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on Banking |
| By: | Simone Auer (Bank of Italy); Nicola Branzoli (Bank of Italy); Giuseppe Ferrero (Bank of Italy); Antonio Ilari (Bank of Italy); Francesco Palazzo (Bank of Italy); Edoardo Rainone (Bank of Italy) |
| Abstract: | This paper describes the role of central bank and commercial bank money in a modern monetary system and the possible implications of the introduction of a central bank digital currency (CBDC) for the banking system and the economy as a whole. The analysis shows that the impact of a CBDC depends on a number of design choices and on how credit institutions re-optimize their balance sheets in response to the outflow of deposits caused by the substitution of private money with public digital money. We provide a set of illustrative simulations on the impact of a CBDC on the funding structure and profitability of credit institutions using data on Italian banks between June 2021 and March 2023. The analysis suggests that the overall impact on banks' funding could be manageable in the presence of individual holding limits and in an environment characterized by ample liquidity and stable funding for credit institutions. The cost of covering the reduction of deposits would be relatively higher for intermediaries with low excess reserves and for those that may need to issue long-term liabilities to maintain stable funding levels above regulatory requirements. |
| Keywords: | central bank digital currency, monetary policy, financial stability, banks, money |
| JEL: | E41 E42 E43 E44 E51 E58 G21 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_829_24&r=ban |
| By: | Amina Enkhbold |
| Abstract: | I investigate how monetary policy transmits to mortgage rates via the mortgage market concentration channel for both traditional and shadow banks in the United States from 2009 to 2019. On average, shadow and traditional banks exhibit only a slight disparity in transmitting monetary shocks to mortgage rates. Nonetheless, in highly concentrated mortgage markets, shadow banks transmit marginally 35 basis points (bps) more, whereas traditional banks transmit marginally 25 bps less in response to a monetary policy surprise of more than 100 bps. Lastly, banks serve different parts of the mortgage rate distribution: (i) fintech lenders compete with traditional banks for the highest rates, (ii) traditional banks target primarily the middle of the mortgage rate distribution, and (iii) non-fintech lenders specialize in the lowest rates by transmitting monetary policy the least. |
| Keywords: | Monetary policy transmission; interest rates; financial institutions |
| JEL: | E44 E52 G21 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-8&r=ban |
| By: | Tamas Briglevics (Central Bank of Hungary); Artashes Karapetyan (ESSEC Business School); Steven Ongena (University of Zürich; Swiss Finance Institute; KU Leuven; NTNU Business School and CEPR); Schindele Ibolya (Central European University; Corvinus University and Central Bank of Hungary) |
| Abstract: | We exploit a nation-wide introduction of mandatory disclosure of borrowers’ total credit exposures and show that sharing such information increases credit access independent of borrowers’ history. Differentiating between borrowers applying to competitor banks and those reapplying to their current banks, as well as between borrowers with and without default history, we find an overall increase in credit access measured by both loan application acceptance and credit amount. While credit access increases, default rates decrease, generating an increase in aggregate welfare. (78 words) |
| Keywords: | information sharing, bank lending, household access to credit |
| JEL: | G21 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2024/1&r=ban |
| By: | Sheila Dow (Department of Economics, University of Victoria) |
| Abstract: | In order to consider the problem of the relationship between central banks and governments, it is necessary to go back to first principles and consider what society needs from central banks. The role of the central bank is explored as being to provide a stable financial environment as a basis for real economic activity. This involves the provision of a safe money asset; an appropriate level and composition of lending to the corporate sector to finance capital investment; and lending to government as required, subject to maintaining the value of the currency. The evolution of this traditional role in relation to banks and government is analysed in terms of collateral, emphasising their interdependencies. The argument developed here is that the problem of insufficient collateral for the financial system is a product of weak economic conditions and financial instability which has eroded confidence in the valuation of assets, and that this has been compounded by central bank independence. As a result, it is argued that central banks should not be independent of government, but rather that the traditional constructive mutual relationships between central banks and government (and retail banks) be restored. |
| Keywords: | central banks, monetary policy, bank regulation |
| Date: | 2024–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:2014&r=ban |
| By: | Michael Kiley; Frederic S. Mishkin |
| Abstract: | The world economy has experienced the largest financial crisis in generations, a global pandemic, and a resurgence in inflation during the first quarter of the 21st century, yielding important insights for central banking. Price stability has important benefits and is the responsibility of a central bank. Achieving price stability in a complex and uncertain environment involves a credible commitment to a nominal anchor with a strong response to inflation and pre-emptive leaning against an overheating economy. Associated challenges imply that central bank communication and transparency are key elements of monetary policy strategies and tactics. Crises have emphasized the role of central banks in promoting financial stability, as financial stability is key to achieving price and economic stability, but this role increases risks to independence. Goals for central banks other than price and economic stability, complemented by financial stability, can make it more difficult for them to stabilize both inflation and economic activity. |
| JEL: | E4 E5 E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32237&r=ban |
