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on Banking |
| By: | Goodhart, C. A. E.; Sato, Hideki |
| Abstract: | Although monetary policy is the main tool for central banking in order to control inflation/deflation, micro- and macroprudential instruments are also essential for crisis management. In this paper, we aim to clarify the differences between European and international banking methodologies. The European approach as represented by the European Banking Union, is based on a harder legalistic approach, whereas the international approach implemented by the Basel Committee on Banking Supervision has a soft-law methodology. We propose two comparative standpoints: “uniformity” versus “diversity”, and a “legislative” versus "principle-based” approach. |
| Keywords: | European Banking Union (EBU); banking regulation and supervision; Basel Committee on Banking Supervision (BCBS) |
| JEL: | E58 F36 G28 |
| Date: | 2024–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122044&r=ban |
| By: | Allen N. Berger (University of South Carolina - Darla Moore School of Business); Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Sergey Tsyplakov (University of South Carolina - Darla Moore School of Business) |
| Abstract: | Regulators more often bail out “Too-Big-To-Fail” banks than others, but this may not imply preferential treatment as commonly believed. Bailouts are complex dynamic processes involving more than one-time aid, so harsh treatments elsewhere in the process may counter the benefits of the higher likelihood of bailouts for these banks. Using bailout data from 22 European countries we find relatively harsh treatment for Globally-Systemically Important Banks. Regulators bail out G SIBs at later stages of financial deterioration, impose stronger restrictions, and withdraw aid after less significant recoveries. We explain these findings using cross-country data on supervisory powers, political connections, and national culture. |
| Keywords: | Banks, Bailouts, Too-Big-To-Fail, European Union, G-SIBs |
| JEL: | G21 G28 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2411&r=ban |
| 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:2401&r=ban |
| By: | Tristan Bester; Benjamin Rosman |
| Abstract: | Financial inclusion ensures that individuals have access to financial products and services that meet their needs. As a key contributing factor to economic growth and investment opportunity, financial inclusion increases consumer spending and consequently business development. It has been shown that institutions are more profitable when they provide marginalised social groups access to financial services. Customer segmentation based on consumer transaction data is a well-known strategy used to promote financial inclusion. While the required data is available to modern institutions, the challenge remains that segment annotations are usually difficult and/or expensive to obtain. This prevents the usage of time series classification models for customer segmentation based on domain expert knowledge. As a result, clustering is an attractive alternative to partition customers into homogeneous groups based on the spending behaviour encoded within their transaction data. In this paper, we present a solution to one of the key challenges preventing modern financial institutions from providing financially inclusive credit, savings and insurance products: the inability to understand consumer financial behaviour, and hence risk, without the introduction of restrictive conventional credit scoring techniques. We present a novel time series clustering algorithm that allows institutions to understand the financial behaviour of their customers. This enables unique product offerings to be provided based on the needs of the customer, without reliance on restrictive credit practices. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.11066&r=ban |
| By: | Mr. Tobias Adrian; Mr. Ashraf Khan; Lev Menand |
| Abstract: | This paper constructs a new index for measuring de jure central bank independence, the first entirely new index in three decades. The index draws on a comprehensive dataset from the IMF’s Central Bank Legislation Database (CBLD) and Monetary Operations and Instruments Database (MOID) and weightings derived from a survey of 87 respondents, mostly consisting of central bank governors and general counsels. It improves upon existing indices including the Cukierman, Webb, and Neyapti (CWN) index, which has been the de facto standard for measuring central bank independence since 1992, as well as recent extensions by Garriga (2016) and Romelli (2022). For example, it includes areas absent from the CWN index, such as board composition, financial independence, and budgetary independence. It treats dimensions such as the status of the chief executive as composite metrics to prevent overstating the independence of statutory schemes. It distills ten key metrics, simplifying current frameworks that now include upwards of forty distinct variables. And it replaces the subjective weighting systems relied on in the existing literature with an empirically grounded alternative. This paper presents the key features of the new index; a companion, forthcoming paper will provide detailed findings by country/region, income level, and exchange rate regime. |
