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on Banking |
| By: | Tim Kaiser; Annamaria Lusardi |
| Abstract: | This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education. |
| JEL: | D14 G53 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32355&r=ban |
| By: | Giulio Cornelli; Leonardo Gambacorta; Rodney Garratt; Alessio Reghezza |
| Abstract: | Decentralised finance (DeFi) lending protocols have experienced significant growth recently, yet the motivations driving investors remain largely unexplored. We use granular, transaction-level data from Aave, a leading player in the DeFi lending market, to study these motivations. Our theoretical and empirical findings reveal that the search for yield predominantly drives liquidity provision in DeFi lending pools, whereas borrowing activity is mainly influenced by speculative and, to some extent, governance motives. Both retail- and large investors seek potential high returns through market movements and price speculation, however the latter engage in DeFi borrowing relatively more than the former also to influence protocol decisions and accrue more significant governance rights. |
| Keywords: | cryptocurrency, DeFi, decentralized finance, lending |
| JEL: | G18 G23 O39 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1183&r=ban |
| By: | Gubitz, Andrea; Toedter, Karl-Heinz; Ziebarth, Gerhard |
| Abstract: | Despite the "interest rate turnaround" initiated by the ECB in the second half of 2022 as a late reaction to the clearly underestimated persistence of high inflation rates in the euro area, real interest rates are by no means to be regarded as restrictive, neither in the ex post nor in the ex ante view. However, banks have been quite quick to adopt stricter lending guidelines, and demand in housing construction and mortgage lending has plummeted. Against this background, the paper discusses the importance of cash flow effects in annuity loans and in particular analyses the so-called front-loading effect. Accordingly, even if inflation rates are fully anticipated and real market and lending interest rates remain unchanged, higher nominal rates lead to strong additional financial burdens in the first phases of the typically mortgages with long maturities. Such liquidity effects can severely reduce the ability or willingness to pay of private investors in the household sector. This is particularly true for long-run loans in the form of a percentage annuity, as an additional maturity shortening effect occurs here. These types of fixed term loans are quite popular in Germany. Looking ahead, there is also a real risk to the stock of housing loans if there is a refinancing of the large stock of cheap housing loans, a risk that also has implications for macroeconomic and financial stability. |
| Abstract: | Trotz der von der EZB eingeleiteten "Zinswende" in der zweiten Jahreshälfte 2022 als späte Reaktion auf die deutlich unterschätzte Persistenz hoher Inflationsraten im Euroraum sind die Realzinsen sowohl in der ex post Betrachtung als auch in der ex ante Betrachtung keineswegs als restriktiv einzuschätzen. Die Banken haben allerdings recht rasch strengere Vergaberichtlinien beschlossen, und die Nachfrage im Wohnungsbau und bei den Hypothekarkrediten ist stark eingebrochen. Der Beitrag thematisiert vor diesem Hintergrund die Bedeutung von Zahlungsstromeffekten bei Annuitätenkrediten und analysiert hier vor allem den sog. front-loading Effekt. Danach führen höhere Nominalzinsen selbst bei vollständig antizipierten Inflationsraten und unveränderten Realzinsen zu starken finanziellen Zusatzbelastungen in den ersten Phasen der typischerweise langen Kreditlaufzeit. Derartige Liquiditätseffekte können die Zahlungsfähigkeit bzw. die Zahlungsbereitschaft der privaten Investoren empfindlich verringern. Dies gilt vor allem bei Darlehen in Form der Prozentannuität, da hier zusätzlich ein Laufzeitenverkürzungseffekt auftritt. Solche Darlehen sind in Deutschland recht populär. Mit Blick auf die Zukunft besteht auch eine reale Gefahr für den Bestand an Wohnungsbaukrediten, wenn es zu einer Refinanzierung des großen Bestands an günstigen Wohnungsbaukrediten kommt, ein Risiko, das auch Auswirkungen auf die makroökonomische und finanzielle Stabilität hat. |
| Keywords: | ECB, monetary policy, liquidity effects of interest rate policy, front loading effects, housing finance, mortgage |
| JEL: | G21 G51 E59 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hawdps:294836&r=ban |
| By: | Jakree Koosakul; Alexei Miksjuk |
| Abstract: | The expansion of bilateral swap arrangements (BSAs) since the Global Financial Crisis has led to a substantial reconfiguration of the Global Financial Safety Net (GFSN). This paper examines the drivers of BSA supply using a novel dataset on all publicly documented BSAs. It finds that countries with well-developed financial markets and institutions and high trade openness are more likely to backstop other economies by establishing BSAs. In addition, their choice of BSA counterparts is driven by strong investment and trade exposures to these countries, with variation in the relative importance of these factors across major BSA providers. The paper shows that geopolitical considerations often affect such decisions, as BSAs are less likely to be established between geopolitically distant countries and more likely between countries in the same regional economic bloc. |