| By: | Mr. Luis Brandão-Marques; Mr. Lev Ratnovski |
| Abstract: | This paper reviews the trade-offs involved in the choice of the ECB’s monetary policy operational framework. As long as the ECB’s supply of reserves remains well in excess of the banks’ demand, the ECB will likely continue to employ a floor system for implementing the target interest rate in money markets. Once the supply of reserves declines and approaches the steep part of the reserves demand function, the ECB will face a choice between a corridor system and some variant of a floor system. There are distinct pros and cons associated with each option. A corridor would be consistent with a smaller ECB balance sheet size, encourage banks to manage their liquidity buffers more tightly, and facilitate greater activity in the interbank market. But it would require relatively more frequent market operations to ensure the money markets rate stays close to the policy rate and could leave the banking system vulnerable to intermittent liquidity shortages that may have financial stability implications and impair monetary transmission. The floor, on the other hand, would allow for more precise control of the overnight rate and a lower risk of liquidity shortages, but it would entail a somewhat larger ECB balance sheet, weaken the incentives for banks to manage their liquidity buffers, and discourage interbank market activity. The analysis of tradeoffs suggests that, on balance, in steady state, a hybrid system that combines the features of the “parsimonious floor” (with a minimal volume of reserves) with a lending facility or frequent short-term full-allotment lending operations priced at or very close to the deposit rate, making it a “zero (or near-zero) corridor”, would be most conducive for achieving the ECB’s monetary policy objective. |
| Keywords: | Central bank operations; Monetary policy; The ECB |
| Date: | 2024–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/056&r=ban |
| By: | Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Gracjan BACHUREWICZ (Wydzial Zarzadzania, Uniwersytet Warszawski) |
| Abstract: | This study investigates income-smoothing through loan-loss provisions among European Economic Area banks, with a focus on the Covid-19 crisis. Results indicate a pandemic-induced rise in income-smoothing, particularly in countries receiving substantial liquidity support from fiscal schemes and the European Central Bank’s Pandemic Emergency Purchase Program. This trend is mitigated in nations with robust governance and financial openness. Market structure and financial development, while not affecting income-smoothing, influence loan-loss provision levels. Macroprudential vulnerabilities also play a role, as a stricter macroprudential oversight correlates with reduced earnings management via loan-loss provisions. Notably, banks in countries with heightened pre-crisis countercyclical buffers did not engage in income-smoothing during the pandemic, but a zero-buffer rate was associated with a higher degree of income-smoothing. The findings underscore the significance of macroprudential policies in curbing opportunistic financial reporting during economic downturns. |
| Keywords: | loan-loss provisions, income-smoothing, Covid-19 crisis, liquidity support, governance, finance and macroprudential vulnerabilities |
| JEL: | E44 E58 G21 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2024-03&r=ban |
| By: | Emter, Lorenz; McQuade, Peter; Pradhan, Swapan-Kumar; Schmitz, Martin |
| Abstract: | This paper provides insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The UK is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit. Offshore financial centres are pivotal for US dollars loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies. The empirical analysis suggests that euro-denominated loans face the “tyranny of distance”, in line with predictions of gravity models of trade, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar. JEL Classification: F31, F33, F34, F36, G21 |
| Keywords: | cross-border banking, currency denomination, dominant currency paradigm, gravity |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242918&r=ban |
| By: | Dr. Tobias Cwik; Dr. Christoph Winter |
| Abstract: | In the aftermath of the Great Financial Crisis (GFC), central banks from several advanced, small, open economies have used FX interventions (FXI) in order to stimulate inflation, given that their policy rates were very low. We present a quantitative DSGE model that allows us to study the effectiveness of this unconventional monetary policy tool. We apply the model to Switzerland, a country that has seen frequent and sizable central bank interventions. The model implies that FXI are effective and long-lasting: FXI of approximately CHF 27 billion (5% of annual GDP) are necessary to prevent the Swiss franc from appreciating by 1.1%. The effect is stronger the longer the central bank can commit to keep its policy rate constant in response to the inflationary effect of the interventions. We also find that FXI create significant additional leeway for monetary policy in small, open economies. This effect can be shown by the "shadow rate", the policy rate required to keep CPI inflation on its realised path without FXI. This "shadow rate" was up to 1 pp below the realised policy rate and close to -1.5% from 2015 to mid-2022 in Switzerland. Our framework also allows us to study the sensitivity of the shadow rate in an environment in which the policy rate is at (or close to) its lower bound. If the persistence of the policy rate increases at the lower bound, the shadow rate rises in absolute terms. |
| Keywords: | Monetary policy, FX intervention, Shadow rate, DSGE model |
| JEL: | C54 E52 F41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2024-04&r=ban |
| By: | Westermeier, Carola |
