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on Banking |
| By: | Christian Bittner (Deutsche Bundesbank and Goethe University Frankfurt); Alexander Rodnyansky (Presidential Offce of Ukraine, University of Cambridge, and CEPR); Farzad Saidi (University of Bonn and CEPR); Yannick Timmer (Federal Reserve Board) |
| Abstract: | We study the interaction of expansionary rate-based monetary policy and quantitative easing, despite their concurrent implementation, by exploiting heterogeneous banks and the introduction of negative monetary-policy rates in a fragmented euro area. Quantitative easing increases credit supply less, translating into weaker employment growth, when banks' funding costs do not decrease. Using administrative data from Germany, we uncover that among banks selling their securities, central-bank reserves remain disproportionately with high-deposit banks that are constrained due to sticky customer deposits at the zero lower bound. Affected German banks lend relatively less to firms while increasing their interbank exposure in the euro area. |
| Keywords: | Negative Interest Rates, Quantitative Easing, Unconventional Monetary Policy, Bank Lending Channel |
| JEL: | E44 E52 E58 E63 F45 G20 G21 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:292&r=ban |
| By: | Viral V. Acharya; Nicola Cetorelli; Bruce Tuckman |
| Abstract: | In recent years, assets of non-bank financial intermediaries (NBFIs) have grown significantly relative to those of banks. These two sectors are commonly viewed either as operating in parallel, performing different activities, or as substitutes, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of banking regulation. We argue instead that NBFI and bank businesses and risks are so interwoven that they are better described as having transformed over time rather than as having migrated from banks to NBFIs. These transformations are at least in part a response to regulation and are such that banks remain special as both routine and emergency liquidity providers to NBFIs. We support this perspective as follows: (i) The new and enhanced financial accounts data for the United States (“From Whom to Whom”) show that banks and NBFIs finance each other, with NBFIs especially dependent on banks; (ii) Case studies and regulatory data show that banks remain exposed to credit and funding risks, which at first glance seem to have moved to NBFIs, and also to contingent liquidity risk from the provision of credit lines to NBFIs; and (iii) Empirical work confirms bank-NBFI linkages through the correlation of their abnormal equity returns and market-based measures of systemic risk. We discuss some potential regulatory responses, including treating the two sectors holistically; recognizing the implications for risk propagation and amplification; and exploring new ways to internalize the costs of systemic risk. |
| JEL: | G01 G20 G21 G22 G23 G24 G28 G29 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32316&r=ban |
| By: | Serena Merrino; Keagile Lesame; Ilias Chondrogiannis |
| Abstract: | In 2013, South Africa amended its bank regulatory framework in line with the Basel III accord, which introduced system-wide capital and liquidity adequacy requirements designed to curb the economys financial cycle so-called macroprudential policy. These regulations aim to create a more resilient banking system, but they can also lead to changes in lending behaviour, potentially affecting the availability and terms of loans to specific segments of the credit market. This is especially important in emerging markets such as South Africa, where market segmentation and inequality are more prominent than elsewhere. This paper examines how South Africas credit market has responded to macroprudential policy measures, with a focus on borrowers heterogeneity, to evaluate whether financial stability objectives are achieved at the expense of an equitable credit allocation. Our empirical approach is two-fold and employs both panel and time-series data for the period 20082023. We find that macroprudential regulation has reduced lending to households, especially if poor, to the benefit of firms, especially if large. We also find that this regulation triggers lenders adverse selection by penalising more creditworthy enterprises. Our results suggest that while Basel III has reduced reckless consumer credit, it has also redistributed finance in ways that are not beneficial to long-term growth and financial stability. |
| Date: | 2024–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11062&r=ban |
| By: | Scott L. Fulford; Joanna Stavins |
| Abstract: | In consumer credit, “ability‐to‐pay” (ATP) rules require lenders to consider whether the consumer can repay a loan without experiencing undue hardship. ATP rules have recently been implemented or considered in many countries and markets. Using a large panel of credit card accounts, we study the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act’s ATP rule and its effect, if any, on the US credit card market. We find that the rule appears to have had no effect on bank credit decisions because actual credit limits are almost always substantially lower than reasonable ATP limits. We examine other factors that may explain banks’ credit decisions. Nearly 27 percent of consumer accounts that had a change in cardholder income received a credit limit increase of $100 or more in the same month as the income change. Most credit limit increases followed an income increase, although 19 percent of the instances of an income decrease also were followed by a credit limit increase. Most credit limit increases occurred without cardholders providing banks with income updates. The magnitude of the income change coefficient when an income update occurred is estimated to be nearly zero. We conclude that after the origination of an account, the direction and size of the account holder’s income updates are largely unimportant for credit limit changes from either a regulatory or bank profitability standpoint. |