| Keywords: | Bilateral swap arrangements; geoeconomic fragmentation; global financial safety net; liquidity provision |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/088&r=ban |
| By: | Chekir, Hamouda; Cueva, Simon; Gonzalez, Jose Antonio |
| Abstract: | Ecuador, like several other frontier economies with high levels of external debt, currently faces severe liquidity constraints. In recent years, Ecuador has made significant efforts to overcome these challenges. This includes successfully completing an ambitious program with the International Monetary Fund, restructuring its external commercial debt in 2020 (which amounted to over US$17 billion), and addressing its debt to Chinese lending institutions in 2022 (approximately US$4 billion). In March 2020, Ecuador faced a dual crisis with plummeting oil prices and the Covid-19 health crisis, leading to a significant loss of fiscal revenues. Subsequently, Ecuador publicly announced severe liquidity shortages and its inability to fully meet its debt obligations. This led to missed coupon payments and comprehensive debt restructuring negotiations, presenting a unique case with several noteworthy takeaways for future debt restructuring episodes. This research paper delves into the 2020 debt restructuring episode to offer valuable insights on handling liquidity vulnerabilities and engaging in constructive dialogue with key creditors. |
| Keywords: | Debt Restructuring, Ecuador, national central banks, International Monetary Fund, global development, international financial architecture |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:notfdl:2403&r=ban |
| By: | Buhui Qiu; Teng Wang |
| Abstract: | This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny. This improvement is further evident in positive stock return reactions to M&A deals financed by loans subject to enhanced lender scrutiny. As companies engage in fewer but higher-quality deals, they also experience higher returns on assets. Our findings highlight the importance of lender scrutiny in corporate M&A activities. |
| Keywords: | Mergers and acquisitions; Lender scrutiny; Stress tests |
| JEL: | G21 G34 |
| Date: | 2024–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2024-25&r=ban |
| By: | Hetzel, Robert L.; Humphrey, Thomas M.; Tavlas, George S. |
| Abstract: | Carl Snyder was one of the most prominent U.S. monetary economists of the 1920s and 1930s. His pioneering work on constructing the empirical counterparts of the terms in the equation of exchange led him to formulate a four percent monetary growth rule. Snyder is especially apposite because he was on the staff of the New York Federal Reserve Bank. Despite his pioneering empirical work and his position as an insider, why did Snyder fail to effectively challenge the dominant real bills views of the Federal Reserve (Fed)? A short answer is that he did not possess a convincing version of the quantity theory that attributed the Great Depression to a contraction in the money stock produced by the Fed as opposed to the dominant real bills view attributing it to the collapse of speculative excess. |
| Date: | 2024–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:5xqt9&r=ban |
| By: | Lilian Muchimba (Bank of Zambia); Mimoza Shabani (University of East London); Alexis Stenfors (University of Portsmouth); Jan Toporowski (University of Portsmouth) |
| Abstract: | The paper adopts a TVP-VAR methodology to investigate the dynamics of inflation components for three countries: the UK, the US and Japan from 1993 to 2023. We deconstruct the CPI into components to examine the actual price changes that make up the CPI and the degree to which changes in those prices influence each other. By doing so, we uncover the connectedness and spillovers between domestic inflation components. We find that whilst connectedness of price changes has been moderate over the last three decades it has increased significantly since the CPI started to soar in late 2021, suggesting the existence of a spillover effect among price-setting firms in the economy. Furthermore, our empirical evidence shows that the transmission mechanism across domestic CPI components varies significantly across countries and over time. From a monetary policy perspective, the findings suggest that a signalling process among consumer market producers complements the signalling by central banks in relation to inflation. Lastly, the cross-country variations over time imply that “no size fits all”, thus emphasizing the importance of domestic spillovers. |
| Keywords: | Consumer Prices, Dynamic Connectedness, Inflation, Monetary policy, Signalling, TVP-VAR |
| JEL: | C81 E31 E52 D43 |
| Date: | 2024–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pbs:ecofin:2024-04&r=ban |
| By: | Nordine Abidi; Mehdi El Herradi; Boriana Yontcheva; Ananta Dua |