| Keywords: | Central bank independence; monetary policy; governance; transparency |
| Date: | 2024–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/035&r=ban |
| By: | Cristiano Cantore (Sapienza University of Rome); Edoardo Leonardi |
| Abstract: | How does the monetary and fiscal policy mix alter households’ saving incentives? And what are the resulting implications on the evolution and stabilization of the economy? To answer these questions, we build a heterogenous agents New Keynesian model where 3 different types of agents can save in assets with different liquidity profiles to insure against idiosyncratic risk. Policy mixes affect saving incentives differently according to their effect on the liquidity premium- the return difference between less liquid assets and public debt. We derive an intuitive analytical expression linking the liquidity premium with consumption differentials amongst different types of agents. Our analysis highlights the presence of two competing forces on the liquidity premium: a self-insurance-driven demand channel and a policy-driven supply channel. We show that the relative strength of the two is tightly linked to the policy mix in place and the type of business cycle shock hitting the economy. |
| Keywords: | monetary-fiscal interaction, liquidity, government debt, HANK |
| JEL: | E12 E52 E62 E58 E63 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2406&r=ban |
| By: | Jeffrey Allen; Hamzah Daud; Jochen Demuth; Daniel Little; Megan Rodden; Amber Seira; Cy Watsky |
| Abstract: | Stablecoins are increasingly important in decentralized finance (DeFi) and crypto asset markets, and their prominence has led to greater scrutiny of their unique role as expressions of the U.S. dollar running on blockchain networks. Stablecoins attempt to perform a mechanically complex function – to remain pegged to the dollar, even during periods of market volatility. |
| Date: | 2024–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-02-23-3&r=ban |
| By: | Michał Brzoza-Brzezina; Julia Jabłońska; Marcin Kolasa; Krzysztof Makarski |
| Abstract: | During the COVID-19 pandemic, governments in the euro area sharply increased spending, while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers), but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, we document that young households benefited from the stimulus, while the bill was mainly paid by middle-aged and older agents. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, welfare of some actually decreased. |
| Keywords: | COVID-19; Fiscal expansion, Monetary policy, Redistribution |
| JEL: | E31 E51 E52 H5 J11 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2024097&r=ban |
| By: | Jiménez, Gabriel; Laeven, Luc; Martinez-Miera, David; Peydró, José-Luis |
| Abstract: | We show that public guaranteed loans (PGL) increase credit availability improving real effects, but private banks’ incentives imply that weaker banks shift riskier corporate loans to taxpayers. We exploit credit register data during the COVID-19 shock in Spain, and a stylized model guides the empirics. Unlike non-PGL, banks provide more PGL to riskier firms in which banks have higher pre-crisis shares of firm total credit. Importantly, these effects are stronger for weaker banks. Results using firm(-bank) fixed effects and loan volume versus price information suggest a credit supply-driven mechanism. Moreover, exploiting exogenous variation across similar firms with differing PGL access, we confirm these findings, and we additionally show that PGL increases banks’ overall lending and credit share, with positive effects for firm survival and investment. JEL Classification: G01, G21, G38, E62, H81 |
| Keywords: | banking, COVID-19, private incentives, public guarantees, risk-shifting |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242913&r=ban |
| By: | Radoslav Raykov |
| Abstract: | Do banks realize simultaneous trading losses because they invest in the same assets, or because different assets are subject to the same macro shocks? This paper decomposes the comovements of bank trading losses into two orthogonal channels: portfolio overlap and common shocks. While portfolio overlap generates strong comovements, I find that the sensitivity to common shocks from non-overlapping assets is larger. This sensitivity operates through two sub-channels: the short-long interest rate correlation and the stock-bond correlation, driven by macroeconomic factors. This reveals a new trade-off whereby reductions in portfolio overlap can increase the comovement of trading losses by adding exposures to macro shocks. |
| Keywords: | Financial institutions; Financial stability |
| JEL: | G10 G11 G20 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-6&r=ban |