| Keywords: | CARD Act; credit cards; credit limits; ability to pay |
| JEL: | D14 E42 G21 G51 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:98175&r=ban |
| By: | Corentin Roussel |
| Abstract: | Output floor has emerged as a possibly important tool to ensure financial stability within the banking system. This paper proposes to assess the quantitative potential of output floor to ensure financial stability through the lens of a general equilibrium model for the Euro Area. We get three main results. First, implementation of output floor entails macrofinancial stabilization benefits for Euro Area activities in the long run, which confirms results found by financial European regulators. Second, along financial and economic cycles, output floor activation reduces volatility of banks capital to risk-weighted-asset ratio and the dispersion of this ratio between core and periphery banks, consistently with the desired outcome defined by financial regulators. Third, moderate banking openness in Euro Area limits cross-border credit flows spillovers, which does not affect output floor efficiency. However, full banking openness (i.e. banking union) produces high spillovers and erodes this efficiency. |
| Keywords: | Output Floor, Credit Risk, Banking System, Euro Area, DSGE. |
| JEL: | G21 F36 F41 E44 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-18&r=ban |
| By: | Hartung, Benjamin |
| Abstract: | Banks in the euro area can generate high-quality liquid assets (HQLA) by borrowing central bank reserves from the Eurosystem against non-HQLA collateral. This paper quantifies the extent of this liquidity transformation and finds that on average EUR 0.92 of net HQLA are generated for each euro of credit provided by the Eurosystem. The paper then identifies intentional liquidity transformation using two novel approaches: The first approach compares the liquidity profile of already pledged vs new collateral, and the second approach compares the liquidity profile of the pool of pledged securities with banks' total eligible securities holdings. Both approaches show that banks use their least liquid assets as collateral first and pledge more liquid assets only at the margin. This intentional liquidity transformation is sizable and accounts for 30-60% of generated HQLA. These results are relevant for calibrating the collateral framework as well as the optimal size and composition of the Eurosystem balance sheet. JEL Classification: C23, E52, E58, G28 |
| Keywords: | central bank operational framework, collateral framework, liquidity coverage ratio, liquidity transformation, reserve demand |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242933&r=ban |
| By: | Erdinc Akyildirim (University of Zurich); Shaen Corbet (Dublin City University ; University of Waikato - Management School); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); David Staunton (Dublin City University) |
| Abstract: | This study examines the repercussions of banks’ reputational damages on affiliated Money Market Funds (MMFs). It reveals that such events depress bank valuations and induce heightened outflows from MMFs despite their financial independence from sponsoring banks. Highlighting a secondary behavioural effect, we demonstrate that investor sensitivity to reputational risks amplifies the contagion risk between banks and MMFs. The effect is particularly pronounced for shocks related to governance. Our findings underscore the significant impact of reputational events on the stability and liquidity of financial institutions and their investment vehicles, enriching the discourse on investor behaviour and systemic financial interdependencies. |
| Keywords: | Reputational Risk, Banks, MMFs, corporate governance, Contagion |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2424&r=ban |
| By: | Yuliyan Mitkov (University of Bonn); Ulrich Schüwer (Goethe University Frankfurt) |
| Abstract: | We use tools from survival analysis to study the equilibrium probability of bank failure in a model with imperfect correlation in loan defaults where a systematic risk factor and idiosyncratic frailty factors govern borrower credit worth. We derive several surprising results: in equilibrium, a bank can be more likely to fail with less risky than with more risky borrowers. In addition, the equilibrium relationship between borrower and bank risk can be fundamentally altered by a greater dispersion of the frailty factors, similar to how mixing items of different durability can fundamentally change the overall aging pattern. |
| Keywords: | Correlated defaults, borrower heterogeneity, bank failure, survival analysis |
| JEL: | G21 G28 E43 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:294&r=ban |
| By: | Wenxin Du; Kristin Forbes; Matthew N. Luzzetti |
