|
on Banking |
| By: | Cappelletti, Giuseppe; Marqués-Ibáñez, David; Reghezza, Alessio; Salleo, Carmelo |
| Abstract: | How a historic drop in bank deposits shapes banks’ loan supply? We exploit the effects of a large, and unexpected, increase in monetary policy rates to estimate the deposit channel of monetary policy using an extensive credit register that includes all bank-firm lending relationships in all euro area countries. We find that banks experiencing large deposit outflows reduce credit, but not the interest rate they charge, to the same borrower relative to other lenders. This credit restriction is stronger for fixed rate and longer maturity loans, but not for riskier borrowers. The effect is mostly driven by banks coming into the hiking period with a larger unhedged duration gap that renders borrowers of those banks more vulnerable to credit restrictions due to the deposit outflows as interest rates surge. We resort to the deposit beta as an instrument variable and a matched estimator that bear out the thrust of our results. JEL Classification: E51, E58, G21 |
| Keywords: | bank deposits, banks, monetary policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242923&r=ban |
| By: | Claudia M. Buch; Linda S. Goldberg |
| Abstract: | Global liquidity flows are largely channeled through banks and nonbank financial institutions. The common drivers of global liquidity flows include monetary policy in advanced economies and risk conditions. At the same time, the sensitivities of liquidity flows to changes in these drivers differ across institutions and have been evolving over time. Microprudential regulation of banks plays a role, influencing leverage and capitalization, changing sensitivities to shocks, and also driving risk migration from banks to nonbank financial institutions. Risk sensitivities and flightiness of global liquidity are now strongest in more leveraged nonbank financial institutions, raising challenges in stress episodes. Current policy initiatives target linkages across different types of financial institutions and associated risks. Meanwhile, significant gaps remain. This paper concludes by discussing policy options for addressing systemic risk in banks and nonbanks. |
| Keywords: | international banks; nonbank financial institutions; global liquidity; regulation; prudential policy |
| JEL: | F3 G21 G23 G28 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97968&r=ban |
| By: | Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iași; National Institute for Economic Research, Romanian Academy) |
| Abstract: | We examine the association between sectoral credit dynamics and systemic risk. Contrary to most studies that only delve into broad-based credit development, we focus on sectoral credit allocation, specifically to households versus firms, and to the tradable versus non-tradable sector. Based on a global sample of 417 banks across 46 countries over the period 2000-2014, we find that lending to households and corporates in the non-tradable sector increases system-wide distress. Conversely, credit granted to corporations and to the tradable sector reduces banks’ systemic behavior. The findings emphasize critical policy implications considering sectoral heterogeneity. Authorities can intervene in the most systemic economic sectors and limit the accumulation of “bad credit” and preserve systemic resilience, while still benefiting from the positive impact of “good credit” on growth and financial stability. |
| Keywords: | systemic risk; sectoral credit; financial stability |
| JEL: | G21 G32 E51 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2423&r=ban |
| By: | Ozili, Peterson K |
| Abstract: | In a world where banked customers are increasingly aware of social and environmental issues, agents of financial inclusion need to adopt sustainable practices to remain relevant. This brings us to the issue of sustainable financial inclusion which is quite different from the mainstream financial inclusion concept. Sustainable financial inclusion is a concept used to describe the integration of sustainability principles into financial inclusion strategies. This paper provides an in-depth discussion of sustainable financial inclusion. Using the discourse analysis method, the paper provides several definitions of sustainable financial inclusion, and show the importance and benefits of sustainable financial inclusion. The paper also highlights the strategies to achieve sustainable financial inclusion and some challenges that may be experienced in the pursuit of sustainable financial inclusion. The implication of sustainable financial inclusion is that there will be increasing demand for agents of financial inclusion to not only seek profits but to also seek the preservation of society and the environment in their efforts to increase financial inclusion in rural and urban areas. The sustainable financial inclusion agenda will give banked adults an opportunity to pressure agents of financial inclusion to be sustainability oriented. This is a privilege that is non-existent in the mainstream financial inclusion agenda. This calls for a shift from the ‘mainstream financial inclusion’ agenda to a ‘sustainable financial inclusion’ agenda. |
| Keywords: | financial inclusion, sustainable financial inclusion, sustainability, sustainable development, sustainable development goals, SDGs |
| JEL: | G21 G28 I31 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120440&r=ban |
| By: | Cavallaro, Eleonora (University of Rome, Sapienza, Department of Economics and Law); Villani, Ilaria (Banking Supervision, European Central Bank) |
| Abstract: | This paper proposes an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. It finds that the risk sharing mechanism is more effective in more stable financial environments, whereas a larger fraction of shocks remains unsmoothed in the lower financial clusters, especially in the aftermath of the global financial crisis, when the credit channel is significantly downsized. |