| Abstract: | The European Central Bank (ECB) has entered the preparation phase for the potential issuance of a digital euro. The digital euro under consideration represents a retail Central Bank Digital Currency (CBDC), a digital representation of central bank money that is intended for use by the general public. This article foregrounds the digital euro as an infrastructure that furthers European security ambitions. It argues that the development of the digital euro is a materialization of European (in)security rationales that aim to secure pan-European financial transactions amid growing geopolitical tensions. It focuses on the development of the technology and analyses how central bankers’ scenarios of the future manifest in the anticipated design and prototypes. While the provision of a financial infrastructure is the most decisive security-related implication of the digital euro, the introduction of a new form of public money is the decisive financial feature with potentially wide-ranging implications for banks. Although the ECB seeks to balance the interests of banks and other financial actors in the development of the digital euro, its plans are still met with criticism. Finally, the paper argues that the European Central Bank exerts itself more explicitly than before as geopolitical actors in its own regard. |
| Date: | 2024–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:x45eg&r=ban |
| By: | Salih Zeki Atilgan; Tarik Aydogdu; Mehmet Selman Colak; Muhammed Hasan Yilmaz |
| Abstract: | In this paper, we propose the use of regularization and shrinkage methods to address the variable selection problem in predicting credit growth. Using data from the 10 largest Turkish banks and a broader set of macro-financial predictors for the period 2012-2023, we find that the models generated by the Least Absolute Shrinkage and Selection Operator (LASSO) method have superior predictive power (lower level of forecast errors) for bank-level total credit growth compared to alternative factor-augmented models through recursive out-of-sample forecasting exercises. Our baseline findings remain intact against alternative choices of the tuning parameter and LASSO specifications. In addition to the dynamics of the total credit growth, the improvement in prediction accuracy is evident for commercial credit growth at all horizons, while the effect is limited to short-term horizons for consumer credit growth. Furthermore, additional robustness checks show that the baseline results do not vary considerably against different sample coverage and benchmark models. In the subsequent analyses, we utilize the LASSO method to synthesize the “residual credit” indicator as a proxy for excessive credit movements deviating from the level implied by macro-financial dynamics. In the scope of a case study, using this indicator as an input for local projection estimates, we show that recent inflationary pressures have resulted in excessive lending activity, which is not fully explained by macro-financial dynamics, in the period 2020-2023. |
| Keywords: | Credit growth, Forecasting, LASSO, Residual credit, Local projection |
| JEL: | G21 C53 C55 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2402&r=ban |
| By: | Ezra Oberfield; Esteban Rossi-Hansberg; Nicholas Trachter; Derek T. Wenning |
| Abstract: | We study the spatial expansion of banks in response to banking deregulation in the 1980s and 90s. During this period, large banks expanded rapidly, mostly by adding new branches in new locations, while many small banks exited. We document that large banks sorted into the densest markets, but that sorting weakened over time as large banks expanded to more marginal markets in search of locations with a relative abundance of retail deposits. This allowed large banks to reduce their dependence on expensive wholesale funding and grow further. To rationalize these patterns we propose a theory of multi-branch banks that sort into heterogeneous locations. Our theory yields two forms of sorting. First, span-of-control sorting incentivizes top firms to select the largest markets and smaller banks the more marginal ones. Second, mismatch sorting incentivizes banks to locate in more marginal locations, where deposits are abundant relative to loan demand, to better align their deposits and loans and minimize wholesale funding. Together, these two forms of sorting account well for the sorting patterns we document in the data. |
| JEL: | D20 G21 G24 L23 L25 R12 R19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32256&r=ban |
| By: | Cândida Ferreira |
| Abstract: | This paper contributes to the literature using first a Data Envelopment Analysis (DEA) approach to measure bank efficiency and the results provided by the Malmquist indices to analyse the evolution of the technical, technological, and scale efficiency changes, in a panel including 784 relevant banks of all the 27 European Union (EU) countries, between 2006 and 2021. In the second stage, the study uses panel dynamic Generalised Method of Moments (GMM) estimations to analyse the impact on the total productivity changes of bank market competition (measured with the estimated Boone indicator) and bank stability (proxied with the estimated Z-score), while controlling for some relevant bank activities, economic growth and the influence of the relevant crises that affected the EU banking sector during the considered period. The main findings reveal that while bank market competition looks like promoting the banks’ total factor productivity change, bank loans, bank deposits and short-term funding, as well as bank market stability and economic growth do not contribute to the banks’ total factor productivity changes. |
| Keywords: | European Union banking sector; Malmquist indices; bank total factor productivity changes; Z-score; Boone indicator. |
| JEL: | C33 D53 F36 G21 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03152024&r=ban |
| By: | Jacob Sesugh Angahar (NISER - Nigeria institute of social and Economic Research Ibadan) |
| Abstract: | This research examined the modeling of the financial intermediation functions of banks in Nigeria. The effectiveness of financial intermediation was determined by its impact on economic growth in Nigeria. Secondary time series data were collected to determine the association between variables. The study adopted an ex post facto research design and used ordinary least squares regression tests that reveal the predictive power of the model as well as the relative statistics of the short-term variables, while testing for the existence of a long-term equilibrium relationship, based on the multivariate cointegration technique performed. The results of the study suggest that there are both short-term and long-term relationships between financial intermediation and economic growth in Nigeria. Specifically, CBCPS has a positive relationship with GDP, while MS and MLR have a positive and significant relationship with GDP in the long run. The study recommends, inter alia, that monetary authorities, in particular the Central Bank of Nigeria, has to use measures to force banks to reduce their interest rates on loans. This will increase investment and enhance the overall performance of the economy's productive sectors. |