| By: | Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of a small open economy to examine the behavior of money, prices, and output under the gold standard. In particular, we formally analyze Hume’s celebrated price-specie flow mechanism. Our framework incorporates the influence of international trade on the money supply in the Home country through gold flows. In the short run, a positive correlation exists between the quantity of money and the price level. Additionally, we demonstrate that money is non-neutral during the transition to the steady state, which has implications for welfare. While the gold standard exposes the Home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels. We discuss the importance of policy coordination for achieving efficiency under the gold standard and consider the role of fiat money in this environment. We also develop a version of the model with two large economies. |
| Keywords: | Gold standard; specie flows; non-neutrality of money; long-run price stability; inelastic money supply |
| JEL: | E42 E58 G21 |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97882&r=ban |
| By: | Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama |
| Abstract: | We present a novel fact called the ``V-shaped relationship'' between firms' growth opportunities and cash holdings. Specifically, cash holdings are positively correlated with growth opportunities in firms experiencing positive growth but negatively correlated with those facing adverse growth opportunities. This divergent link suggests that the motivation for cash holdings varies between these two types of firms. To account for this V-shaped relationship, we develop a new numerical model in which a manager optimally determines the levels of investment and cash holdings in response to shocks that affect the corporate production process. A unique aspect of this model is that it incorporates the dual motives of cash holdings: cash serves as a cushion against an adverse shock and simultaneously allows the provision of agile money, thereby seizing a growth opportunity. Considering these passive and proactive motives for cash holdings enables the model to replicate the V-shaped link. Furthermore, we investigate the rise in corporate cash holdings in recent decades through the model and find that tighter borrowing constraints and lower interest rates after the global financial crisis account for more than 60% of the rise in corporate cash holdings. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e200&r=ban |
| By: | Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru |
| Abstract: | The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70% to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation. |
| JEL: | E50 G2 G20 G21 G22 G23 G24 G28 G29 L50 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32176&r=ban |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | We study the evolving operating procedures used by the ECB since its creation. During the period up to 2015, bank reserves were scarce and the ECB, like other central banks, used a corridor system in which the money market rate could fluctuate within the bounds set by the lending and the deposit rates. With the start of Quantitative Easing (QE) the operating procedure evolved into a regime of reserve abundance. This regime has become problematic since the inflation surge forced the central banks to raise the policy rate. The result has been a massive transfer of central banks’ profits (and more) to the banks. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation. |
| JEL: | F3 G3 |
| Date: | 2024–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122133&r=ban |
| By: | Jef Boeckx (Economics and Research Department, National Bank of Belgium); Leonardo Iania (, Université catholique de Louvain, LFIN/CORE); Joris Wauters (Economics and Research Department, National Bank of Belgium) |
| Abstract: | We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically grounded determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights into how macroeconomic variables affect market-based inflation expectation measures |
| Keywords: | Inflation-linked swaps, affine term structure model, inflation expectations, inflation risk premia, inflation trend, shifting endpoints |
| JEL: | E31 E44 E52 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202402-446&r=ban |
| By: | Colombo, Jéfferson Augusto; Yarovaya, Larisa |
| Abstract: | Cryptocurrencies and blockchain have become a global phenomenon, transforming people’s relationships with technology and offering innovative tools for businesses and individuals to strive in a digital age. However, little is still known about the main drivers of cryptocurrency ownership, especially in emerging markets. Based on a representative online survey among 573 Brazilian digital platform investors, we find that crypto investors tend to be young, male, more tolerant to risk, less optimistic in their economic views, and consider themselves as ‘better’ investors compared to non-crypto online traders. While crypto and non-crypto investors have similar educational backgrounds, our results show that cryptocurrency literacy positively and strongly relates to cryptocurrency ownership and intentions to invest in cryptocurrency. A gender gap among cryptocurrency investors has been confirmed. The findings further suggest that sophisticated investors are more likely to hedge pessimistic economic expectations using cryptocurrency than their unsophisticated peers. We also find significant heterogeneity among cryptocurrency investors (e.g., early x late adopters) on attitudes and beliefs. The insights into digital investors’ intentions to invest in cryptocurrency can be valuable for policymakers in designing strategies for the broader adoption of digital assets in the era of a decentralized economy, considering the planned adoption of CBDC in Brazil. |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:568&r=ban |
