|
on Banking |
| By: | Miquel-Flores, Ixart; Reghezza, Alessio; Buchetti, Bruno; Perdichizzi, Salvatore |
| Abstract: | This study investigates the underlying reasons for banks’ continued support of fossil fuel-based firms and examines the role of public guaranteed loans (PGLs) in redirecting resources towards greener economic activities, thereby facilitating the climate transition process. Using a unique pan-European credit register dataset, we combine supervisory bank data with firm-level greenhouse gas emission data and financial information. Our analysis yields three main findings. Firstly, European banks perceive lending to green companies as riskier compared to their brown counterparts, a phenomenon we term as the “green-transition risk.” Secondly, we provide evidence that during the COVID-19 pandemic, European banks have strategically leveraged PGLs to channel resources towards environmentally sustainable activities, thereby augmenting the proportion of green loans in their portfolios and partially shifting the inherent “green-transition risk” to European governments and citizens. Lastly, our investigation reveals a banking preference for awarding PGLs to financially robust green firms over less profitable, highly indebted green firms, which could pose significant challenges for green businesses requiring financial support during the COVID-19 crisis. JEL Classification: G20, G21, G28 |
| Keywords: | climate change, credit risk, green lending, public guaranteed loans |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242916&r=ban |
| By: | Rodolfo G. Campos (Banco de Espana); Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, CEPR); Galo Nuno (BIS, Banco de Espana, CEMFI, CEPR); Peter Paz (Banco de Espana) |
| Abstract: | We study a new type of monetary-fiscal interaction in a heterogeneous-agent New Keynesian model with a fiscal block. Due to household heterogeneity, the stock of public debt affects the natural interest rate, forcing the central bank to adapt its monetary policy rule to the fiscal stance to guarantee that inflation remains at its target. There is, however, a minimum level of debt below which the steady-state inflation deviates from its target due to the zero lower bound on nominal rates. We analyze the response to a debt-financed fiscal expansion and quantify the impact of different timings in the adaptation of the monetary policy rule, as well as the performance of alternative monetary policy rules that do not require an assessment of the natural rates. We validate our findings with a series of empirical estimates. |
| Keywords: | HANK models, natural rates, fiscal shocks |
| JEL: | E32 E58 E63 |
| Date: | 2024–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:24-007&r=ban |
| By: | Tatar, Balint; Wieland, Volker |
| Abstract: | The Federal Reserve has been publishing federal funds rate prescriptions from Taylor rules in its Monetary Policy Report since 2017. The signals from the rules aligned with Fed action on many occasions, but in some cases the Fed opted for a different route. This paper reviews the implications of the rules during the coronavirus pandemic and the subsequent inflation surge and derives projections for the future. In 2020, the Fed took the negative prescribed rates, which were far below the effective lower bound on the nominal interest rate, as support for extensive and long-lasting quantitative easing. Yet, the calculations overstate the extent of the constraint, because they neglect the supply side effects of the pandemic. The paper proposes a simple model-based adjustment to the resource gap used by the rules for 2020. In 2021, the rules clearly signaled the need for tightening because of the rise of inflation, yet the Fed waited until spring 2022 to raise the federal funds rate. With the decline of inflation over the course of 2023, the rules' prescriptions have also come down. They fall below the actual federal funds rate target range in 2024. Several caveats concerning the projections of the interest rate prescriptions are discussed. |
| Keywords: | Monetary policy, interest rates, Federal Reserve, Taylor rule, New Keynesian macroepidemic models |
| JEL: | E42 E43 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:285356&r=ban |
| By: | Henrik Andersen; Ragnar E Juelsrud; Carola Müller |
| Abstract: | We use unique relationship-level data which includes banks' private risk assessments of corporate borrowers to quantify how competition among banks affects the risk sensitivity of interest rates in the corporate credit market. We show that an increase in competition makes corporate lending rates less sensitive to banks' own assessment of borrower probability of default and this is more pronounced in market segments with higher degree of asymmetric information. Our results are driven by banks with low franchise values, outlining a novel channel of how the competition-fragility nexus can operate. |
| Keywords: | banking competition, relationship lending, credit markets, risk-based pricing, financial stability |
| JEL: | G21 G28 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1169&r=ban |
| By: | Daixin Wang; Zhiqiang Zhang; Yeyu Zhao; Kai Huang; Yulin Kang; Jun Zhou |