| Keywords: | Financial intermediation banks credit to private sector maximum lending rate money supply economic growth, Financial intermediation, banks, credit to private sector, maximum lending rate, money supply, economic growth |
| Date: | 2024–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04493271&r=ban |
| By: | Cristina Demma (Bank of Italy); Giovanni Ferri (Lumsa); Andrea Orame (Bank of Italy); Valerio Pesic (Universita' La Sapienza); Valerio Vacca (Bank of Italy) |
| Abstract: | Using the unanticipated and exogenous Covid-19 shock as a unique laboratory, we address the topic of business continuity at banks, where limitations to social mobility hindered the provision of branch-executed services. Namely, we conjecture that business resilience was higher if a bank had previously invested heavily in IT to increase its degree of digitalization, shifting more customers from branch- to online-executed services. In particular, we speculate that such investments should unfold greater readiness in migrating retail customers towards online payments during the pandemic, confirming that IT investments contribute to operational resilience. Exploiting thinly disaggregated supervisory data, our empirical analyses provide robust support to our hypothesis. Hence, digitalization seems to breed resilience at banks against unforeseen natural events; this corroborates the usefulness of technological investments also as an insurance against unpredictable risks and indirectly confirms the complementarity of the twin Green-Digital transition. |
| Keywords: | innovation, Fintech, banks, bank credit transfers, payment habits, Covid-19 pandemic |
| JEL: | E41 E42 D12 G21 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_833_24&r=ban |
| By: | Nghiem, Giang; Dräger, Lena; Dalloul, Ami |
| Abstract: | This paper explores communication strategies for anchoring households' medium-term inflation expectations in a high inflation environment. We conducted a survey experiment with a representative sample of 4, 000 German households at the height of the recent inflation surge in early 2023, with information treatments including a qualitative statement by the ECB president and quantitative information about the ECB's inflation target or projected inflation. Inflation projections are most effective, but combining information about the target with a qualitative statement also significantly improves anchoring. The treatment effects are particularly pronounced among respondents with high financial literacy and high trust in the central bank. |
| Keywords: | anchoring of inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT) |
| JEL: | E52 E31 D84 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-719&r=ban |
| By: | Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (BI Norwegian Business School; CogniFrame); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | This paper introduces a novel database of text features extracted from the speeches of 53 central banks from 1996 to 2023 using state-of-the-art NLP methods. We establish four facts: (1) central banks with floating and pegged exchange rates communicate differently, and these differences are particularly pronounced in discussions about exchange rates and the dollar, (2) communication spillovers from the Federal Reserve are prominent in exchange rate and dollar-related topics for dollar peggers and in hawkish sentiment for others, (3) central banks engage in FX intervention guidance, and (4) more transparent institutions are less responsive to political pressure in their communication. |
| Keywords: | Exchange Rates; Natural Language Processing (NLP); International Spillovers; Monetary Policy |
| JEL: | C55 E42 E50 F31 F42 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0432&r=ban |
| By: | Simone di Paolo (Bank of Italy); Danilo Liberati (Bank of Italy) |
| Abstract: | This paper presents the seasonal adjustment process applied to the credit time series produced by the Bank of Italy. Due to the methodological and computational improvements made in recent times, making the most suitable choice for estimating the seasonal component has become more challenging. First, the paper discusses the seasonal adjustment methods most widely adopted within the community of central banks and statistical institutes. Second, it compares the output of the different approaches with reference to the credit time series currently published by the Bank of Italy and explains the main reasons underlying the adoption of X-13ARIMA-SEATS. Finally, the paper extends the new approach in order to derive new seasonally adjusted time series for banks’ loans to non-financial corporations and to households classified by economic sector of activity (NACE) and by purpose of lending respectively. |
| Keywords: | seasonal adjustment, X-13ARIMA-SEATS, TRAMO-SEATS, banking data |
| JEL: | C22 C87 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_835_24&r=ban |
| By: | Linda S. Goldberg; Oliver Zain Hannaoui |
| Abstract: | The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks is sometimes taken as an indicator of dollar status. We show that the observed decline in the aggregate share of U.S. dollar assets does not stem from a systematic shift in currency preferences away from holding dollar assets. Instead, a small group of countries with large foreign exchange reserve balances drive the dollar share decline observed in aggregate statistics. This arises either due to countries conducting monetary policy vis-à-vis the euro or due to preference shifts away from dollars. Regression analysis shows that interest rate differentials between traditional and nontraditional reserve currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares, especially if the primary foreign currency liquidity needs of the central bank are already satisfied. |
| Keywords: | foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves |
| JEL: | F3 F31 F33 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97928&r=ban |
| By: | Andre Guettler; Mahvish Naeem; Lars Norden; Bernardus Van Doornik |