| Keywords: | financial structure, financial heterogeneity, growth, volatility, risk sharing |
| JEL: | F15 F36 O16 E44 G1 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bda:wpsmep:wp2024/21&r=ban |
| By: | Rustam Jamilov; Tobias König; Karsten Müller; Farzad Saidi |
| Abstract: | We study the macroeconomic causes and consequences of bank runs in 184 countries over the period of 1800-2022. A new narrative chronology of bank run events coupled with a newly constructed historical dataset on banking sector deposits allows us to distinguish between systemic bank runs—those associated with substantial declines in aggregate deposits—and non-systemic episodes. We find that bank runs are typically associated with large contractions in deposits, credit, and output, as well as exchange rate crashes and sudden stops. Whether deposits contract during runs, in turn, predicts the severity of output declines, highlighting that bank runs are particularly costly when they are systemic in nature. Using several sources of historical and contemporary bank-level data, we show that systemic bank runs are associated with a wide dispersion in deposit growth rates and a flow of deposits from more leveraged to safer banks. Taken together, our analysis highlights a key role for the liability side of banks in financial crises, and our new quantitatively validated measure of bank runs provides unprecedented scope for studying such episodes. |
| Date: | 2024–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:1039&r=ban |
| By: | Isha Agarwal (Sauder School of Business/University of British Columbia); David Jaume (Bank of Mexico); Everardo Tellez de la Vega (Sauder School of Business/University of British Columbia); Martin Tobal (Bank of Mexico) |
| Abstract: | We provide the first empirical evidence that the “type” of bank lending to the government affects the extent of crowding out in an Emerging Market and Developing Economy (EMDE). For this purpose, we build a new dataset combining proprietary information on all loans granted by commercial banks to non-financial private firms and the government in Mexico, along with data on government bonds held by these banks. By exploiting heterogeneity in firms’ exposure to different types of bank lending to the government within this unique dataset, we show for the first time that the size of crowding out of credit to small and medium-sized firms (SMEs) varies significantly across debt instruments. Specifically, we find that the crowding-out effect is around three times larger for bank loans than for bank holdings of government bonds. This reduced crowding-out effect of bonds is linked to banks’ ability to use them as collateral in the interbank market, which helps them raise secured funding and reduces the need to curtail credit supply to firms. Our findings underscore the importance of welldeveloped sovereign bond markets in mitigating the adverse effects of government borrowing on credit access for SMEs, particularly in EMDEs where credit markets are underdeveloped and these firms are more credit-constrained. |
| Keywords: | Crowding Out, Firm Credit, Public Sector Financing |
| JEL: | E44 H63 G20 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:314&r=ban |
| By: | Juan M. Sanchez |
| Abstract: | The Taylor rule offers a formula to calculate a prescribed policy rate. How do alternative measures of the output gap affect this prescribed rate? |
| Keywords: | Taylor rule; output gaps; monetary policy; policy rate |
| Date: | 2024–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:97906&r=ban |
| By: | Stephan Luck; Matthew Plosser |
| Abstract: | In this post, we evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle. We find that while deposit betas have continued to rise, they did not accelerate following the bank runs in March 2023. In addition, while overall deposit funding has remained stable, we find that the banks most affected by the March 2023 events are offering higher deposit rates and are growing their deposit funding relative to the broader banking industry. |
| Keywords: | deposit beta; deposits; banks; funding |
| JEL: | G21 |
| Date: | 2024–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97973&r=ban |
| By: | Cecilia Ying; Stephen Thomas |
| Abstract: | In an effort to improve the accuracy of credit lending decisions, many financial intuitions are now using predictions from machine learning models. While such predictions enjoy many advantages, recent research has shown that the predictions have the potential to be biased and unfair towards certain subgroups of the population. To combat this, several techniques have been introduced to help remove the bias and improve the overall fairness of the predictions. We introduce a new fairness technique, called \textit{Subgroup Threshold Optimizer} (\textit{STO}), that does not require any alternations to the input training data nor does it require any changes to the underlying machine learning algorithm, and thus can be used with any existing machine learning pipeline. STO works by optimizing the classification thresholds for individual subgroups in order to minimize the overall discrimination score between them. Our experiments on a real-world credit lending dataset show that STO can reduce gender discrimination by over 90\%. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.10652&r=ban |
| By: | Damane, Moeti; Ho, Sin-Yu |