| Abstract: | This paper uses the recent cross-country experience with quantitative tightening (QT) to assess the impact of shrinking central bank balance sheets. We analyze the experience in seven advanced economies (Australia, Canada, Euro area, New Zealand, Sweden, UK and US)—documenting different strategies and the substantive reduction in central bank balance sheets that has already occurred. Then we assess the macroeconomic and financial impact of QT announcements on yields and a range of other market prices. QT announcements increase government bond yields, steepening the yield curve and potentially signaling a greater commitment to raising policy interest rates, but have more limited effects on most other financial market indicators. Active QT has a larger impact than passive QT, particularly on longer maturities. The implementation of QT has been associated with a modest rise in overnight funding spreads and a decline in the “convenience yield” of government bonds, but QT transactions did not significantly affect the pricing and market liquidity of government debt securities. Finally, we evaluate who buys assets when central banks unwind balance sheets, an issue which will become increasingly important if central banks continue to reduce their security holdings while government debt issuance remains elevated. We find that increased demand by domestic nonbanks has largely compensated for reduced bond holdings by central banks. This series of cross-country results suggests that QT has had more of an impact than “paint drying”, but far less than simply reversing the effects of the quantitative easing programs launched during periods of market stress. Looking ahead, although QT has been smooth to date, frictions could increase in the future so that QT quickly evolves into more like watching “water boil”. |
| JEL: | E4 E5 F30 G10 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32321&r=ban |
| By: | Manish Gupta (Nottingham University Business School); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We examine the redistributive impact of 30-year mortgage and federal funds rates on mortgage lending between 1995 and 2021. Between 2008 and 2014, the Fed deployed Quantitative Easing (QE) by purchasing mortgage-backed securities, intendedly lowering mortgage rates. We find that lending is regressive pre-QE, becomes progressive during the QE era, and then reverts to being regressive following the QE's conclusion until 2019. Nonbank lending becomes regressive when the federal funds rate increases between 2015 and 2019, and this pattern persists during the pandemic. In contrast, while banks lend regressively until 2019, they refinance progressively during the pandemic. |
| Keywords: | Inequality, Mortgage, Financial Crisis, Quantitative Easing (QE), COVID-19, Nonbanks |
| JEL: | E52 G01 G21 G23 G51 H23 R23 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2428&r=ban |
| By: | Altavilla, Carlo; Gürkaynak, Refet S.; Quaedvlieg, Rogier |
| Abstract: | We establish basic facts about the external finance premium. Tens of millions of individual loan contracts extended to euro area firms allow studying the determinants of the external finance premium at the country, bank, firm, and contract levels of disaggregation. At the country level, the variance in the premium is closely linked to sovereign spreads, which are important in understanding financial amplification mechanisms. However, country-level differences only explain half of the total variance. The rest is predominantly attributed to variances at the bank and firm levels, which are influenced by the respective balance sheet characteristics. Studying the response of the external finance premium to monetary policy, we find that balance sheet vulnerabilities of banks and firms strengthen the transmission of policy measures to financing conditions. Moreover, our findings reveal an asymmetrical effect contingent upon the sign and type of the policies. Specifically, policy rate hikes and quantitative easing measures exert a more pronounced impact on lending spreads, further magnified through their repercussions on the external finance premium. JEL Classification: E44, E58, F45, G15, G21 |
| Keywords: | euro area, external finance premium, financial accelerator, loan pricing |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242934&r=ban |
| By: | Ferrara, Federico Maria |
| Abstract: | This study provides new evidence on the relationship between unconventional monetary policy and auction cycles in the euro area. Using proprietary data on purchases of public sector securities implemented by the Eurosystem, the paper examines the flow effects of asset purchase programmes on 10-year government bond yields in secondary markets around dates of public debt auctions. The findings indicate that Eurosystem’s asset purchase flows mitigate yield cycles during auction periods and counteract the amplification impact of market volatility. The dampening effect of central bank asset purchases on auction cycles is more sizeable and precisely estimated for purchases of securities with medium-term maturities and in jurisdictions with relatively lower credit ratings. The analysis has broader implications for monetary policy and market functioning in the euro area. JEL Classification: E52, E58, G12, G14 |
| Keywords: | bond yields, Eurosystem, flow effects, public debt auctions, unconventional monetary policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242927&r=ban |
| By: | Goutsmedt, Aurélien (UC Louvain - F.R.S-FNRS); Sergi, Francesco |