| Abstract: | We investigate whether pre-publication revisions of bank financial statements contain forward-looking information about bank risk. Using 7.4 million observations of monthly financial reports from all banks in Brazil during 2007-2019, we show that 78% of all revisions occur before the publication of these statements. The frequency, missing of reporting deadlines, and severity of revisions are positively related to future bank risk. Using machine learning techniques, we provide evidence on mechanisms through which revisions affect bank risk. Our findings suggest that private information about pre-publication revisions is useful for supervisors to monitor banks. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:590&r=ban |
| By: | Nicoletti, Giulio; Rariga, Judit; Rodriguez d’Acri, Costanza |
| Abstract: | We study the impact of a liquidity shock affecting investment funds on the financing conditions of firms. The abrupt liquidity needs of investment funds, triggered by the outbreak of the Covid-19 pandemic, prompted a retrenchment from bond purchases of firms and a withdrawal of short term funds from banks, impacting firm financing costs directly via bond markets, and indirectly via banks. According to our results, the spreads of corporate bonds held by investment funds increased. Furthermore, an increase in the short term funding exposure of a bank to investment funds triggered a contraction in new loans to euro area firms. Overall, our results show that while non-banks in general support firm financing by acting as a spare tyre when banks do not, their own stress can trigger a contractionary credit supply effect for firms. JEL Classification: E52, G23, G30 |
| Keywords: | bank lending channel, bond lending channel, firm financing, investment funds, monetary policy |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242917&r=ban |
| By: | Luis F. Dumlao (Ateneo de Manila University); Alvin P. Ang (Ateneo de Manila University); Ser Percival K. Pena-Reyes (Ateneo de Manila University); Genesis Kelly S. Lontoc (Ateneo de Manila University); Satyabhama Andrea C. Gulapa (ACERD); Fernando T. Aldaba (Ateneo de Manila University) |
| Abstract: | Starting off from Chapter 11 (Ensure Macroeconomic Stability and Expand Inclusive and Innovative Finance) Subsection 1 (Ensure Macroeconomic Stability and Expand Inclusive and Innovative Finance) of the Philippine Development Plan 2023-2028 (PDP), we focus our research on Monetary and Financial Agenda Towards Inclusion, Consumer Protection, and Innovation. In Section IV, we revisit Republic Act 3765 or the Truth in Lending Act of 1963. In the spirit of consumer protection, we recommend regulations that are expected to improve transparency and empower consumers to make better informed decisions. In Section V, we use literature from behavioral finance on how regulators can nudge consumers to make better financial actions providing opportunities for inclusion and innovation. In Section VI, we discuss starting points for legislative discussion on how to protect retirees from financial and monetary matters as a complement and/or alternative to providing financial literacy programs. One in which our laws are relatively silent is on the treatment of whistleblowers. In Section VII, we discuss conventional practices on the treatment of whistleblowers in other jurisdictions to deter and/or catch nefarious agents and/or practices in the financial industry. In the last two sections, we acknowledge that prohibitively high interest rates on loans is a major hurdle towards inclusion. Part of the reason is that there are laws and/or regulations that charge financial institutions forcing them to pass on thecost to consumers. |
| Keywords: | financial inclusion, financial innovation, consumer protection, monetary policy |
| JEL: | G18 G21 G41 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:agy:dpaper:202407&r=ban |
| By: | Mr. Luis Brandão-Marques; Mr. Roland Meeks; Vina Nguyen |
| Abstract: | When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates. This robust approach, characterized by a "better safe than sorry" philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation. Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias. Specifically, a high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario which the policymaker fully understands how shocks to those variables are transmitted to inflation and output. This paper provides empirical evidence of such uncertainty and estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area to derive a robust interest rate path for the ECB which serves to illustrate the case for insuring against inflation turning out to have greater persistence. |
| Keywords: | Robust policy; monetary policy; uncertainty; inflation persistence; wage and price dynamics.; Monetary Policy stance; policy rule parameter; price Persistence; IMF working paper 2024/47; inflation expectation; Inflation; Central bank policy rate; Output gap; Wages; Europe; Central and Eastern Europe; Eastern Europe |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/047&r=ban |
| By: | Yoko Shirasu; Yukihiro Yasuda |
| Abstract: | Using comprehensive data on banks' M&A arrangements in Asia-Pacific countries from 2000 to 2014, we investigate differing performance effects based on the types of foreign institutional investors from the perspective of the acquirer bank's M&A strategies. Measured by the simple Q ratio, our results indicate that acquirer bank's future prospects in Asia-Pacific countries increase three years following the completion of M&A deals when the foreign institutional investors' is a bank type and has high equity stakes in the acquirer. In addition, acquirer banks' loan ratios are found to significantly increase without an accompanying increase in nonperforming loans when held by a bank type foreign investor. Moreover, banks' incomes from other fee-based businesses increase. By contrast, when an investment advisor or fund type of foreign institutional investors have high equity stakes, acquirer banks failed to expand core businesses in the long run, although some success is made in cost reduction in the short run. These results indicate that bank type foreign investors contribute to acquirer banks' future performance through influential advisory functions in the opaque banking industry of Asia. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e202&r=ban |
| By: | Gianluca Pallante; Mattia Guerini; Mauro Napoletano; Andrea Roventini |