| Abstract: | International policymakers prioritize financial stability and inclusion, but often view them as separate goals, overlooking potential overlap and trade-offs. If synergies and trade-offs between the two concepts are not recognized and understood, policy design may yield less-than-ideal results. This paper provides a systematic review of the theoretical literature on financial inclusion and financial stability as well as empirical research initiatives examining the relationship between the two concepts. We found that current studies do not always present a unified theoretical approach or conceptual framework to explain the channels of the relationship between financial inclusion and stability. Empirical studies to date offer divergent views on the financial inclusion and stability nexus, a dispensation that may be due to country specificities, the multi-faceted nature of financial inclusion and stability or the seldom uniform use of proxies to capture these concepts in the literature. Not only are some studies inconclusive, but some also suggest that financial inclusion has a positive and significant impact on financial stability, as explained by the institutional theory. While other studies, supported by the aggressive credit expansion theory, reveal that financial inclusion can have a negative influence on financial stability. Through this comprehensive review, we intend to improve awareness and cohesion among scholars and policy makers of financial inclusion and financial stability while also facilitating the development of solid foundations to address future research and policy making challenges. |
| Keywords: | Financial inclusion; Financial stability; Financial regulation, Literature review |
| JEL: | G0 G20 G21 G28 |
| Date: | 2024–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120369&r=ban |
| By: | Giuseppe Calafiore; Giulia Fracastoro; Anton Proskurnikov |
| Abstract: | In this paper we analyze the resilience of a network of banks to joint price fluctuations of the external assets in which they have shared exposures, and evaluate the worst-case effects of the possible default contagion. Indeed, when the prices of certain external assets either decrease or increase, all banks exposed to them experience varying degrees of simultaneous shocks to their balance sheets. These coordinated and structured shocks have the potential to exacerbate the likelihood of defaults. In this context, we introduce first a concept of {default resilience margin}, $\epsilon^*$, i.e., the maximum amplitude of asset prices fluctuations that the network can tolerate without generating defaults. Such threshold value is computed by considering two different measures of price fluctuations, one based on the maximum individual variation of each asset, and the other based on the sum of all the asset's absolute variations. For any price perturbation having amplitude no larger than $\epsilon^*$, the network absorbs the shocks remaining default free. When the perturbation amplitude goes beyond $\epsilon^*$, however, defaults may occur. In this case we find the worst-case systemic loss, that is, the total unpaid debt under the most severe price variation of given magnitude. Computation of both the threshold level $\epsilon^*$ and of the worst-case loss and of a corresponding worst-case asset price scenario, amounts to solving suitable linear programming problems.} |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.10631&r=ban |
| By: | Jonathan G. James (Department of Economics, Swansea University); Philip Lawler (Department of Economics, Swansea University) |
| Abstract: | The issue of optimal central bank disclosure of its information regarding aggregate demand shocks is revisited in the context of a widely studied model featuring monopolistically competitive firms whose observations of central bank announcements are subject to private errors. Given the existence of such ‘receiver noise’, the principal conclusion drawn by previous contributions using this framework is found to be overturned when a plausible additional modification is made to the information structure: namely, the existence of public information which is exogenous in the sense that its informativeness regarding shock realizations is beyond the central bank’s influence. For plausible parameterizations, full disclosure of its own information by the central bank is found to be welfare-dominated by a policy of partial obfuscation. The key insight is found to have wider relevance beyond the specific macroeconomic framework deployed, notably to models of supply-schedule competition in homogeneous-good markets. |
| Keywords: | strategic complementarity; public disclosure; receiver noise |
| JEL: | D62 D82 E58 |
| Date: | 2024–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:swn:wpaper:2024-03&r=ban |
| By: | Neil Bhutta; Aurel Hizmo; Daniel R. Ringo |
| Abstract: | We assess racial discrimination in mortgage approvals using confidential data on mortgage applications. Minority applicants tend to have significantly lower credit scores, higher leverage, and are less likely than White applicants to receive algorithmic approval from raceblind government-automated underwriting systems (AUS). Observable applicant-risk factors explain most of the racial disparities in lender denials. Further, we exploit the AUS data to show there are risk factors we do not directly observe, and our analysis indicates that these factors explain at least some of the residual 1-2 percentage point denial gaps. Overall, we find that differential treatment has played a more limited role in generating denial disparities in recent years than suggested by previous research. |
| Keywords: | mortgage; mortgage approval; discrimination; mortgage lender; automated underwriting; credit score; fair lending |
| JEL: | G21 G28 R30 R51 |
| Date: | 2024–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97985&r=ban |
| By: | Corentin Roussel |
| Abstract: | Differentiated treatment of green credit risk in banks’ capital requirements to favor green transition generates lot of debates among European prudential regulators. The aim of this paper is to examine whether the key Basel 3 finalization instrument - the Output Floor - should be applied to green credit risk in order to ensure stability of banking system and promote green finance. To do so, we assess macrofinancial and environmental benefits of such green policy for the Euro Area through the lens of a general equilibrium model. We get three main results. First, when banks get transitory ’environmental awareness’, an Output Floor (OF) applied to brown credits only (i.e. a brown OF) faces a trade-off between limiting environmental aftermaths and reaching OF objectives (i.e reducing volatility of banks’ capital adequacy ratio). Second, to mitigate the prudential cost of this trade-off, brown OF should be joined with additional green financial policies such as green Quantitative Easing. Third, pollutant emissions tax erodes brown OF efficiency along financial and economic cycles but limits the welfare cost implied by pollution in the long run. |