| By: | Martin Hoefer; Carmine Ventre; Lisa Wilhelmi |
| Abstract: | The recent banking crisis has again emphasized the importance of understanding and mitigating systemic risk in financial networks. In this paper, we study a market-driven approach to rescue a bank in distress based on the idea of claims trading, a notion defined in Chapter 11 of the U.S. Bankruptcy Code. We formalize the idea in the context of financial networks by Eisenberg and Noe. For two given banks v and w, we consider the operation that w takes over some claims of v and in return gives liquidity to v to ultimately rescue v. We study the structural properties and computational complexity of decision and optimization problems for several variants of claims trading. When trading incoming edges of v, we show that there is no trade in which both banks v and w strictly improve their assets. We therefore consider creditor-positive trades, in which v profits strictly and w remains indifferent. For a given set C of incoming edges of v, we provide an efficient algorithm to compute payments by w that result in maximal assets of v. When the set C must also be chosen, the problem becomes weakly NP-hard. Our main result here is a bicriteria FPTAS to compute an approximate trade. The approximate trade results in nearly the optimal amount of assets of v in any exact trade. Our results extend to the case in which banks use general monotone payment functions and the emerging clearing state can be computed efficiently. In contrast, for trading outgoing edges of v, the goal is to maximize the increase in assets for the creditors of v. Notably, for these results the characteristics of the payment functions of the banks are essential. For payments ranking creditors one by one, we show NP-hardness of approximation within a factor polynomial in the network size, when the set of claims C is part of the input or not. Instead, for proportional payments, our results indicate more favorable conditions. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.13627&r=ban |
| By: | Pape, Fabian; Rommerskirchen, Charlotte |
| Abstract: | Scholarship on sovereign debt emphasizes the importance of central banks in backstopping markets, but less attention has been devoted to the interactions of debt management offices with private finance. To fill this gap, this article examines the market-based operations of debt management offices alongside those of central banks. Debt management has played a crucial role in constructing and nurturing liquidity conditions in primary and secondary markets for sovereign debt through the contracting of primary dealers as monetary and fiscal policy partners, the embrace of repo markets, and later through the creation of special liquidity facilities. Co-working in the collateral factory of the modern financial system creates new forms of entanglements that we term the ‘collateral triangle’, linking together central banking, debt management, and primary dealer operations in a shared convergence on repo finance as integral to public sector governability and private sector business models. Debt management and central banking jointly created and now maintain the infrastructures of this ‘collateral triangle’, not least because the inherent stability risks of repo markets threaten market-based monetary policy and market-based debt management. Routine de-risking by both actors is a core feature of the collateral system. |
| Keywords: | critical macrofinance; sovereign debt; primary dealers; repo markets; monetary-fiscal coordination; 1912377; ES/S011277/1; T&F deal |
| JEL: | J1 |
| Date: | 2024–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121407&r=ban |
| By: | Fang Cai; Sharjil M. Haque |
| Abstract: | Private credit or private debt investments are debt-like, non-publicly traded instruments provided by non-bank entities, such as private credit funds or business development companies (BDCs), to fund private businesses. Private credit is typically extended to middle-market firms with annual revenues between $10 million and $1 billion, but has grown rapidly in recent years to fund larger companies that were traditionally funded by leveraged loans. |
| Date: | 2024–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-02-23-2&r=ban |
| By: | Valentina Macchiati; Piero Mazzarisi; Diego Garlaschelli |