| Abstract: | User financial default prediction plays a critical role in credit risk forecasting and management. It aims at predicting the probability that the user will fail to make the repayments in the future. Previous methods mainly extract a set of user individual features regarding his own profiles and behaviors and build a binary-classification model to make default predictions. However, these methods cannot get satisfied results, especially for users with limited information. Although recent efforts suggest that default prediction can be improved by social relations, they fail to capture the higher-order topology structure at the level of small subgraph patterns. In this paper, we fill in this gap by proposing a motif-preserving Graph Neural Network with curriculum learning (MotifGNN) to jointly learn the lower-order structures from the original graph and higherorder structures from multi-view motif-based graphs for financial default prediction. Specifically, to solve the problem of weak connectivity in motif-based graphs, we design the motif-based gating mechanism. It utilizes the information learned from the original graph with good connectivity to strengthen the learning of the higher-order structure. And considering that the motif patterns of different samples are highly unbalanced, we propose a curriculum learning mechanism on the whole learning process to more focus on the samples with uncommon motif distributions. Extensive experiments on one public dataset and two industrial datasets all demonstrate the effectiveness of our proposed method. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.06482&r=ban |
| By: | Muhammed Bulutay |
| Abstract: | How do households perceive the forecasting performance of the central bank? Using two novel experiments embedded in the Bundesbank's Survey on Consumer Expectations (total N=9500), this article shows that the majority of German households underestimate the ECB's inflation forecasting accuracy. In particular, they believe that the ECB is overly optimistic. Communication that challenges these perceptions improves the anchoring of inflation expectations, reduces inflation uncertainty and discourages consumption of durable goods. Treated households also report higher trust in the ECB, perceive the ECB's inflation target as more credible, the ECB's communication as more honest, and the ECB's policy as more beneficial to them. Finally, the causal effect of central bank trust on inflation expectations is quantified using instruments to deal with endogeneity. |
| Keywords: | Inflation Expectations, Central Bank Trust, Inflation Forecasts, Central Bank Communication, Information Provision Experiments |
| JEL: | C83 D91 E71 |
| Date: | 2024–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:bdp:dpaper:0034&r=ban |
| By: | Ariadne Checo; Francesco Grigoli; Damiano Sandri |
| Abstract: | Doubts persist about the effectiveness of monetary transmission in emerging markets, but the empirical evidence is scarce due to challenges in identifying monetary policy shocks. In this paper, we construct new monetary policy shocks using novel analysts' forecasts of policy rate decisions. Crucial for identification, analysts can update forecasts up to the policy meeting, allowing them to incorporate any relevant data release. Using these shocks, we show that monetary transmission in emerging markets operates similarly to advanced economies. Monetary tightening leads to a persistent increase in bond yields, a contraction in real activity, and a delayed reduction in inflation. Furthermore, monetary policy impacts leveraged firms more strongly. |
| Keywords: | monetary policy shocks, financial markets, emerging markets |
| JEL: | E50 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1170&r=ban |
| By: | Ebner, André; Westhoff, Christiane |
| Abstract: | We set out a stylised framework for the policies enacted to address the risks posed by systemically important institutions (SIIs) and to counter the too-big-to-fail (TBTF) problem, examining conceptually how far supervisory and resolution policies are complementary or substitutable. The Financial Stability Board (FSB) TBTF reforms comprise (i) a higher loss-absorbing capacity in the form of regulatory capital buffers for SIIs, (ii) more intensive and effective supervision and (iii) a recovery and resolution regime, including sufficient loss-absorbing and recapitalisation capacity in the form of capital and eligible liabilities, to deal with distressed or failing institutions. These reform strands are part of a fundamentally integrated concept, but were largely developed and implemented independently of each other. Therefore, they may fall short of fully taking interdependencies into account, rendering policies less effective and consistent than an integrated approach, which we outline as an alternative. The analysis discusses the regulatory interplay, its implications for policymaking based on the FSB TBTF reforms for banks and its operationalisation in the Basel framework at the global level and in the European Union. JEL Classification: G01, G28, G38 |
| Keywords: | financial regulation, financial stability, going concern, gone concern, macroprudential policy, resolution framework, systemically important institutions, systemic risk, too big to fail |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkops:202425&r=ban |
| By: | John O S Wilson; Linh Nguyen; Anna Sobiech; Lechedzani Kgari |
