=ban |
| By: | Tavlas, George S. |
| Abstract: | Milton Friedman and David Meiselman’s 1963 article “The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958, ” was one of the most influential studies to come out of the Keynesian-monetarist debates of the 1960s and 1970s. The gestation of the article, however, is shrouded with considerable inaccuracy and ambiguity. I use archival materials to provide a more accurate chronological ordering of the gestation of the article than has hitherto been available. I show that the gestation was subject to considerable delays. I provide reasons that explain why a long-promised follow-up paper was never completed and why a book sequel to Friedman’s 1956 Studies in the Quantity Theory of Money, planned as a co-edited work shortly after the appearance of the Friedman and Meiselman 1963 article, was not published until 1970 and was edited by Meiselman alone. |
| Date: | 2024–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:vq4ht&r=ban |
| By: | Loubergé, Henri (Université de Genève); Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management) |
| Abstract: | The chapter reviews the evolution in risk and insurance economics over the past 50 years, first recalling the situation in 1973, then presenting the developments and new approaches that have flourished since then. We argue that these developments were only possible because steady advances were made in the economics of risk and uncertainty and in financial theory. Insurance economics has grown in importance to become a central theme in modern economics, providing not only practical examples and original data to illustrate new theories, but also inspiring new ideas that are relevant to the overall economy. |
| Keywords: | Insurance economics; optimal insurance protection; optimal self-protection; insurance pricing; insurance demand; economics of risk and uncertainty; financial economics; risk management; asymmetric information; insurance markets; climate finance |
| JEL: | A33 B15 D10 D20 D80 D82 G22 G32 G52 L22 |
| Date: | 2024–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2024_001&r=ban |