| Abstract: | This article introduces a new conceptual framework for examining the transformation of central banks’ activities at the intersection of science and politics. The article relies on the results of four historical case studies gathered by the special issue “The Scientization of Central Banks. National Patterns and Global Trends”—to which this article provides also an introduction. We start with an analysis of Martin Marcussen’s concept of “scientization”, originally formulated to describe the changes within central banks since the 2000s. After highlighting how Marcussen’s concept has raised different interpretations, we broaden our scope to examine how “scientization” is applied in the wider social sciences, extending beyond the study of central banks. This brings to the fore two ideas: scientization as “boundary work” (redrawing the line between “science” and “non-science”) happening both in the public-facing (“frontstage”) and internal (“backstage”) activities of organizations. Finally, we suggest how these two ideas can be used to reinterpret “scientization” of central banks as the emergence of central banks as “boundary organizations”. This reframing allows us to untangle and clarify the phenomena previously conflated under the original concept of scientization, offering a more coherent framework for ongoing research on central banks. |
| Date: | 2024–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:dxvfp&r=ban |
| By: | Jialan Wang |
| Abstract: | Digital technologies and fintech firms have rapidly reshaped the consumer financial landscape in recent years, and have the potential to help consumers make better decisions and improve their financial health. Existing technologies such as autopay are also experiencing increased takeup, a trend that could be accelerated by innovations such as open banking. I examine the extent to which autopay affects payment behavior for customers of a credit card serviced by a fintech company. Using sharp changes in the company's practices in a regression discontinuity design, I find that a small nudge accounts for half of all autopay enrollment during the sample period, and that enrollment at account opening is persistent. Autopay increases the likelihood of making the minimum payment by 20 to 29pp, more than doubling the baseline rate. The results show that seemingly minor technological defaults can have economically large effects on consumer credit outcomes. |
| JEL: | D12 D14 G21 G41 G51 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32332&r=ban |
| By: | Leslie Sheng Shen; Tony Zhang |
| Abstract: | We develop a structural model of the global banking network and analyze its role in facilitating risk sharing and amplifying shocks across countries and over time. Using bilateral international lending data, we uncover significant heterogeneity in the willingness and capacity of banks to provide cross‐border interbank and corporate loans. This heterogeneity explains variation in risk sharing and amplification across countries. Moreover, we show that cross‐border loan supply has become less elastic overtime, resulting in a decline in risk sharing. While shock amplification has also declined on average, some countries may experience greater amplification in response to foreign funding shocks. |
| Keywords: | global economy; risk sharing; shock propagation; capital flows |
| JEL: | F34 G21 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:98178&r=ban |
| By: | António Afonso; M. Carmen Blanco-Arana |
| Abstract: | Financial inclusion is a key factor for economic growth in most developing countries. This paper examines the relationship between financial inclusion and Gross Domestic Product (GDP) per capita in the Least Developed Countries (LDCs) using panel data for the period 1990-2021. The empirical evidence suggests that financial inclusion is indeed related to economic growth in the LDCs. We consider different dimensions of financial inclusion: usability (% of bank credit to bank deposits), accessibility (commercial bank branches), concentration (% of concentration of banks) and availability (depositors with commercial banks) to determine which has a greater effect on economic growth in the countries analyzed. Therefore, we assess which dimensions of financial inclusion are a better tool to improve the economic situation in the poorest countries in the world. While we conclude that all dimensions of financial inclusion have a positive effect on economic growth, in the expected direction, we find that not all dimensions affect economic growth similarly. The dimensions ‘accessibility’ and ‘concentration’ are robustly associated with economic growth, while ‘usability’ and ‘availability’ produce a significant but relatively lesser effect in the LDCs. |
| Keywords: | financial inclusion, GDP per capita, panel data, LDCs |
| JEL: | O40 O47 C33 F30 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11054&r=ban |
| By: | Sumit Agarwal; Bernardo C. Morais; Amit Seru; Kelly Shue |
| Abstract: | While reliance on human discretion is a pervasive feature of institutional design, human discretion can also introduce costly noise (Kahneman, Sibony, and Sunstein 2021). We evaluate the consequences, determinants, and trade-offs associated with discretion in high-stake decisions assessing bank safety and soundness. Using detailed data on the supervisory ratings of US banks, we find that professional bank examiners exercise significant personal discretion—their decisions deviate substantially from algorithmic benchmarks and can be predicted by examiner identities, holding bank fundamentals constant. Examiner discretion has a large and persistent causal impact on future bank capitalization and supply of credit, leading to volatility and uncertainty in bank outcomes, and a conservative anticipatory response by banks. We identify a novel source of noise: weights assigned to specific issues. Disagreement in ratings across examiners can be attributed to high average weight (50%) assigned to subjective assessment of banks’ management quality, as well as heterogeneity in weights attached to more objective issues such as capital adequacy. Replacing human discretion with a simple algorithm leads to worse predictions of bank health, while moderate limits on discretion can translate to more informative and less noisy predictions. |