| Abstract: | This paper presents the findings of an investigation of the type, evolution and impacts on performance of bank business models in South Africa. We identify the various business models used by South African banks using data on the monthly balance sheets of commercial banks made available by the South African Reserve Bank between 1993 and 2022. We cluster banks into different business models based on the composition of their balance sheets. Based on these clusters, we identify business models oriented to wholesale and retail funding, as well as to universal, investment and interbank activities. Overall, our clustering exercise returns six distinct business models. We observe large differences in terms of business size, performance and risk profiles across the business models. We also analyse the evolution of business models over time. The results suggest that banks exhibit relatively stable business models, but where transition exists it tends to be between certain business models. Increased risk is associated with a higher probability of banks shifting business models. |
| Date: | 2024–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11059&r=ban |
| By: | Tiffany Eder; Claire Labonne; Caitlin O'Loughlin; Krish Sharma |
| Abstract: | We describe an important risk management tool at financial institutions, risk appetite frameworks. We observe those frameworks for credit cards portfolios at four large banks and analyze when and why banks adjust them. The risk appetite frameworks for these banks monitor 40 to 150 metrics. We focus on metrics related to outstanding balances of which we identified 79. Overall, we find that these frameworks are sticky. Most adjustments occur during scheduled annual reviews and are relatively limited. Limit breaches are rare. Thresholds are often changed the month after a breach or after the utilization rate crossed 90 percent, but most breaches imply risk mitigating measures such as tightening credit standards. Notably, managers’ reactions were even stickier in the pandemic period. |
| Keywords: | banking supervision; risk management; risk limits; risk appetite framework; credit cards |
| JEL: | G32 G21 G38 |
| Date: | 2024–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:97930&r=ban |
| By: | Alessandro Cantelmo (Bank of Italy); Nikos Fatouros (University of Birmingham); Giovanni Melina (International Monetary Fund); Chris Papageorgiou (International Monetary Fund) |
| Abstract: | With climate change increasing the frequency and intensity of natural disasters, how should central banks respond to these catastrophic events? Looking at IMF reports for 34 disaster-years, which occurred in 16 disaster-prone countries from 1999 to 2017, what emerges is a non-negligible heterogeneity in central banks' responses to climate-related disasters. Using a standard small-open-economy New-Keynesian model with disaster shocks, we show that, consistently with textbook theory, inflation targeting remains the welfare-optimal regime. The best strategy for monetary authorities is to resist the impulse to accommodate in the face of catastrophic natural disasters, and rather to continue to focus on price stability. |
| Keywords: | natural disasters, climate change, DSGE, monetary policy, exchange rate regimes |
| JEL: | E5 E52 E58 F41 Q54 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1443_24&r=ban |
| By: | Ross M. Batzer (Federal Housing Finance Agency); Jonah Coste (Federal Housing Finance Agency); William M. Doerner (Federal Housing Finance Agency); Michael J. Seiler (Federal Housing Finance Agency) |
| Abstract: | People can be "locked-in" or constrained in their ability to make appropriate financial changes, such as being unable to move homes, change jobs, sell stocks, rebalance portfolios, shift financial accounts, adjust insurance policies, transfer investment profits, or inherit wealth. These frictions---whether institutional, legislative, personal, or market-driven---are often overlooked. Residential real estate exemplifies this challenge with its physical immobility, high transaction costs, and concentrated wealth. In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell. This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4. The supply reduction increased home prices by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%. These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability. Certain borrower groups with lower wealth accumulation are less able to strategically time their sales, worsening inequality. |
| Keywords: | housing, interest rate, lock-in, monetary policy, mortgages |
| JEL: | C50 D10 E50 G21 G50 R23 R31 |
| URL: | http://d.repec.org/n?u=RePEc:hfa:wpaper:24-03&r=ban |
| By: | Camila Gutierrez; Javier Turen; Alejandro Vicondoa |
| Abstract: | We study the international spillover effects of a macroeconomic surprise in China. Using high-frequency data, we show that the surprise component of the release of macro data in China brings a sizeable and significant effect on asset prices and global risk, across different economies. We document that the dynamic effect of Chinese Macro surprises is both significant and persistent for a broad range of financial variables worldwide. When assessing the relative importance of Chinese surprises relative to other known drivers of the Global Financial Cycle, we show that while the Monetary Policy in the US still accounts for most of the reaction, our measure is equally relevant to account for the reaction of commodities and the EMBI. |
| Keywords: | Spillovers, Global Financial Cycle, China, High-frequency |
| JEL: | E44 F21 F40 G15 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:577&r=ban |
| By: | Steininger, Lea; Hesse, Casimir |