| Abstract: | We extend the Schumpeter meeting Keynes (K+S; see Dosi et al., 2010, 2013, 2015) to model the emergence and the dynamics of an interbank network in the money market. The extended model allows banks to directly exchange funds, while evaluating their interbank positions using a network- based clearing mechanism (NEVA, see Barucca et al., 2020). These novel adds on, allow us to better measure financial contagion and systemic risk events in the model and to study the possible interactions between micro-prudential and macro-prudential policies. We find that the model can replicate new stylized facts concerning the topology of the interbank network, as well as the dynamics of individual banks’ balance sheets. Policy results suggest that the economic system at large can benefit from the introduction of a micro-prudential regulation that takes into account the interbank network relationships. Such a policy decreases the incidence of systemic risk events and the bankruptcies of financial institutions. Moreover, a trade-off between financial stability and macroeconomic performance does not emerge in a two-pillar regulatory framework grounded on i) a Basel III macro-prudential regulation and ii) a NEVA-based micro-prudential policy. Indeed, the NEVA allows the economic system to achieve financial stability without overly stringent capital requirements. |
| Keywords: | Financial contagion, Systemic risk, Micro-prudential policy, Macro-prudential policy, Macroeconomic stability, Agent-based computational economics |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2024/08&r=ban |
| By: | Nikolay Hristov; Oliver Hülsewig; Benedikt Kolb |
| Abstract: | We examine the fiscal footprint of macroprudential policy in euro area countries arising through the bond market channel (Reis, 2021). Using local projections, we estimate impulse responses of the fiscal balance to an unexpected tightening in macroprudential capital regulation. Our findings suggest a dichotomy between country groups. In peripheral countries, the cyclically adjusted primary balance ratio deteriorates after a restrictive capital-based macroprudential policy shock. Since banks are important investors in domestic government debt, the shift in the public budget toward higher borrowing after the innovation might pose a threat to financial stability to the extent that sovereign risk increases. By contrast, in core countries, the cyclically adjusted primary balance ratio barely reacts to a sudden tightening in capital regulation. |
| Keywords: | fiscal footprint, macroprudential capital regulation, sovereign-bank nexus, local projections |
| JEL: | C33 G28 H63 K33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10968&r=ban |
| By: | Anastasia Cozarenco; Ariane Szafarz |
| Abstract: | Outcome tests for discrimination in the credit market typically assume that profit is the lender’s goal. This assumption ignores nonprofit and social lending institutions that value prosocial outcomes. These institutions may combine positive and negative discrimination, further complicating the identification of bias. We propose a test for discrimination in lending that is robust to the profit orientation of the lender. Consistent with the Basel framework for credit risk management, our test is based on recovery records. It is applicable to the identification of both positive and negative bias. |
| Keywords: | Test for credit discrimination; prosocial lender; social finance; discrimination; affirmative action |
| JEL: | C12 C44 J15 J16 G21 D63 |
| Date: | 2024–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/369880&r=ban |
| By: | Sara Lamboglia (Bank of Italy); Noemi Oggero (University of Turin and CERP); Mariacristina Rossi (COVIP and University of Turin); Massimiliano Stacchini (Bank of Italy) |
| Abstract: | In this study, we explore whether financial literacy plays a role in shaping the career aspirations of young people. Using data collected in 2023 by the Bank of Italy on a representative sample of individuals aged 18-34, we find that financial knowledge increases the intention to become an entrepreneur. Our results are confirmed by using instrumental variable estimations. We also show that financial knowledge helps to reduce indecisiveness regarding future professional choices, making young people more focused on their aspirations. |
| Keywords: | financial literacy, entrepreneurial intention |
| JEL: | G53 L26 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_838_24&r=ban |
| By: | Giorgio Massari (University of Pavia); Luca Portoghese (University of Pavia); Patrizio Tirelli (University of Pavia) |
| Abstract: | We show that popular models of (flight-to-) liquidity shocks rely on strongly counterfactual implications for asset returns and the composition of firms’ liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. We also uncover some counterfactual/implausible interpretations of the Fed’s monetary policy stance during recession periods, as hinted by the estimated gap between policy and natural rates. By including the relevant financial variables as observables in our empirical model, we find that liquidity shocks played a negligible role and became virtually irrelevant after 2010. Our estimates also imply that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate. Finally, our estimates provide a quite different interpretation of the monetary policy stance. |
| Keywords: | natural rate of interest, DSGE models, liquidity shocks, flight-to-quality, financial frictions |
| JEL: | C11 C32 C54 E43 E44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0217&r=ban |
| By: | Xin Yue Ren; Dena Firoozi |
| Abstract: | In this paper, we address linear-quadratic-Gaussian (LQG) risk-sensitive mean field games (MFGs) with common noise. In this framework agents are exposed to a common noise and aim to minimize an exponential cost functional that reflects their risk sensitivity. We leverage the convex analysis method to derive the optimal strategies of agents in the limit as the number of agents goes to infinity. These strategies yield a Nash equilibrium for the limiting model. The model is then applied to interbank markets, focusing on optimizing lending and borrowing activities to assess systemic and individual bank risks when reserves drop below a critical threshold. We employ Fokker-Planck equations and the first hitting time method to formulate the overall probability of a bank or market default. We observe that the risk-averse behavior of agents reduces the probability of individual defaults and systemic risk, enhancing the resilience of the financial system. Adopting a similar approach based on stochastic Fokker-Planck equations, we further expand our analysis to investigate the conditional probabilities of individual default under specific trajectories of the common market shock. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.03915&r=ban |