| JEL: | G28 G4 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32344&r=ban |
| By: | Jean-Guillaume Sahuc; Grégory Levieuge; José Garcia-Revelo |
| Abstract: | The European Central Bank and the Federal Reserve introduced new policy instruments and made changes to their operational frameworks to address the global financial crisis (2008) and the Covid-19 pandemic (2020). We study the macroeconomic effects of these monetary policy evolutions on both sides of the Atlantic Ocean by developing and estimating a tractable two-country dynamic stochastic general equilibrium model. We show that the euro area and the United States faced shocks of different natures, explaining some asynchronous monetary policy measures between 2008 and 2023. However, counterfactual exercises highlight that all conventional and unconventional policies implemented since 2008 have appropriately (i) supported economic growth and (ii) maintained inflation on track in both areas. The exception is the delayed reaction to the inflationary surge during 2021-2022. Furthermore, exchange rate shocks played a significant role in shaping the overall monetary conditions of the two economies. |
| Keywords: | Monetary policy, real exchange rate dynamics, two-country DSGE model, Bayesian estimation, counterfactual exercises |
| JEL: | E32 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2024-13&r=ban |
| By: | Tobias Herbst (University of Bonn & Bundesbank); Moritz Kuhn (University of Mannheim & CEPR); Farzad Saidi (University of Bonn & CEPR) |
| Abstract: | Houses are the most important asset on American households' balance sheets, rendering the U.S. economy sensitive to house prices. There is a consensus that credit conditions affect house prices, but to what extent remains controversial, as an expansion in credit supply often coincides with changes in house price expectations. To address this long-standing question, we rely on novel microdata on the universe of mortgages guaranteed under the Veterans Administration (VA) loan program. We use the expansion of eligibility of veterans for the VA loan program following the Gulf War to estimate a long-lived effect of credit supply on house prices. We then exploit the segmentation of the conventional mortgage market from program eligibility to link this sustained house price growth to developments in the initially unaffected segment of the credit market. We uncover a net increase in credit for all other residential mortgage applicants that aligns closely with the evolution of house price growth, which supports the view that credit-induced house price shocks are amplified by beliefs. |
| Keywords: | credit supply, mortgages, beliefs, house prices, veterans |
| JEL: | E21 G20 G21 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:293&r=ban |
| By: | Hałaj, Grzegorz; Hipp, Ruben |
| Abstract: | We evaluate the effects of contagion and common exposure on banks’ capital through a regression design inspired by the structural VAR literature and derived from the balance sheet identity. Contagion can occur through direct exposures, fire sales, and market-based sentiment, while common exposures result from portfolio overlaps. We estimate the structural regression on granular balance sheet and interbank exposure data of the Canadian banking market. First, we document that contagion varies in time, with the highest levels around the Great Financial Crisis and lowest levels during the pandemic. Second, we find that after the introduction of Basel III the relative importance of risks has changed, hinting that sources of systemic risk have changed structurally. Our new framework complements traditional stress-tests focused on single institutions by providing a holistic view of systemic risk. JEL Classification: G21, C32, C51, L14 |
| Keywords: | banking, contagion, networks, structural estimation, systemic risk |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242929&r=ban |
| By: | Idris Adamu Adamu (Department of Accounting, Faculty of Management Sciences, Federal University Dutsin-Ma, Nigeria. Author-2-Name: Irma Tyasari Author-2-Workplace-Name: Department of Accounting, Faculty of Economics and Business, Universitas PGRI Kanjuruhan Malang, Indonesia. Author-3-Name: Ahmad Haruna Abubakar Author-3-Workplace-Name: "Faculty of Business and Management and Professional Studies, Management and Science University Shah Alam, Malaysia. " Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:) |
| Abstract: | " Objective - This study examined the effect of female directors and their banking expertise on corporate reputation in Nigeria. Methodology/Technique - This study employs ordinary least square regression on sample data from 2009 to 2018. The sample consists of 11 banks from 2009 to 2018, which resulted in 110 observations of the listed banks from the main floor of the NSE market. The data used in the study were extracted from Bloomberg DataStream. Findings - In line with our hypothesis, we documented that female directors on the board and female directors with banking expertise are positively related to corporate reputation, suggesting that female directors on the board and with banking expertise led to a higher corporate reputation. Novelty - Our findings add to the existing body of literature on gender and corporate reputation. as well as resource dependency theory. The findings also corroborate the existing CBN policy on gender diversity. Hence, the study's findings offer additional awareness to the corporate stakeholders. Type of Paper - Empirical" |