| Keywords: | Output Floor, Credit Risk, Green Finance, Climate Change, DSGE. |
| JEL: | Q54 G21 E44 E51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-07&r=ban |
| By: | : Dubois, Loick (University Paris-Dauphine); Sahuc, Jean-Guillaume (Banque de France, University Paris-Nanterre); Vermandel, Gauthier (Ecole Polytechnique, Palaiseau and University Paris-Dauphine) |
| Abstract: | This paper studies the general equilibrium effects of carbon permit banking during the transition to a climate-neutral economy by 2050. The analysis highlights the critical role of permit banking in shaping the policy outcomes. |
| Keywords: | Emission trading systems, cap policies, carbon permit banking, environmental real business cycle model, occasionally-binding constraints, nonlinear estimation |
| JEL: | C32 E32 Q50 Q52 Q58 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bda:wpsmep:wp2024/20&r=ban |
| By: | Matteo Bonetti; Dirk Broeders; Damiaan Chen; Daniel Dimitrov |
| Abstract: | In pursuing its mandate, a central bank assumes financial risks through its mon- etary policy operations. Central bank capital is a critical tool in mitigating these risks. We investigate the concept of central bank capital as a mechanism for risk- sharing with its shareholder. Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its cap- ital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative capital. Our analysis dissects the trade-offs inherent in these options, seeking a mutually beneficial agreement that disincentivizes deviation for either party. This equilibrium is essential for safe- guarding the independence and credibility of the central bank in executing monetary policy effectively. |
| Keywords: | Capital; Central Bank; Contingent Claim Analysis, Risk Management; Shareholder; Stackelberg Games |
| JEL: | G13 G32 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:809&r=ban |
| By: | Charles W. Calomiris; Matthew S. Jaremski |
| Abstract: | The high social costs of financial crises imply that economists, policymakers, businesses, and households have a tremendous incentive to understand, and try to prevent them. And yet, so far we have failed to learn how to avoid them. In this article, we take a novel approach to studying financial crises. We first build ten case studies of financial crises that stretch over two millennia, and then consider their salient points of differences and commonalities. We see this as the beginning of developing a useful taxonomy of crises – an understanding of the most important factors that reappear across the many examples, which also allows (as in any taxonomy) some examples to be more similar to each other than others. From the perspective of our review of the ten crises, we consider the question of why it has proven so difficult to learn from past crises to avoid future ones. |
| JEL: | E30 G01 N20 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32213&r=ban |
| By: | Koray Alper; Tanju Capacioglu |
| Abstract: | This paper documents how a system-wide deterioration in funding quality, which we argue to be underpinned by macroeconomic conditions, can have a substantial effect on the pricing of deposit and loan rates. The study is motivated by a puzzling observation from the Turkish banking system. During 2015-2016, retail rates of Turkish banks displayed a persistent upward trend while the policy and money market rates remained unchanged. We conjecture that the underlying reason was the continued deterioration in the structural liquidity positions of Turkish banks, reflected as rising loan-to-deposit ratios (LDR). Our results show that in the presence of increasing pressures from worsening funding quality, banks with high LDRs tried to attract more deposits while trying to slow loan growth rates. To this end, these banks offered higher rates to deposits, particularly to more stable deposit types. Similarly, evidence suggests that banks with worse funding quality raised the rates more on the loans side. As expected, banks increased the rates for the clients/segments where they had more market power. On the other side, despite the increasing pressures on interest rate margins, high LDR banks do not seem to have opted for risky loans. |
| Keywords: | Funding quality, Turkish banking system, Structural liquidity position, Loan-to-deposit ratio |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2403&r=ban |
| By: | Shaojie Li; Xinqi Dong; Danqing Ma; Bo Dang; Hengyi Zang; Yulu Gong |
| Abstract: | Mobile Internet user credit assessment is an important way for communication operators to establish decisions and formulate measures, and it is also a guarantee for operators to obtain expected benefits. However, credit evaluation methods have long been monopolized by financial industries such as banks and credit. As supporters and providers of platform network technology and network resources, communication operators are also builders and maintainers of communication networks. Internet data improves the user's credit evaluation strategy. This paper uses the massive data provided by communication operators to carry out research on the operator's user credit evaluation model based on the fusion LightGBM algorithm. First, for the massive data related to user evaluation provided by operators, key features are extracted by data preprocessing and feature engineering methods, and a multi-dimensional feature set with statistical significance is constructed; then, linear regression, decision tree, LightGBM, and other machine learning algorithms build multiple basic models to find the best basic model; finally, integrates Averaging, Voting, Blending, Stacking and other integrated algorithms to refine multiple fusion models, and finally establish the most suitable fusion model for operator user evaluation. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.14483&r=ban |