| Abstract: | In 2012, Draghi put an end to rising euro area sovereign bond yield spreads by resolving to do 'whatever it takes'. The crisis rhetoric and institutional practices of unlimited liquidity have since become commonplace, as countermeasures to recent market turmoil show. This paper sets out to explain how and why 'unlimited liquidity' ideas moved to the ECB's center of economic analysis during the euro crisis. Previous work fails to decipher that the ideational shift was highly anomalous when viewed against German ordoliberalism or scholarly support for 'expansionary austerity'. Addressing this relative neglect in other accounts, we draw on qualitative text analysis and expert interviews to argue that this shift was due to norm entrepreneurs who capitalized on the uncertainty of the crisis. We employ constructivist arguments to identify four scoping conditions that account for the ascendance of 'unlimited liquidity': an indicative reference, credibility, institutional positioning, and -- as an extension to the literature -- intellectual sensitivity. Our analysis suggests that the euro crisis changed economic ideas, and fundamentally remodels the constructivist framework for studying monetary policy in crisis times. |
| Keywords: | European Central Bank; euro crisis; monetary policy; unlimited liquidity; economic ideas; constructivism |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:61209747&r=ban |
| By: | Ms. Mai Hakamada; Carl E. Walsh |
| Abstract: | Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation. |
| Keywords: | monetary policy; inflation policy delay; behavioral expectations; falling behind the curve |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/042&r=ban |
| By: | Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú.); Luis Surco (Departamento de Economía de la Pontificia Universidad Católica del Perú.) |
| Abstract: | This paper estimates and analyzes the dynamics of trend inflation, as well as the persistence and volatility of the inflation gap in the Pacific Alliance countries (Chile, Colombia, Mexico, and Peru). For this purpose, the econometric approach is based on methodologies proposed by Stock and Watson (2007) and Chan et al. (2013). Among these, the AR-Trend-Bound model considers the implications of inflation targeting in estimating the unobserved components of inflation. The results indicate that this model effectively allocates most of the permanent component to trend inflation. Additionally, a decreasing trend in inflation in the 1990s, stabilization in the first two decades of the 21st century, and a growing trend inflation following the onset of the COVID-19 pandemic are observed in all four countries. The low levels of inflation gap persistence prior to the pandemic reflect the effectiveness of central banks in maintaining inflation close to its trend level. Finally, the volatility of the inflation gap identifies the “Great Moderation” of inflation, with increases in volatility during the pandemic reaching levels similar to those estimated in the 1990s. JEL Classification-JE: C32, E32, E51. |
| Keywords: | Inflation, Trend Inflation, Inflation Gap Persistence, Inflation Gap Volatility, Inflation Targets, Pacific Alliance. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00533&r=ban |
| By: | Hu, Bowei (University of California, Los Angeles) |
| Abstract: | Racial minorities, often sidelined by traditional financial systems, are a primary demographic for alternative financial services (AFS). While promoting financial inclusion is seen as a way to address racial disparities in the use of AFS, this claim is often complicated by selection and post-treatment biases. Drawing on data from the National Survey of Unbanked and Underbanked Households (2015–2019) with over one hundred thousand households and adopting causal decomposition analysis, this study investigates the effect of bank account ownership on racial disparities in three AFS channels: payday lending, pawn shop loans, and check cashing. Results confirm that Black and Hispanic households are more inclined to use these AFS compared to their White counterparts. Notably, the results uncover a distinct impact of hypothetically increased bank account ownership for unbanked households. While it decreases the reliance on nonbank check cashing among banked racial minority households, it paradoxically escalates payday loan usage within Black households when they become banked. These results suggest that while expanding bank account ownership can reduce certain AFS dependencies, it inadvertently perpetuates a form of exclusive inclusion that leads more financially included Black households to opt for payday loans. |
| Date: | 2024–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:mcew5&r=ban |
| By: | Yuteng Cheng; Ryuichiro Izumi |
| Abstract: | We examine the optimal amount of user anonymity in a central bank digital currency (CBDC) in the context of bank lending. Anonymity, defined as the lender’s inability to discern an entrepreneur’s actions that enable fund diversion, influences the choice of payment instrument due to its impact on a bank’s lending decisions. We show that moderate anonymity in CBDC leads to an inefficient pooling equilibrium. To avoid this, CBDC anonymity should be either low, reducing attractiveness, or high, discouraging bank lending. Specifically, the anonymity should be high when CBDC significantly benefits sales, and low otherwise. However, competition between deposits and CBDC may hinder the implementation of low anonymity. |
| Keywords: | Digital currencies and fintech |
| JEL: | E42 E58 G28 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-9&r=ban |
| By: | Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Casimir Hesse (Rothschild & Co.) |