| Keywords: | Female directors, female directors' banking expertise, and corporate reputation. |
| JEL: | M14 M19 |
| Date: | 2024–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:gtr:gatrjs:afr231&r=ban |
| By: | Victor Cardenas |
| Abstract: | The document provides an overview of financial climate risks. It delves into how climate change impacts the global financial system, distinguishing between physical risks (such as extreme weather events) and transition risks (stemming from policy changes and economic transitions towards low carbon technologies). The paper underlines the complexity of accurately defining financial climate risk, citing the integration of climate science with financial risk analysis as a significant challenge. The paper highlights the pivotal role of microfinance institutions (MFIs) in addressing financial climate risk, especially for populations vulnerable to climate change. The document emphasizes the importance of updating risk management practices within MFIs to explicitly include climate risk assessments and suggests leveraging technology to improve these practices. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.07331&r=ban |
| By: | Jean N. Lee (World Bank); Jonathan Morduch (Robert F. Wagner Graduate School of Public Service, New York University); Saravana Ravindran (Lee Kuan Yew School of Public Policy, National University of Singapore); Abu S. Shonchoy (Department of Economics, Florida International University) |
| Abstract: | Behavioral household finance shows that people are often more willing to spend when using less tangible forms of money like debit cards or digital payments than when spending in cash. We show that this “payment effect†cannot be generalized to mobile money. We surveyed families in rural Northwest Bangladesh, where mobile money is mainly received from relatives working in factories. The surveys were embedded within an experiment that allows us to control for the relationships between senders and receivers of mobile money. The finding suggests that the source of funds matters, and mobile money is earmarked for particular purposes and thus less fungible than cash. In contrast to the expectation of greater spending, the willingness to spend in the rural sample was lower by 24 to 31 percent. In urban areas, where the sample does not receive remittances on net, there are no payment effects associated with mobile money. |
| Keywords: | payment effect, digital finance, willingness to pay, social meaning of money, earmarks |
| JEL: | O15 G41 G50 D91 D14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:2402&r=ban |
| By: | Nina Boyarchenko; Richard K. Crump; Keshav Dogra; Leonardo Elias; Ignacio Lopez Gaffney |
| Abstract: | We re-examine the relationship between monetary policy and financial stability in a setting that allows for nonlinear, time-varying relationships between monetary policy, financial stability, and macroeconomic outcomes. Using novel machine-learning techniques, we estimate a flexible “nonlinear VAR” for the stance of monetary policy, real activity, inflation, and financial conditions, and evaluate counterfactual evolutions of downside risk to real activity under alternative monetary policy paths. We find that a tighter path of monetary policy in 2003-05 would have increased the risk of adverse real outcomes three to four years ahead, especially if the tightening had been large or rapid. This suggests that there is limited evidence to support “leaning against the wind” even once one allows for rich nonlinearities, intertemporal dependence, and crisis predictability. |
| Keywords: | monetary policy; financial stability; leaning against the wind |
| JEL: | E44 E52 E58 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:98177&r=ban |
| By: | Jaccard, Ivan |
| Abstract: | The evidence suggests that monetary policy transmission is asymmetric over the business cycle. Interacting financing frictions with a preference for liquidity provides an explanation for this fact. Our mechanism generates monetary asymmetries in a model that jointly reproduces a set of asset market and business cycle facts. Accounting for the joint dynamics of asset prices and business cycle fluctuations is key; in a variant of the model that is unable to produce realistic macro-finance implications, monetary asymmetries disappear. Our results suggest that asymmetries in the transmission mechanism critically depend on the macro-finance implications of monetary policy models, and that resorting to nonlinear techniques is not sufficient to detect monetary asymmetries. JEL Classification: E31, E44, E58 |
| Keywords: | asset pricing in DSGE models, money demand, nonlinear solution methods, stochastic discount factor, term premium |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242928&r=ban |
| By: | Adam Brzezinski; Nuno Palma; Francois R. Velde |
| Abstract: | Debates about the nature and economic role of money are mostly informed by evidence from the 20th century, but money has existed for millennia. We argue that there are many lessons to be learned from monetary history that are relevant for current topics of policy relevance. The past acts as a source of evidence on how money works across different situations, helping to tease out features of money that do not depend on one time and place. A close reading of history also offers testing grounds for models of economic behavior and can thereby guide theories on how money is transmitted to the real economy. |
| Keywords: | Monetary policy; Monetary History; Natural Experiments |