| By: | Flavia Alves |
| Abstract: | How do "Information and Communication Technologies" (ICTs) reshape the banking industry and banking habits? Using panel data containing detailed banking statements for more than 25, 000 public and private bank branches distributed among over 3, 500 municipalities of Brazil, I show that, following the rollout of the 4G mobile network, 6% of private banks exit the municipalities while their branches shrink on average 11% within five years of the introduction of this technology compared to municipalities that do not have it. By contrast, public banks are not reactive to better mobile connectivity. Credit, savings, and deposits also display different patterns in response to better mobile network in public and private banks. Globally, these results suggest that the internet has been deeply reshaping the banking industry and modifying how credit and savings are distributed to the population with different levels of internet access, with important policy implications for both the industry and consumers. |
| Keywords: | ICT, internet, 4G mobile network, banks, credit, savings, financial inclusion, competition |
| JEL: | D14 G21 G40 L10 L86 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1174&r=ban |
| By: | Luis E. Rojas (UAB, MOVE and Barcelona School Of Economics); Dominik Thaler (European Central Bank) |
| Abstract: | The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bonds (ESBies)). A central bank backstop (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated. |
| Keywords: | sovereign default, bailout, doom loop, self-fulfilling crises, transmission protection instrument, ESBies |
| JEL: | E44 E6 F34 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2409&r=ban |
| By: | Ojo, Marianne |
| Abstract: | Important lessons which were drawn from the most recent GFC - notably, the growing need for accommodative policies (unconventional and conventional) to facilitate appropriate responses - given limited monetary policy spaces, the emergence, rise and evolution of private actors and their implications for monetary policies and financial stability. Amongst other goals and objectives, this paper considers innovative possibilities - particularly those of distributed ledger technologies which constitute benefits which can be harnessed to enhance digital possibilities of the Fourth Industrial Revolution. |
| Keywords: | monetary policies; financial stability; innovative techniques; forecasting techniques ; accommodative policies |
| JEL: | E43 E47 E58 G2 M21 O1 O19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120515&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: | G41 G51 I22 |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97987&r=ban |
| By: | Sastry, Parinitha; Verner, Emil; Marqués-Ibáñez, David |
| Abstract: | This paper studies the impact of voluntary climate commitments by banks on their lending activity. We use administrative data on the universe of bank lending from 19 European countries. There is strong selection into commitments, with increased participation by the largest banks and banks with the most pre-existing exposure to high-polluting industries. Setting a commitment leads to a boost in a lender’s ESG rating. Lenders reduce credit in sectors they have targeted as high priority for decarbonization. However, climate-aligned banks do not change their lending or loan pricing differentially compared to banks without climate commitments, suggesting they are not actively divesting. We can reject that climate-aligned lenders divest from firms in targeted sectors by more than 2.6%. Firm borrowers are no more likely to set climate targets after their lender sets a climate target, which casts doubt on active engagement by lenders. These results call into question the efficacy of voluntary commitments. JEL Classification: Q50, G21 |
| Keywords: | banks, green lending, voluntary targets |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242921&r=ban |
| By: | Ida, Daisuke; Kaminoyama, Kenichi |
| Abstract: | This paper explores the impact of the cost channel on the monetary transmission mechanism in a behavioral New Keynesian model. In contrast to previous studies, we demonstrate that the degree of cognitive discounting significantly affects the determinacy condition in the model with a cost channel. Second, we show that the price puzzle arises only when a large value of the cost channel parameter, which is not empirically supported, is introduced with a high degree of cognitive discounting. Third, we find that the degree of cognitive discounting significantly impacts the effect of the cost channel on optimal monetary policy. |
| Keywords: | Cognitive discounting; New Keynesian model; Cost channel; Monetary policy rules; Price puzzle; |
| JEL: | E52 E58 |
| Date: | 2024–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120424&r=ban |
| By: | Misra, Biswa Swarup; Sahoo, Biresh |
| Abstract: | Examining the impact of ratio-based efficiency metrics, such as cost-to-income-ratio, and multifactor-based level efficiency on profitability can be potentially misleading. Our examination of Indian banks spanning the period from 2006 to 2023 reveals that profitability is significantly influenced by multifactor-based growth efficiency, rather than level efficiency. Notably, this finding remains robust when using either conventional or risk-adjusted measure of market power. |
| Keywords: | Profitability; Level efficiency; Growth efficiency; Lerner index; Indian banking |
| JEL: | D24 G21 |