| By: | Antonietta di Salvatore (Bank of Italy); Mirko Moscatelli (Bank of Italy) |
| Abstract: | Distributional information on the debt held by households and on the characteristics of debtors is fundamental for creating and updating policy-relevant indicators and models. The primary source for this information in Italy is the Survey on Household Income and Wealth (SHIW), carried out periodically by the Bank of Italy. Its estimates, however, are affected by several types of non-sampling errors inevitably present in surveys. In this work, we use granular credit registers to improve debt estimates and determine which households are more likely to have measurement errors for their debts. The results show that integrating the SHIW with information derived from the credit registers increases household debt participation and the amount of debt households hold. Moreover, we find that households belonging to the wealthiest quintiles of the population, residing in the South and Islands, and for which the reference person has a low level of financial education are more likely not to report their loans for property purchases to the SHIW. |
| Keywords: | survey, administrative data, residential mortgages, consumer credit |
| JEL: | C83 D31 G51 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_839_24&r=ban |
| By: | Braxton, John Carter (University of Wisconsin-Madison); Chikhale, Nisha (University of Wisconsin-Madison); Herkenhoff, Kyle (University of Minnesota); Phillips, Gordon (Dartmouth College) |
| Abstract: | We combine the Decennial Census, credit reports, and administrative earnings to create the first panel dataset linking parent's credit access to the labor market outcomes of children in the U.S.We find that a 10% increase in parent's unused revolving credit during their children's adolescence (13 to 18 years old) is associated with 0.28% to 0.37% greater labor earnings of their children during early adulthood (25 to 30 years old). Using these empirical elasticities, we estimate a dynastic, defaultable debt model to examine how the democratization of credit since the 1970s – modeled as both greater credit limits and more lenient bankruptcy – affected intergenerational mobility. Surprisingly, we find that the democratization of credit led to less intergenerational mobility and greater inequality. Two offsetting forces underlie this result: (1) greater credit limits raise mobility by facilitating borrowing and investment among low-income households; (2) however, more lenient bankruptcy policy lowers mobility since low-income households dissave, hit their constraints more often, and reduce investments in their children. Quantitatively, the democratization of credit is dominated by more lenient bankruptcy policy and so mobility declines between the 1970s and 2000s. |
| Keywords: | credit limits, bankruptcy, intergenerational mobility |
| JEL: | D14 E21 E24 G51 J62 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16826&r=ban |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | In this paper, we assess the impact of monetary policy shocks on the income distribution in the Eurozone after the Global Financial Crisis, i.e., a time of unconventional monetary policy. Unlike previous papers that focus on the precrisis era, where monetary policy was primarily conducted through interest rates, expansionary policy typically increases inequality. This can be mitigated by highly developed financial markets and sound institutions that limit rent seeking. |
| Keywords: | monetary policy, inequality, Eurozone |
| JEL: | D33 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202402&r=ban |
| By: | Masao Fukui; Niels Joachim Gormsen; Kilian Huber |
| Abstract: | We show that firms' nominal required returns to capital (i.e., their discount rates) are sticky with respect to expected inflation. Such nominally sticky discount rates imply that increases in expected inflation directly lower firms' real discount rates and thereby raise real investment. We analyze the macroeconomic implications of sticky discount rates using a New Keynesian model. The model naturally generates investment-consumption comovement in response to household demand shocks and higher investment in response to government spending. Sticky discount rates imply that inflation has real effects, even absent other nominal rigidities, making them a distinct source of monetary non-neutrality. At the same time, sticky discount rates make the short-term interest rate less effective at stimulating investment. Optimal monetary policy focuses on inflation expectations and permanently lowers the long-run inflation target in response to expansionary shocks, even when shocks are temporary. |
| JEL: | D22 E22 E23 E31 E32 E43 E44 E52 E58 G12 G31 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32238&r=ban |
| By: | Jeremy Samer Srouji (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, Erasmus University Rotterdam) |
| Abstract: | The evolution of the international monetary system towards a more multipolar configuration is not only reflective of fundamentals but of increasing fragilities and uncertainty. In this paper, we map the trajectories of the big four (EUR, GBP, JPY, USD) and secondary currencies (AUD, CAD, CHF, CNY) in the past decade and argue that the system is increasingly illadapted to thereconfiguration of the globaleconomy, bringing to theforefront the need, in particular, for a reliable alternative international reserve asset. |
| Keywords: | currency internationalization, functions of money, international monetary system, international reserves, payments |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04459960&r=ban |
| By: | Boran Plong; Neil Maru |
| Abstract: | From the autumn of 2023 into early 2024, the Canadian Overnight Repo Rate Average (CORRA), a measure of the cost of overnight general collateral Canadian dollar repos, was consistently well above the Bank’s target for the overnight rate. We find that, among several factors, long bond positions that require repo financing are the main driver of the recent upward pressure on CORRA. |