| Abstract: | Networks of financial exposures are the key propagators of risk and distress among banks, but their empirical structure is not publicly available because of confidentiality. This limitation has triggered the development of methods of network reconstruction from partial, aggregate information. Unfortunately, even the best methods available fail in replicating the number of directed cycles, which on the other hand play a crucial role in determining graph spectra and hence the degree of network stability and systemic risk. Here we address this challenge by exploiting the hypothesis that the statistics of higher-order cycles is strongly constrained by that of the shortest ones, i.e. by the amount of dyads with reciprocated links. First, we provide a detailed analysis of link reciprocity on the e-MID dataset of Italian banks, finding that correlations between reciprocal links systematically increase with the temporal resolution, typically changing from negative to positive around a timescale of up to 50 days. Then, we propose a new network reconstruction method capable of enforcing, only from the knowledge of aggregate interbank assets and liabilities, both a desired sparsity and a desired link reciprocity. We confirm that the addition of reciprocity dramatically improves the prediction of several structural and spectral network properties, including the largest real eigenvalue and the eccentricity of the elliptical distribution of the other eigenvalues in the complex plane. These results illustrate the importance of correctly addressing the temporal resolution and the resulting level of reciprocity in the reconstruction of financial networks. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.11136&r=ban |
| By: | Sunday Akukodi Ugwu; Shazia'Ayn Babul; Sofia Medina |
| Abstract: | The mini-project models propagation of shocks, in time point, through links in connected banks. In particular, financial network of 100 banks out of which 15 are shocked to default (that is, 85.00% of the banks are solvent) is modelled using Erdos and Renyi network -- directed, weighted and randomly generated network. Shocking some banks in a financial network implies removing their assets and redistributing their liabilities to other connected ones in the network. The banks are nodes and two ranges of probability values determine tendency of having a link between a pair of banks. Our major finding shows that the ranges of probability values and banks' percentage solvency have positive correlation. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.08071&r=ban |
| By: | Marijn A. Bolhuis; Judd N. L. Cramer; Karl Oskar Schulz; Lawrence H. Summers |
| Abstract: | Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad. |
| JEL: | D14 E30 E31 E43 E52 G51 R31 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32163&r=ban |
| By: | Kortelainen, Mika |
| Abstract: | We study the effect of quantitative tightening both without forward guidance and with higher for longer guidance. This is done by simulating quantitative tightening strategies in a dynamic stochastic general equilibrium model estimated with the euro area data. Quantitative tightening is quantified by a bond supply shock that raises the long-term term premium. Initially, we assume that quantitative tightening comes without forward guidance, meaning that central bank does not communicate any information regarding the future path of the policy rate. Subsequently, we consider quantitative tightening with forward guidance which is communicated through a higher for longer pledge. In addition, this higher for longer pledge is assumed to be fully credible. We find that if credible, quantitative tightening implemented with forward guidance in the form a higher for longer pledge can tighten monetary policy, albeit a little. |
| Keywords: | monetary policy, quantitative tightening, forward guidance |
| JEL: | E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:284721&r=ban |
| By: | Bassi, Claudio; Grill, Michael; Mirza, Harun; O’Donnell, Charles; Wedow, Michael; Hermes, Felix |
| Abstract: | The introduction of the Securities Financing Transactions Regulation into EU law provides a unique opportunity to obtain an in-depth understanding of repo markets. Based on the transaction-level data reported under the regulation, this paper presents an overview and key facts about the euro area repo market. We start by providing a description of the dataset, including its regulatory background, as well as highlighting some of its advantages for financial stability analysis. We then go on to present three sets of findings that are highly relevant to financial stability and focus on the dimensions of the different market segments, counterparties, and collateral, including haircut practices. Finally, we outline how the data reported under the regulation can support the policy work of central banks and supervisory authorities. We demonstrate that these data can be used to make several important contributions to enhancing our understanding of the repo market from a financial stability perspective, ultimately assisting international efforts to increase repo market resilience. JEL Classification: G10, G18, G23 |
| Keywords: | financial stability, regulation, securities financing transactions |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024342&r=ban |
| By: | Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent |
| Abstract: | We investigate whether European banks adjust their loan prices and volumes of new lending in the months running up to major national elections. Using a unique dataset that draws on data covering some 250 banksin 19 Eurozone countries from 2010 to 2020 at monthly frequency, and that includes lending amounts and interest rates on new lending, we find that European banks increase loan rates for corporate and housing loans ahead of elections. This supports the view that loan pricing changes of European banks are driven by the electoral uncertainty inherent to the democratic election process. We find that the impact of elections is more pronounced for small banks, as well as obtain some evidence that elections affect the credit supply of banks. Our findings suggest that the occurrence of elections is affecting the behavior of European banks. |