| Abstract: | In 2012, Draghi put an end to rising euro area sovereign bond yield spreads by resolving to do 'whatever it takes'. The crisis rhetoric and institutional practices of unlimited liquidity have since become commonplace, as countermeasures to recent market turmoil show. This paper sets out to explain how and why 'unlimited liquidity' ideas moved to the ECB's center of economic analysis during the euro crisis. Previous work fails to decipher that the ideational shift was highly anomalous when viewed against German ordoliberalism or scholarly support for 'expansionary austerity'. Addressing this relative neglect in other accounts, we draw on qualitative text analysis and expert interviews to argue that this shift was due to norm entrepreneurs who capitalized on the uncertainty of the crisis. We employ constructivist arguments to identify four scoping conditions that account for the ascendance of 'unlimited liquidity': an indicative reference, credibility, institutional positioning, and -- as an extension to the literature -- intellectual sensitivity. Our analysis suggests that the euro crisis changed economic ideas, and fundamentally remodels the constructivist framework for studying monetary policy in crisis times. |
| Keywords: | European Central Bank, euro crisis, monetary policy, unlimited liquidity, economic ideas, constructivism |
| JEL: | E52 E58 F50 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp357&r=ban |
| By: | Jiri Gregor |
| Abstract: | This paper focuses on the calibration of borrower-based measures using a semi-structural modelling framework and defines two approaches to the setting of these measures. The first approach takes into account the magnitude of losses in the mortgage portfolio and the associated absorption potential of banks, while the second, preferred approach, considers both the benefits of regulation in terms of loss reduction and its costs manifested as foregone profits. This approach thus facilitates the optimization of the macroprudential strategy to minimize Type I error (no regulation) and Type II error (excessive regulation). The case of the Czech Republic serves as an illustrative example, demonstrating that borrower-based regulation appears unnecessary and costly during periods of low credit growth, specifically in the downward phase of the credit cycle. However, if any regulation is preferred with respect to other factors and circumstances that are not captured by the modelling framework, a purely loan-to-value regulation shows the best results in terms of cost-benefit analysis. |
| Keywords: | Borrower-based measures, macroprudential policy, mortgage lending, stress testing, systematic risk |
| JEL: | C63 E58 G21 G28 R31 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2024/2&r=ban |
| By: | Meyer, Justus; Teppa, Federica |
| Abstract: | This paper contributes to understanding consumers' retail payment preferences and digitalisation in personal finances. We focus on the acceptance of cashless payments in everyday situations and the use of mobile banking apps in the euro area, where the payment services market has changed significantly in recent years. In particular, we study app-based tools for day-to-day (offline) purchases that involve small amounts of money as well as digital tools for managing personal finances. By looking at factors associated with using non-cash payment methods, and app-based financial services solutions, we shed light on the topic of financial inclusion in payment services that concern consumers’ everyday choices. Using granular microdata from the European Central Bank's Consumer Expectations Survey, we find that most people prefer to use only one payment instrument. After the COVID-19 pandemic, it has mostly been cash and contactless cards. The use of cash is partly due to limited perceived acceptance of non-cash payments by merchants. We also find substantial cross-country heterogeneity and highlight the prominent role of demographic factors in choosing non-cash payment options and app-based tools when managing personal finances. While mobile banking is already popular amongst euro area consumers, the use of smart payment methods remains very limited. Our findings suggest that financial service providers should recognize the growing preference of the younger generations for alternative payment methods. Creating awareness among consumers might also lead to positive feedback effects by reducing consumers’ reliance on cash through higher perceived availability of non-cash payment options. JEL Classification: C13, D12, E42, O33 |
| Keywords: | cash, Consumer Expectations Survey (CES), digitalisation, FinTech, payment preferences |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242915&r=ban |
| By: | Weber, Michael; Candia, Bernardo; Afrouzi, Hassan; Ropele, Tiziano; Lluberas, Rodrigo; Frache, Serafin; Meyer, Brent; Kumar, Saten; Gorodnichenko, Yuriy; Georgarakos, Dimitris; Coibion, Olivier; Ponce, George; Kenny, Geoff |
| Abstract: | Using randomized control trials (RCTs) applied over time in different countries, we study whether the economic environment affects how agents learn from new information. We show that as inflation rose in advanced economies, both households and firms became more attentive and informed about publicly available news about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low-and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment. JEL Classification: E3, E4, E5 |
| Keywords: | inattention, inflation expectations, RCTs |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242914&r=ban |
| By: | Tomás Monarrez; Lesley J. Turner |