| JEL: | E40 E50 N10 |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:98103&r=ban |
| By: | Bougheas, Spiros; Commendatore, Pasquale; Gardini, Laura; Kubin, Ingrid; Zörner, Thomas O. |
| Abstract: | We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework, enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality. |
| Keywords: | Banks; Financial Innovation; Cycles; Income Inequality |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:62095520&r=ban |
| By: | François Gourio; Phuong Ngo |
| Abstract: | We develop a parsimonious New Keynesian macro-finance model with downward nominal rigidities to understand secular and cyclical movements in Treasury bond premia. Downward nominal rigidities create state-dependence in output and inflation dynamics: a higher level of inflation makes prices more flexible, leading output and inflation to be more volatile, and bonds to become more risky. The model matches well the relation between the level of inflation and a number of salient macro-finance moments. Moreover, we show that empirically, inflation and output respond more strongly to productivity shocks when inflation is high, as predicted by the model. |
| Keywords: | term premium; Bond premiums; Phillips curve; Inflation; Asymmetry |
| JEL: | E31 E32 E43 E44 G12 |
| Date: | 2024–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:98104&r=ban |
| By: | MASUJIMA Yuki; SATO Yuki |
| Abstract: | This paper tries to investigate the driving factors of FX rates, focusing on the roles of sovereign credit risks and energy prices in the post-pandemic period. We find that the yen’s safe-haven status has weakened, and the European currencies became more sensitive to debt risks and fragile to uncertainty. The yen’s sensitivity to higher sovereign risks increased after the introduction of the yield curve control (YCC) policy implemented by the Bank of Japan (BOJ), even if its policy could have reduced the volatility of Japan’s credit default swap (CDS) rates. Moreover, the type of shock (supply or demand) may change the impacts of oil prices on FX moves. Our results hint at the policy implication that the government’s fiscal policy stance is important not only for sovereign risk premiums but for exchange rate movement. The BOJ’s YCC could unintentionally limit some sovereign risks, but it may cause a rapid depreciation of the home currency when debt sustainability becomes more doubtful. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24054&r=ban |
| By: | Daria Minima; Gabriele Galati; Richhild Moessner; Maarten van Rooij |
| Abstract: | This paper examines how information provision affects consumers’ inflation expectations. Using data from a representative Dutch household survey, we document that providing information about current and past inflation rates, as well as the ECB’s inflation target, brings inflation expectations closer to the target and reduces the upward bias typically found in the literature. The beneficial effect of information holds across various types of inflation expectations and time horizons. We also find that consumers' reactions to information are heterogeneous, with women, respondents with low levels of education and income, and renters showing stronger reactions to information provision. Finally, we observe that the effect of information provision on inflation expectations in times of normal economic activity is similar to its effects during periods of large economic shocks such the start of the Covid-19 pandemic, the Ukraine war and the start in 2022 of the monetary tightening cycle following a strong increase in inflation. |
| Keywords: | inflation expectations; shocks; information acquisition; monetary policy; |
| JEL: | D10 D84 D90 E31 E52 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:810&r=ban |
| By: | Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Ganesh Viswanath-Natraj (Warwick Business School); Junxuan Wang (University of Cambridge - Centre for Endowment Asset Management, Cambridge Judge Business School) |
| Abstract: | We conduct the first comprehensive study of blockchain currencies, stablecoins pegged to traditional currencies and traded on decentralized exchanges. Our findings reveal that the blockchain market generally operates efficiently, with blockchain prices and trading volumes closely aligned with those of their traditional counterparts. However, blockchain-specific factors, such as gas fees and Ethereum volatility, act as frictions. Blockchain prices are determined by macroeconomic fundamentals and order flow. We use a rich transaction-level database of trades and link it to the characteristics of market participants. Traders with significant market share and access to the primary market have a greater impact on pricing, likely due to informational advantages. |
| Keywords: | Stablecoins, foreign exchange, blockchain, price efficiency, market resilience, microstructure |
| JEL: | D53 E44 F31 G18 G20 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2429&r=ban |
| By: | Nicolas Caramp; Dejanir H. Silva |
| Abstract: | We study the role of asset revaluation in the monetary transmission mechanism. We build an analytical heterogeneous-agents model with two main ingredients: i) rare disasters; ii) heterogeneous beliefs. The model captures time-varying risk premia and precautionary savings in a setting that nests the textbook New Keynesian model. The model generates large movements in asset prices after a monetary shock but these movements can be neutral on real variables. Real effects depend on the redistribution among agents with heterogeneous precautionary motives. In a calibrated exercise, we find that this channel accounts for the majority of the transmission to output. |