| Date: | 2024–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120360&r=ban |
| By: | Egemen Eren; Timothy Jackson; Giovanni Lombardo |
| Abstract: | Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets. |
| Keywords: | optimal monetary policy, central bank balance sheet, government debt, reserves, financial frictions, macroprudential |
| JEL: | E42 E44 E51 E52 G2 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1173&r=ban |
| By: | Charalambakis, Evangelos; Teppa, Federica; Tsiortas, Athanasios |
| Abstract: | This paper analyses the consumer’s decision to apply for credit and the probability of the credit being accepted in the euro area during a period characterized by the unprecedented concomitance of events and changing borrowing conditions linked to the global COVID-19 pandemic and the Russian invasion of Ukraine. We use data between 2020Q1 and 2023Q2 from the ECB’s Consumer Expectations Survey. We find that the credit demand is highest when the first lockdown ends and drops when supportive monetary compensation schemes are implemented. There is evidence that constrained households are significantly less likely to apply for credit. Credit is more likely to be accepted under favourable borrowing conditions and after the approval of national recovery plans. We also find that demographic, economic factors, perceptions and expectations are associated with the demand for credit and the credit grant. JEL Classification: C23, D12, D14, G51 |
| Keywords: | consumer expectations survey, consumer finance, credit applications, liquidity constraints |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242922&r=ban |
| By: | Sandra Eickmeier; Josefine Quast; Yves Schuler |
| Abstract: | We examine how natural disasters impact the US economy and financial markets using monthly data since 2000. Our analysis reveals large sustained adverse effects of disasters on overall economic activity, with significant implications across various sectors including labor, production, consumption, investment, and housing. Our findings suggest that these effects stem from heightened financial risk, increased uncertainty, declining confidence and heightened awareness of climate change, leading to negative repercussions on the economy. Additionally, consumer prices increase temporarily, likely due to rising energy and food costs. We find a decline in the monetary policy rate and an increase in government spending, which potentially mitigate the adverse macroeconomic effects. However, we also observe a prolonged rise in public debt relative to GDP and a decrease in r-star following the disasters. With climate change persisting, this could constrain the flexibility of monetary and fiscal policies in the future. Overall, our findings emphasize the urgency of combating climate change and, in tandem, enhancing economic and financial resilience. |
| Keywords: | climate change, natural disasters, transmission, local projections |
| JEL: | C22 E31 E32 E44 E52 E62 Q54 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-23&r=ban |
| By: | Gianluca Pallante (Institute of Economics and l'EmbeDS, Scuola Superiore Sant'Anna, Pisa, Italy); Mattia Guerini (Universita di Brescia; Fondazione ENI Enrico Mattei; Université Côte d'Azur, CNRS, GREDEG, France; Sant'Anna School of Advanced Studies); Mauro Napoletano (Université Côte d'Azur, CNRS, GREDEG, France; Sciences Po, OFCE, France; Sant'Anna School of Advanced Studies); Andrea Roventini (Institute of Economics and EMbeDS, Scuola Superiore Sant'Anna; Sciences Po, OFCE) |
| 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 |
| JEL: | C63 E32 E42 E58 G18 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2024-10&r=ban |
| By: | Anulo, Olkamo, Degefe |
| Abstract: | Ethiopia has experienced substantial growth in per capita income, domestic savings, and financial sector developments over the past four decades. This paper aims to examine the causal relationship between certain variables in Ethiopia from 1981 to 2023. The variables considered in this paper include per capita income, private sector credit, domestic savings, and the rate of change in the consumer price index. Per capita income and private sector credit are used as proxies to measure real economic growth and financial sector development, while the inflation rate plays a crucial role in controlling these variables. The study used the bounds cointegration test within the Autoregressive Distributive Lag (ARDL) model framework to investigate the existence of long-run integration among series. The ADF unit root test was employed to determine whether variables remained stationary. In this paper, the Granger causality test based on the vector error correction model is deployed to determine the causal influences and to identify supportive hypotheses for the Ethiopian economy. The findings affirm the existence of bidirectional causal relationships among the variables. Thus, the Ethiopian economy adheres to a feedback or bidirectional hypothesis, which suggests that an expansion of real economic growth will favour efficient financial development and stimulate savings. Similarly, having a well-functional financial sector development and steadfast domestic resources plays a crucial role in promoting economic growth. The study also recommends that the monetary authority should promptly encourage the development of a market-based financial system that is compatible with the development of bank-based systems. |
| Keywords: | Supply-leading and Demand-following Hypotheses, Granger Causality Approach, VECM, Private Sector Credit, real Per capita Income and Domestic Savings |
| JEL: | E5 E6 |
| Date: | 2024–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120338&r=ban |
| By: | Neil Bhutta (Federal Reserve Bank of Philadelphia); Andreas Fuster (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Aurel Hizmo (Board of Governors of the Federal Reserve System) |