| Keywords: | bank, lending, politics, elections, political uncertainty, loan pricing |
| JEL: | C51 E37 E44 F34 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofitp:284402&r=ban |
| By: | Yifan Duan; Guibin Zhang; Shilong Wang; Xiaojiang Peng; Wang Ziqi; Junyuan Mao; Hao Wu; Xinke Jiang; Kun Wang |
| Abstract: | Credit card fraud poses a significant threat to the economy. While Graph Neural Network (GNN)-based fraud detection methods perform well, they often overlook the causal effect of a node's local structure on predictions. This paper introduces a novel method for credit card fraud detection, the \textbf{\underline{Ca}}usal \textbf{\underline{T}}emporal \textbf{\underline{G}}raph \textbf{\underline{N}}eural \textbf{N}etwork (CaT-GNN), which leverages causal invariant learning to reveal inherent correlations within transaction data. By decomposing the problem into discovery and intervention phases, CaT-GNN identifies causal nodes within the transaction graph and applies a causal mixup strategy to enhance the model's robustness and interpretability. CaT-GNN consists of two key components: Causal-Inspector and Causal-Intervener. The Causal-Inspector utilizes attention weights in the temporal attention mechanism to identify causal and environment nodes without introducing additional parameters. Subsequently, the Causal-Intervener performs a causal mixup enhancement on environment nodes based on the set of nodes. Evaluated on three datasets, including a private financial dataset and two public datasets, CaT-GNN demonstrates superior performance over existing state-of-the-art methods. Our findings highlight the potential of integrating causal reasoning with graph neural networks to improve fraud detection capabilities in financial transactions. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.14708&r=ban |
| By: | Leek, Lauren Caroline (European University Institute); Bischl, Simeon; Freier, Maximilian |
| Abstract: | While institutionally independent, monetary policy-makers do not operate in a vacuum. The policy choices of a central bank are intricately linked to government policies and financial markets. We present novel indices of monetary, fiscal and financial policy-linkages based on central bank communication, namely, speeches by 118 central banks worldwide from 1997 to mid-2023. Our indices measure not only instances of monetary, fiscal or financial dominance but, importantly, also identify communication that aims to coordinate monetary policy with the government and financial markets. To create our indices, we use a Large Language Model (ChatGPT 3.5-0301) and provide transparent prompt-engineering steps, considering both accuracy on the basis of a manually coded dataset as well as efficiency regarding token usage. We also test several model improvements and provide descriptive statistics of the trends of the indices over time and across central banks including correlations with political-economic variables. |
| Date: | 2024–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:78wnp&r=ban |
| By: | Kristy Jansen (University of Southern California and De Nederlandsche Bank); Sven Klingler (BI Norwegian Business School); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Patty Duijm (De Nederlandsche Bank) |
| 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:chf:rpseri:rp2416&r=ban |
| By: | Torsten Wezel; Hannah Sheldon; Zhengwei Fu |
| Abstract: | While deeply undercapitalized banks have been shown to misallocate credit to weak firms, the drivers of such zombie banks are less researched, particularly across countries. To furnish empirical evidence, we compile a dataset of undercapitalized banks from emerging markets and developing economies. We classify zombie banks as those not receiving remedial treatment by owners or regulators or, alternatively, remaining chronically undercapitalized. Using logit regressions, we find that country-specific factors are more influential for zombie status than bank characteristics, alhough some become significant when disaggreating by region. The paper’s overall findings imply the need for a proper regulatory framework and an effective resolution regime to deal with zombie banks more decisively. |
| Keywords: | Banks; Capital Requirements; Financial Crises |
| Date: | 2024–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/036&r=ban |
| By: | Garga, Vaishali (Federal Reserve Bank of Boston); Lakdawala, Aeimit (Wake Forest University, Economics Department); Sengupta, Rajeswari (Indira Gandhi Institute of Development Research) |