| Abstract: | Rising student loan debt and concerns over unaffordable payments provide a rationale for the broad class of “income-driven repayment” (IDR) plans for federal student loans. These plans aim to protect borrowers from delinquency, default, and resulting financial consequences by linking payments to income and providing forgiveness after a set repayment period. We estimate the causal effect of IDR payment burdens on loan repayment and schooling outcomes for several cohorts of first-time IDR applicants using a regression discontinuity design. Federal student loan borrowers who are not required to make payments see short-run reductions in delinquency and default risk, but these effects fade or reverse in the longer run as some borrowers become disconnected from the student loan repayment system when not required to make payments. |
| Keywords: | student debt; inattention; income-driven repayment |
| JEL: | I22 G51 G41 |
| Date: | 2024–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97952&r=ban |
| By: | Rambod Rahmani; Marco Parola; Mario G. C. A. Cimino |
| Abstract: | Due to the recent increase in interest in Financial Technology (FinTech), applications like credit default prediction (CDP) are gaining significant industrial and academic attention. In this regard, CDP plays a crucial role in assessing the creditworthiness of individuals and businesses, enabling lenders to make informed decisions regarding loan approvals and risk management. In this paper, we propose a workflow-based approach to improve CDP, which refers to the task of assessing the probability that a borrower will default on his or her credit obligations. The workflow consists of multiple steps, each designed to leverage the strengths of different techniques featured in machine learning pipelines and, thus best solve the CDP task. We employ a comprehensive and systematic approach starting with data preprocessing using Weight of Evidence encoding, a technique that ensures in a single-shot data scaling by removing outliers, handling missing values, and making data uniform for models working with different data types. Next, we train several families of learning models, introducing ensemble techniques to build more robust models and hyperparameter optimization via multi-objective genetic algorithms to consider both predictive accuracy and financial aspects. Our research aims at contributing to the FinTech industry in providing a tool to move toward more accurate and reliable credit risk assessment, benefiting both lenders and borrowers. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.03785&r=ban |
| By: | Lioba Heimbach; Wenqian Huang |
| Abstract: | In decentralized finance (DeFi), lending protocols are governed by predefined algorithms that facilitate automatic loans – allowing users to take on leverage. This paper examines DeFi leverage – ie the asset-to-equity ratio at the wallet level in major lending platforms. The overall leverage typically ranges between 1.4 and 1.9, while the largest and most active users consistently exhibit higher leverage than the rest. Leverage is mainly driven by loan-to-value requirements and borrowing costs, as well as crypto market price movements and sentiments. Higher wallet leverage generally undermines lending resilience, particularly increasing the share of outstanding debt close to being liquidated. Borrowers with high leverage are more likely to tilt towards volatile collateral when their debt positions are about to be liquidated. |
| Keywords: | leverage, collateralised borrowing, decentralised finance, automated algorithm |
| JEL: | G12 G23 O36 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1171&r=ban |
| By: | Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini |
| Abstract: | When inflation picks up, central banks are most concerned that the de-anchoring of inflation expectations and the ignition of wage-price spirals will trigger inflation dynamic instability. However, such scenarios do not materialize in the standard New Keynesian theoretical framework for monetary policy. Using a simulative model, we show that they can materialize upon introducing in particularly strong doses boundedly-rational expectations that de-anchor endogenously, as they are updated according to the actual inflation process, with indexed wages, and persistent inflation shocks. In these cases, a more hawkish central-bank stance on inflation expands the stability region of the system, which however remains bounded. On the other hand, the critical combinations of factors that trigger instability can be regarded as extreme in empirical terms, while in "normal times" the system is resilient to shocks and expectation de-anchoring even with more dovish monetary policy. |
| Keywords: | cost-push inflation, New Keynesian models for monetary policy, wage-price spiral, de-anchoring of inflation expectations |
| JEL: | E17 E30 E50 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10966&r=ban |
| By: | Zhenbang Feng; Hardhik Mohanty; Bhaskar Krishnamachari |
| Abstract: | In decentralized finance (DeFi), stablecoins like DAI are designed to offer a stable value amidst the fluctuating nature of cryptocurrencies. We examine the class of crypto-backed stable derivatives, with a focus on mechanisms for price stabilization, which is exemplified by the well-known stablecoin DAI from MakerDAO. For simplicity, we focus on a single-collateral setting. We introduce a belief parameter to the simulation model of DAI in a previous work (DAISIM), reflecting market sentiments about the value and stability of DAI, and show that it better matches the expected behavior when this parameter is set to a sufficiently high value. We also propose a simple mathematical model of DAI price to explain its stability and dependency on ETH price. Finally, we analyze possible risk factors associated with these stable derivatives to provide valuable insights for stakeholders in the DeFi ecosystem. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.18119&r=ban |