| Abstract: | Comparing mortgage rates that borrowers obtain to rates that lenders could offer for the same loan, we find that many homeowners significantly overpay for their mortgage, with overpayment varying across borrower types and with market interest rates. Survey data reveal that borrowers' mortgage knowledge and shopping behavior strongly correlate with the rates they secure. We also document substantial variation in how expensive and profitable lenders are, without any evidence that expensive loans are associated with a better borrower experience. Despite many lenders operating in the US mortgage market, limited borrower sophistication may provide lenders with market power. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2421&r=ban |
| By: | Salomón García-Villegas (Banco de España); Enric Martorell (Banco de España) |
| Abstract: | How should bank capital requirements be set to deal with climate-related transition risks? We build a general equilibrium macro banking model where production requires fossil and low-carbon energy intermediate inputs, and the banking sector is subject to volatility risk linked to changes in energy prices. Introducing carbon taxes to reduce carbon emissions from fossil energy induces risk spillovers into the banking sector. Sectoral capital requirements can effectively address risks from energy-related exposures, benefiting household welfare and indirectly facilitating capital reallocation. Absent carbon taxes, implementing fossil penalizing capital requirements does not reduce emissions significantly and may threaten financial stability. During the transition, capital requirements can complement carbon tax policies, safeguarding financial stability and trading off long-run welfare gains against lower investment and credit supply in the short run. |
| Keywords: | climate risk, financial intermediation, macroprudential policy, bank capital requirements |
| JEL: | Q43 D58 G21 E44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2410&r=ban |
| By: | Steffen Murau (Global Climate Forum, Berlin; Freie Universität Berlin; Global Development Policy Center, Boston University); Alexandru-Stefan Goghie (Freie Universität Berlin); Matteo Giordano (Department of Economics, SOAS University of London) |
| Abstract: | Despite the paramount centrality of repurchase agreements (repos) in today’s market-based finance regime, both conceptual and empirical questions about European repo markets are insufficiently explored as contradictory legal and accounting treatments make their on-balance-sheet representation intricate. Drawing on the literature on monetary hierarchy, we make three connected conceptual arguments: First, we argue that the balance sheet mechanics of repos vary if the counterparties involved are on hierarchically different levels (“vertical repos†) or on the same hierarchical level (“horizontal repos†). While the vertical repo mechanism implies money creation, the horizontal repo mechanism only lends on pre-existing money. Second, we coherently represent the whereabouts of the security posted as repo collateral, which is held as an off-balance-sheet position of the repo lender, combined with a liability to repay it. Basel III regulations interpret this ambiguous status of the collateral as being “encumbered†and not leaving the repo borrower’s balance sheet. Third, we introduce an on-balance-sheet notation of the collateral framework as a means of the repo lender to alter the elasticity of the funding provided. Applying our methodology on two cases—vertical repos created by the Eurosystem for monetary policy implementation and horizontal repos used in the European interbank market—offers an innovative and consistent way to represent changes in the collateral frameworks that affect the elasticity space in the Euro area’s monetary architecture. Our analysis yields two main contributions: We offer a novel understanding of different mechanisms for repo creation based on monetary hierarchy, and we put forth a data-driven empirical analysis of repos in Europe aimed at supporting our conceptual elaborations. |
| Keywords: | repurchase agreements; collateral; market-based finance; Eurosystem; European Central Bank; Eurex clearing. |
| JEL: | G21 G23 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:soa:wpaper:262&r=ban |
| By: | DiMaria, charles-henri |
| Abstract: | Taxonomy and efficiency assessments provide financial intermediaries (FIs) with guidance to grant funds according to the Environmental, Social and Governance principles. The EBRD provides a classification of industries according to a priori potential risk (low, medium or high). Using a panel of 28 industries in Luxembourg (2008-2019) and National Account data (NA), we challenge this taxonomy. We compute Data Envelopment Analysis (DEA) efficiency scores indicating if an industry could increase output while simultaneously lowering the emission of greenhouse gases. Our results show that EBRD low risk industries are the most efficient ones. Surprisingly, high-risk industries are more efficient than medium-risk ones, suggesting a potential unintended outcome of the EBRD taxonomy—limiting credit to industries classified as high risk that are in fact more efficient than industries classified as medium risk. |
| Keywords: | EBRD Risk taxonomy; Social acceptance; efficiency; bad output; credit rationing; ESG |
| JEL: | C44 G11 Q51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120410&r=ban |
| By: | Pablo A. Aguilar (Banco de España); Mario Alloza (Banco de España); James Costain (Banco de España); Samuel Hurtado (Banco de España); Jaime Martínez-Martín (Banco de España) |
| Abstract: | This paper empirically quantifies the effect on Spain’s public finances of the asset purchase programmes implemented in the euro area between 2015 and 2022. Specifically, it evaluates the impact of the ECB’s Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) on Spanish public revenue, expenditure, deficit and debt. The results suggest that these programmes have had a significant cumulative downward effect on the level of public debt. |