| Abstract: | We propose a novel framework to gauge the credibility of a central bank’s commitment to inflation targeting. Our framework combines survey data on macroeconomic forecasts with financial market data to estimate how market-perceived responsiveness of the central bank to inflation evolves with the adoption of inflation targeting. This approach is especially suitable for emerging economies, many of which have adopted an inflation targeting framework but lack data on long-run inflation expectations. We apply our framework to study the adoption of inflation targeting in India. We find that the Reserve Bank of India’s commitment to inflation targeting is viewed as credible. |
| Keywords: | Macroeconomic forecasts; Financial markets; Credibility; Inflation Targeting; Inflation expectations. |
| JEL: | E44 E47 E52 E58 |
| Date: | 2024–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:ris:wfuewp:0107&r=ban |
| By: | Luis Ceballos; Jens H. E. Christensen; Damian Romero |
| Abstract: | Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in the steady-state short-term real interest rate—the so-called equilibrium or natural rate of interest. Given the recent sharp increase in interest rates, we revisit this question in an emerging bond market context and offer a Chilean perspective using a dynamic term structure finance model estimated directly on the prices of individual Chilean inflation indexed bonds with adjustments for bond-specific liquidity risk and real term premia. We estimate that the equilibrium real rate in Chile fell about 2 and a half percentage points in the 2003-2022 period and has remained low since then. |
| Keywords: | affine arbitrage-free term structure model; financial market frictions; monetary policy; rstar |
| JEL: | C32 E43 E52 G12 |
| Date: | 2024–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97796&r=ban |
| By: | Arce, Óscar; Ciccarelli, Matteo; Montes-Galdón, Carlos; Kornprobst, Antoine |
| Abstract: | This paper applies the semi-structural model proposed by Bernanke and Blanchard (2023) to analyse wage growth, price inflation and inflation expectations in the euro area. It is part of a broader project coordinated by Bernanke and Blanchard to provide a unified framework for analysing and comparing global inflation dynamics across the major world economic areas, including US, euro area, Canada, UK, and Japan. The paper makes four main contributions. First, it estimates the model using quarterly data from the euro area covering the period from the first quarter of 1999 to the second quarter of 2023. Second, it conducts an empirical assessment of how euro area price inflation responds to various exogenous shocks. This includes evaluating how shock transmission evolved during the pandemic and comparing it with experience in the United States. Third, the model decomposes the drivers of wage growth and price inflation in the post-pandemic period. It emphasises the transmission channels and the respective roles of supply and demand forces that have contributed to the recent inflationary surge. Notably, it identifies the impact of labour market tightness, productivity, global supply chain disruptions and energy and food price shocks. Finally, the model generates conditional projections based on these exogenous shocks, enabling a more robust cross-check of inflation forecasts during times of significant global economic disturbances. JEL Classification: C5, E47, E52, E58, F4 |
| Keywords: | central banking, econometric modelling, forecasting and simulation, monetary policy |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024343&r=ban |
| By: | Zinn, Jesse Aaron (Clayton State University) |
| Abstract: | This work introduces the Heart of Monetary Economics, a novel figure that depicts the relationships between aggregate monetary variables. The figure contains more information than the Venn diagram that shows how the monetary base and money supply have currency in circulation as their intersection. A distinguishing feature of the heart is that it illustrates how the net amount of financial capital generated by depository institutions equals the difference between the money supply and the monetary base. As such, the figure may aid students learning about money creation. This work also points out a nearly identical figure that contains the same information as the heart. It also provides a proof that these two figures are the only two with their general shape consistent with the relationships they display. |
| Date: | 2024–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:h5z9b&r=ban |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (BI Norwegian Business School) |
| Abstract: | Central bank money provides utility by serving as means of exchange for virtually all transactions in the economy. Central banks issue reserves (money) to banks in exchange for assets such as government bonds. If additional reserves have value to a bank, an asset’s degree of convertibility into reserves can affect its price. We show the existence of a government bond reserves convertibility premium, which tapers off at longer maturities. The degree of convertibility is priced, but heterogeneously so. Our findings have implications for our understanding of reserves, liquidity premia, the term structure of interest rates, and central bank collateral policy. |
| Keywords: | central bank, reserves, convertibility premium, liquidity premium, term structure, yield curve, collateral policy, haircut |
| JEL: | G12 E43 E58 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2417&r=ban |