| Keywords: | Financial markets; Interest rates; Lender of last resort; Monetary policy implementation |
| JEL: | D4 D5 D53 E4 E43 E44 E5 E52 G1 G12 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:24-4&r=ban |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US) |
| Abstract: | Unitary monetary policy in large emerging economies with substantial regional disparities is likely to have heterogeneous effects with unintended consequences. This paper explores the regional effects of monetary policy in China by estimating the response of a series of provincial variables to a national monetary policy shock using quarterly data over the period 1999-2022. Regional heterogeneity is assessed by comparing the results from a fixed-effects and a mean-group estimator. The response of consumer prices and loans is found to be homogeneous across provinces, while that of output and property prices exhibits significant regional variation. Further analysis of the differential response for two provincial clusters indicates that output in Western China experiences faster drops after a contractionary monetary policy shock and takes longer to recover than in Eastern and Central China. In the same context, property prices react with a delay and endure a more gradual recovery after the shock. The advancement of market institutions, the share of state-owned enterprises, and the size of the private sector are identified as potential determinants of the differential response across the two regional clusters. |
| Keywords: | monetary policy, regional effects, China |
| JEL: | E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202401&r=ban |
| By: | Pablo Burriel (Banco de España); Mar Delgado-Téllez (EUROPEAN CENTRAL BANK); Camila Figueroa (AFI); Iván Kataryniuk (Banco de España); Javier J. Pérez (Banco de España) |
| Abstract: | This paper proposes a novel approach to estimating the contribution of macroeconomic factors to sovereign spreads in the euro area, defined as the spread level consistent with the country’s prevailing macroeconomic conditions. Despite the wealth of papers estimating sovereign spreads, model-dependency and lack of robustness remain key considerations. Accordingly, we propose a “thick modeling” empirical framework, based on the estimation of a wide range of models. We focus on 10-year sovereign bond yields for nine euro area countries, using a sample that covers the period January 2000 to December 2023. Our results show that observed spreads behave in line with macro-financial determinants in “normal” times. Macroeconomic determinants are also able to account for a significant fraction of the observed sovereign spread dynamics in most episodes of financial turbulence, such as the pandemic and the aftermath of the Russian invasion of Ukraine. However, we find evidence of some deviations of sovereign spreads from their estimated values during the 2010-2012 euro area sovereign debt crisis. In this period, macroeconomic indicators are able to explain at most 26% of the observed peaks in spreads among non-core countries. |
| Keywords: | sovereign bond spreads, euro area, macroeconomic fundamentals |
| JEL: | E44 O52 G15 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2408&r=ban |
| By: | Kento Tango; Yoshiyuki Nakazono |
| Abstract: | We propose a new concept of monetary policy shocks: subjective monetary policy shocks. Using a unique survey on both consumption expenditures and forecasts of interest rates, we identify a cross-sectionally heterogeneous monetary policy shock at the micro level. We first distinguish between exogenous and endogenous interest rate changes and define the exogenous component as a subjective monetary policy shock for each household. We then estimate the impulse responses of consumption expenditures to a subjective monetary policy shock. We find the stark contrasts in the dynamics of consumption expenditures between borrowers and lenders; in response to an unexpected rise in interest rates, consumption expenditures by borrowers decrease, whereas those of asset holders increase. We also find large and quick responses of consumption expenditures when households are attentive to interest rates. Our findings support the theoretical prediction of not only heterogeneous agent New Keynesian models, but also behavioral macroeconomics under imperfect information. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:toh:tupdaa:48&r=ban |
| By: | Zineb Aouni; Marek Hudon; Anaïs A Périlleux; Tyler Wry |
| Abstract: | Unlike traditional investing, where decisions follow a clear financial calculus, it is unclear how and why funders support hybrid ventures. To address this question, we analyze the varied priority that investors place on social impact versus financial returns and draw on categories theory to argue that different priority orderings associate with different perceptions of how hybridity aligns with different investment goals. Results show that funders who prioritize financial goals react positively when they perceive a venture exhibits greater hybridity, while funders who prioritize social impact do not. Our findings contribute to research on impact investing, hybrid organizations, and categories theory. |
| Keywords: | ESG; investment funds; social banks; Sustainable Finance Disclosure Regulation (SFDR); greenwashing; transparency |
| Date: | 2024–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/369203&r=ban |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Steven Yamarik (Department of Economics, California State University Long Beach, CA) |
| Abstract: | This paper examines the impact of Federal Reserve policy on income inequality across US states. We use the local projections method of Jordà to estimate impulse response functions for each state. We find that a restrictive monetary policy increases income inequality in almost all states, but with different magnitudes. Subsequent panel analysis examines the possible transmission mechanisms that can account for these differences. Our empirical results confirm the theoretical predictions – inequality is increased by higher inflation, home ownership, and earnings in the finance, insurance and real estate (FIRE) sector; but decreased by higher housing prices, unionization rates, educational attainment and minimum wage. |
| Keywords: | monetary policy, inequality, US states, local projections |
| JEL: | D31 D63 E52 R19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202404&r=ban |