| Keywords: | quantitative easing, asset purchase programmes, unconventional monetary policy, term structure models, signaling and portfolio balance effects, expectations channel, fiscal effects, Spain |
| JEL: | E43 E44 E52 E63 E65 G18 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2409e&r=ban |
| By: | Victoria Ivashina; Ṣebnem Kalemli-Özcan; Luc Laeven; Karsten Müller |
| Abstract: | Using a new dataset on sectoral credit exposures covering financial and non-financial sectors in 115 economies over the period 1940–2014, we document the following evidence that corporate debt plays a key role in explaining boom-bust cycles, financial crises, and slow macroeconomic recoveries: (i) corporate debt accounts for two thirds of the aggregate credit expansion before crises and three quarters of total nonperforming loans during the bust; (ii) expansions in corporate debt predict crises similarly to household debt; (iii) a measure of imbalance in credit growth flowing disproportionately to some sectors, such as construction and non-bank financial intermediation, is associated with crises; and (iv) the recovery from financial crises is slower after a boom in corporate debt, especially when backed by procyclical collateral values, due to higher nonperforming loans. |
| JEL: | E30 F34 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32225&r=ban |
| By: | Angelika Welte; Katrina Talavera; Liang Wang; Joy Wu |
| Abstract: | In recent years, the rise in digital payments has spurred a discussion in Canada and other countries about the future of cash at the point of sale. To better understand trends in payment methods accepted by Canadian businesses, including cash acceptance and the impact of innovations such as mobile payments, the Bank of Canada conducts the Merchant Acceptance Survey, a survey of small and medium-sized businesses. We find that 96% of these businesses in Canada accepted cash in 2023. Acceptance of debit and credit cards has increased since 2021 to 89%, and acceptance of digital payments has increased as well. However, the vast majority of merchants (92%) have no plans to go cashless in the future. Therefore, cash and digital payments continue to coexist at the point of sale, and Canada is far from being a cashless society. |
| Keywords: | Bank notes; Digital currencies and fintech; Econometric and statistical methods |
| JEL: | C8 D22 E4 L2 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:24-02&r=ban |
| By: | Heider, Florian; Schlegel, Jonas |
| Abstract: | This study analyses potential consequences of exiting the Targeted Long-Term Refinancing Operations (TLTRO) of the European Central Bank (ECB). Thanks to its asset purchase programs, the Eurosystem stillholds plenty of reserveseven with a full exit from the TLTROs. This explains why voluntary and mandatory repayments of TLTRO III borrowing went smoothly. Nevertheless, the more liquidity is drained from the banking system, the more important becomes interbank market borrowing and lending, ideally between euro area member states. Right now, the usual fault lines ofthe euro area show up. The German banking system has plenty of reserves while there are first signs of aggregate scarcity in the Italian banking system. This does not need to be a source of concern if the interbank market can be sufficiently reactivated. Moreover, the ECB has several tools to address possible future liquidity shortages. This document was provided/prepared by the Economic Governance and EMU scrutiny Unit at the request of the ECON Committee. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:287744&r=ban |
| By: | Yun Gao (Hong Kong Monetary Authority); Kenichi Ueda (University of Tokyo) |
| Abstract: | We analyze the loan market under symmetrically imperfect information: the project quality is unknown to both a bank and a firm, but it is revealed with noise to the bank with cost. We show that there are three equilibria, that is, (i) a screening and separating equilibrium, (ii) a non-screening and pooling equilibrium, and (iii) a non-screening, cheap-information based separating equilibrium. They emerge depending on parameter values and are all socially optimal. In particular, the screening and separating equilibrium emerges when the average project quality is low, or when the international interest rate is high. Policies, such as credit easing, business subsidy, and public loan guarantees, make banks reduce or even stop screening. Then, more capital is allocated to unviable firms, resulting in a smaller national income and lower social welfare. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf580&r=ban |
| By: | Paula Bejarano Carbo |
| Abstract: | This paper leverages insights from data and economic theory in order to construct a narrative account of how the nature of inflation has evolved over time in the euro area, United Kingdom and United States since the onset of the Covid-19 pandemic. To this end, I decompose the recent 'inflationary surge episode' into four periods: The Covid shock period (2020 Q1 – 2020 Q2), characterised by joint a negative demand and supply shock; the economic reopening period (2020 Q3 – 2021 Q4), characterised by conflicting positive demand and negative supply shocks; the post-reopening period (2022 Q1 – 2023 Q1), also characterised by conflicting positive demand and negative supply shocks, where the latter is driven by an exogenous increase in energy prices; and the post-energy shock period (2023 Q2 – present), characterised by falling consumer price index (CPI) inflation alongside still-elevated and broad-based underlying inflationary pressures. Having established this 'inflation story', I conclude with some brief comments on the European Central Bank, Bank of England and Federal Reserve monetary policy responses during this time. |
| Keywords: | Inflation, Monetary Policy, Central Bank Policy, Comparative Analysis |
| JEL: | E31 E50 E58 E63 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:554&r=ban |