| Keywords: | monetary policy, wealth effects, asset prices, aggregate risk, heterogeneity beliefs |
| JEL: | E21 E44 E52 G12 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11049&r=ban |
| By: | Darracq Pariès, Matthieu; Kornprobst, Antoine; Priftis, Romanos |
| Abstract: | We evaluate how the euro area economy would have performed since mid-2021 under alternative monetary policy strategies. We use the ECB’s workhorse estimated DSGE model and contrast actual policy conduct against alternative strategies which differ in their ”lower-for-longer” commitment as well as policymaker preferences regarding inflation and output volatility. Assuming that the monetary authority had full knowledge of prevailing conditions from mid-2021 onwards, the alternative policy strategies would call for anticipated timing of the start of the hiking cycle: earlier tightening would prevent inflation from peaking at 10%, but the forceful tightening since 2022:Q3 prevented higher inflation from becoming entrenched. However, once evaluating monetary policy on real-time quarterly vintages of incoming data and projections, the alternative interest rate paths would be broadly consistent with the observed policy conduct. The proximity of some benchmark optimal policy counterfactuals with the baseline, brings further indication that the actual policy conduct succeeded in implementing an efficient management of the output-inflation trade-off. JEL Classification: C53, E31, E42, E52, E58 |
| Keywords: | dual mandate, estimated DSGE model, euro area, monetary policy frameworks, optimal policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242935&r=ban |
| By: | Steven M. Fazzari |
| Abstract: | This article integrates monetary policy into a very simple dynamic supermultiplier model with an accommodating supply side. Results show that monetary policy guided by a conventional Taylor rule may stabilize an economy around the steady-state path of demand-led growth following temporary demand shocks. However, monetary policy is ineffective in offsetting permanent negative demand shocks even if the lower bound for interest rates is not binding. This outcome contrasts with the prevailing view among policymakers that monetary policy can usually assure full utilization of an economy's resources in the long run. The ineffectiveness of monetary policy is particularly acute if autonomous demand grows more slowly than necessary to generate full employment. In this case, if policymakers recognize the under-utilization of resources, monetary policy leads to interest rates trending necessarily to their lower bound. The analysis also shows how monetary policy may lead to counter-productive responses to supply shocks. The article concludes with observations about how the theoretical results correspond with the history of US monetary policy in recent decades. |
| Keywords: | Supermultiplier, Monetary Policy, Demand-Led Growth, Keynesian Macroeconomics |
| JEL: | E12 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:99-2024&r=ban |
| By: | Boris Chafwehe; Andrea Colciago; Romanos Priftis |
| Abstract: | This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term. |
| Keywords: | Energy; productivity; firm entry and exit; monetary policy |
| JEL: | E62 L16 O33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:811&r=ban |
| By: | Efraim Benmelech |
| Abstract: | Secured debt—a debt contract that offers security to creditors in the form of collateralized assets—has been a cornerstone of credit markets in most societies since antiquity. The ability to seize and sell collateral reduces the creditor’s expected losses when the debtor defaults on a promised payment. Moreover, when a firm borrows from multiple creditors with different seniorities, debt secured by assets has higher priority relative to other creditors and is first in line for payment if the firm is bankrupt. While the benefits of secured debt have been shown in both the theoretical and empirical literature, less is known about the costs associated with secured borrowing. This paper surveys the burgeoning empirical literature on secured debt and provides an assessment of the costs and benefits of secured debt. |
| JEL: | G12 G32 G33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32353&r=ban |
| By: | Salim Chahine (Central Bank of Lebanon & ECGI); Ugo Panizza (Geneva Graduate Institute & CEPR); Guilherme Suedekum (Geneva Graduate Institute) |
| Abstract: | This paper studies whether IMF programs and their size affect borrowing costs by comparing the coupon of bonds issued around an IMF arrangement. By comparing bonds issued immediately before the inset of the program with bonds issued immediately after the program, we show that, on average, the approval of the program leads to a 72-basis points reduction in borrowing costs and program size matters. Our point estimates indicate that when program size increases by one percent of GDP, borrowing costs decrease by 23 basis points. We also show that program size only matters for ex-post programs (i.e., those implemented during crises). For precautionary ex-ante programs, borrowing costs increase with program size. However, the effect of program size is small and, therefore, ex-ante programs never lead to a statistically significant increase in borrowing costs and in most cases lead to a significant reduction in borrowing costs. |
| Keywords: | IMF programs; Sovereign debt; Bond yields; International financial markets |
| JEL: | F22 F33 F34 G01 G15 |
| Date: | 2024–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2024&r=ban |