| By: | Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang |
| Abstract: | In a previous post, we described the rapid growth of the stablecoin market over the past few years and then discussed the TerraUSD stablecoin run of May 2022. The TerraUSD run, however, is not the only episode of instability experienced by a stablecoin. Other noteworthy incidents include the June 2021 run on IRON and, more recently, the de-pegging of USD Coin’s secondary market price from $1.00 to $0.88 upon the failure of Silicon Valley Bank in March 2023. In this post, based on our recent staff report, we consider the following questions: Do stablecoin investors react to broad-based shocks in the crypto asset industry? Do the investors run from the entire stablecoin industry, or do they engage in a flight to safer stablecoins? We conclude with some high-level discussion points on potential regulations of stablecoins. |
| Keywords: | stablecoins; runs; money market funds (MMFs); financial stability |
| JEL: | G10 G20 G23 |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97932&r=ban |
| By: | Tommaso Gasparini; Vivien Lewis; Stéphane Moyen; Stefania Villa |
| Abstract: | Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks' balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks. |
| Keywords: | Bank Default, Capital Buffer, Firm Risk, Macroprudential Policy |
| JEL: | E44 E52 E58 E61 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:944&r=ban |
| By: | Spiros Bougheas; David I. Harvey; Alan Kirman; Douglas Nelson; Alan P. Kirman; Douglas R. Nelson |
| Abstract: | We develop a dynamic computational network model of the banking system where fire sales provide the amplification mechanism of financial shocks. Each period a finite number of banks offers a large, but finite, number of loans to households. Banks with excess liquidity also offer loans to other banks with insufficient liquidity. Thus, each period an interbank loan market is endogenously formed. Bank assets are hit by idiosyncratic shocks drawn from a thin tailed distribution. The uneven distribution of shocks across banks implies that each period there are banks that become insolvent. If insolvent banks happen also to be heavily indebted to other banks, their liquidation can trigger other bank failures. We find that the distribution across time of the growth rate of banking assets has a ‘fat left tail’ that corresponds to rare economic disasters. We also find that the distribution of initial shocks is not a perfect predictor of economic activity; that is some of the uncertainty is endogenous and related to the structure of the interbank network. |
| Keywords: | systemic risk, fire sales, banking network, macroeconomic shocks |
| JEL: | E44 G01 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10991&r=ban |
| By: | Pablo Hernández de Cos (Banco de España) |
| Abstract: | Macroprudential policy emerged after the global financial crisis to increase the resilience of the financial system against systemic risk and to prevent the excessive accumulation of such risk. This paper focuses on the effects of this policy on macroeconomic stability, a goal that it can complement monetary and fiscal policies in helping to achieve. Specifically, the potential role for this purpose of capital buffers and, in particular, the countercyclical capital buffer (CCyB), is examined. |
| Keywords: | systemic risk, macroprudential policy, countercyclical capital buffer (CCyB), macro-financial stabilisation |
| JEL: | G21 G28 E50 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2403e&r=ban |
| By: | Michael Bleaney |
| Abstract: | Nearly half of the government bonds purchased under the Bank of England’s Quantitative Easing (QE) programme were bought in 2020-21, when long-term real yields on indexed debt were well below zero and therefore almost bound to entail a sizeable loss to taxpayers. In addition to this expansion of QE, some maturing issues from earlier rounds were rolled over at this time. In so far as QE had the intended effect of raising the prices of the assets bought, the marginal loss per £ increased with the size of the QE programme. There is no evidence that this marginal effect, or the risk that a sizeable QE programme might have a substantial fiscal cost, was taken into account by the Bank’s Monetary Policy Committee or by the Government in its instructions to the Committee. |
| Keywords: | interest rate, monetary policy, quantitative easing |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2024/01&r=ban |
| By: | Marta Gómez-Puig (Department of Economics & Riskcenter, Universitat de Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, 28223 Madrid, Spain.) |
| Abstract: | Multiple interconnected channels link banks and governments: the sovereign-exposure channel (banks hold significant amounts of sovereign debt), the safety net channel (government guarantees protect banks), and the macroeconomic channel (bank and government health affect and is affected by economic activity). However, the sovereign-bank nexus in euro-area countries is particularly worrying since its member states issue debt in a currency they do not directly control and cannot ensure nominal repayment to bondholders. In this work, we summarise the main theoretical and empirical contributions that analyse this phenomenon and the legislative and institutional initiatives to reduce sovereign exposures in the banking sector. |
| Keywords: | Bank risk, Euro area, Interdependency, Sovereign risk, Sovereign-bank nexus. JEL classification: G21, G33, H63. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202406&r=ban |
| By: | Alessandro Lin (Bank of Italy); Marcel Peruffo (University of Sydney) |
| Abstract: | We propose a novel methodology for solving Heterogeneous Agent New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regime shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the extent of this amplification; and 3) the effects of forward guidance are stronger when there is aggregate uncertainty. |
| Keywords: | monetary policy, new Keynesian model, HANK, liquidity traps, Zero Lower Bound, computational methods |
| JEL: | D14 E44 E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1442_24&r=ban |
| By: | Guglielmo Maria Caporale; Matteo Alessi |
| Abstract: | This paper analyses lending behaviour and economic fluctuations in the Italian banking system as a whole and in the case of the Cooperative Credit Banks (CCBs) using time series data from 2000Q1 to 2022Q4. The specified models include the main determinants of loans to households and firms. In the first stage, VECMs are estimated to identify the long-run relationship between credit and economic variables. In the second, on the basis of appropriate exogeneity tests, only the credit variables are treated as endogenous, and all others as exogenous. Specifically. ECMs are estimated for both loans to households and loans to firms at the national level as well as from the CCBs only. The results suggest that lending behaviour is less affected by economic fluctuations in the case of the CCBs, namely these tend to reduce credit by less or not at all during economic downturns. The reason is that relationship lending enables CCBs to gather confidential (non-public) information about their clients, which can aid lending decisions and reduce credit rationing during such phases. |
| Keywords: | cooperative credit banks, bank lending, financial systems, economic cycles |
| JEL: | G01 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10958&r=ban |
| By: | Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek |
| Abstract: | This paper evaluates the efficacy of the Secondary Market Corporate Credit Facility, a program designed to stabilize the U.S. corporate bond market during the COVID-19 pandemic. The program announcements on March 23 and April 9, 2020, significantly reduced investment-grade credit spreads across the maturity spectrum—irrespective of the program’s maturity-eligibility criterion—and ultimately restored the normal upward-sloping term structure of credit spreads. The Federal Reserve’s actual purchases reduced credit spreads of eligible bonds 3 basis points more than those of ineligible bonds, a sizable effect given the modest volume of purchases. A calibrated variant of the preferred habit model shows that a “dash for cash”—a selloff of shorter-term lowest-risk investment-grade bonds—combined with a spike in the arbitrageurs’ risk aversion, can account for the inversion of the investment-grade credit curve during the height of turmoil in the market. Consistent with the empirical findings, the Fed’s announcements, by reducing risk aversion and alleviating market segmentation, helped restore the upward-sloping credit curve in the investment-grade segment of the market. |
| Keywords: | COVID-19; SMCCF; credit spreads; credit market support facilities; event study; purchase effects; preferred habitat |
| JEL: | E44 E58 G12 G14 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:97967&r=ban |
| By: | Ciccarelli, Matteo; Darracq Pariès, Matthieu; Priftis, Romanos; Angelini, Elena; Bańbura, Marta; Bokan, Nikola; Fagan, Gabriel; Gumiel, José Emilio; Kornprobst, Antoine; Lalik, Magdalena; Montes-Galdón, Carlos; Müller, Georg; Paredes, Joan; Santoro, Sergio; Warne, Anders; Zimic, Srečko; Rigato, Rodolfo Dinis; Kase, Hanno; Koutsoulis, Iason; Brunotte, Stella; Cocchi, Sara; Giammaria, Alessandro; Invernizzi, Marco; Von-Pine, Eliott |
| Abstract: | This paper takes stock of the ECB’s macroeconometric modelling strategy by focusing on the models and applications used in the Forecasting and Policy Modelling Division. We focus on the guiding principles underpinning the current portfolio of the main macroeconomic models and illustrate how they can in principle be used for economic forecasting, scenario and risk analyses. We also discuss the modelling agenda which is currently under development, focusing notably on heterogeneity, machine learning, expectation formation and climate change. The paper makes it clear that the large macroeconometric models typically developed in central banks remain stylised descriptions of our modern economies and can fail to predict or assess the nature of economic events (especially when big crises arise). But even in highly uncertain economic conditions, they can still provide a meaningful contribution to policy preparation. We conclude the paper with a roadmap which will allow the ECB and the Eurosystem to exploit technological advances and cooperation across institutions as a useful means of ensuring that the modelling framework is not only resilient to disruptive events but also innovative. JEL Classification: C30, C53, C54, E52 |
| Keywords: | economic models, forecasting, macroeconometrics, monetary policy |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024344&r=ban |