| Abstract: | This paper investigates the effects of climate shocks on inflation and monetary policy in the Middle East and Central Asia (ME&CA) region. We first introduce a theoretical model to understand the impact of climate risks on headline and food inflation. In particular, the model shows how climate shocks could affect the path of policy rates through food prices. We then use local projections to estimate the impact of climate shocks on headline and food inflation. The results show that price stability is more easily achievable under positive climate conditions. Overall, our findings shed new light on the importance of considering climate-related supply shocks when designing monetary policy, particularly in countries where food makes up a significant part of the CPI-basket. |
| Keywords: | Monetary policy; inflation; climate change |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/090&r=ban |
| By: | Cappelletti, Giuseppe; Dimitrov, Ivan; Naruševičius, Laurynas; Le Grand, Catherine; Nunes, André; Podlogar, Jure; Röhm, Nicola; Ter Steege, Lucas |
| Abstract: | This paper presents the updated macroprudential stress test for the euro area banking system, comprising around 100 of the largest euro area credit institutions across 19 countries. The approach involves modelling banks’ reactions to changing economic conditions. It also examines the effects of adverse scenarios as defined for the European Banking Authority’s 2023 stress test on economies and the financial system as a whole by acknowledging a broad set of interactions and interdependencies between banks, other market participants and the real economy. Our results highlight the resilience of the euro area banking system and the important role banks’ adjustments play in the propagation of shocks to the financial sector and real economy. JEL Classification: C30, C53, C54, E52 |
| Keywords: | economic models, forecasting, macroeconometrics, monetary policy |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024347&r=ban |
| By: | Asimakopoulos, Ioannis G.; Tröger, Tobias |
| Abstract: | The lack of a European Deposit Insurance Scheme (EDIS) - often referred to as the "third pillar" of Banking Union - has been criticized since the inception of the EU Banking Union. The Crisis Management and Deposit Insurance (CMDI) framework needs to rely heavily on banks' internal loss absorbing capacity and provides little flexibility in terms of industry resolution funding. This design has, among others, led to the rare application of the CMDI, particularly in the case of small and medium sized retail banks. This reluctance of resolution authorities weakens any positive impact the CMDI may have on market discipline and ultimately financial stability. After several national governments pushed back against the establishment of an EDIS, the Commission recently took a different approach and tried to reform the CMDI comprehensively, without seeking to erect a "third pillar". The overarching rationale of the CMDI Proposal is to make resolution funding more flexible. To this end, the proposal seeks to facilitate contributions from (national) deposit guarantee schemes (DGS). At the same time, the CMDI Proposal tries to broaden the scope of resolution to include smaller and medium sized banks. This paper provides an assessment of the CMDI Proposal. It argues that the CMDI Proposal is a step in the right direction but cannot overcome fundamental deficiencies in the design of the Banking Union. |
| Keywords: | bank resolution, CMDI, EDIS, bail-in, transfer strategies, MREL, Banking Union |
| JEL: | G01 G18 G21 G28 K22 K23 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:lawfin:294847&r=ban |
| By: | Frida Adjalala; Felipe Alves; Hélène Desgagnés; Wei Dong; Dmitry Matveev; Laure Simon |
| Abstract: | We assess both the US and Canadian nominal neutral rates to be in the range of 2.25% to 3.25%, somewhat higher than the range of 2.0% to 3.0% in 2023. The assessed range is back to the level it was at in April 2019. |
| Keywords: | Economic models; Interest rates; Monetary policy |
| JEL: | E4 E40 E43 E5 E50 E52 E58 F4 F41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:24-9&r=ban |
| By: | Alkis Georgiadis-Harris; Maxi Guennewig; Yuliyan Mitkov |
| Abstract: | Since Diamond and Dybvig (1983), banks have been viewed as inherently fragile. We challenge this view in a general mechanism design framework, where we allow for flexibility in the design of banking mechanisms while maintaining limited commitment of the intermediary to future mechanisms. We őnd that the unique equilibrium outcome is efficient. Consequently, runs cannot occur in equilibrium. Our analysis points to the ultimate source of fragility: banks are fragile if they cannot collect and optimally respond to useful information during a run and not because they engage in maturity transformation. We link our banking mechanisms to recent technological advances surrounding ‘smart contracts, ’ which enrich the practical possibilities for banking arrangements. |
| Keywords: | Bank runs, financial fragility, mechanism design, limited commitment, smart contracts |
| JEL: | D82 G2 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_540&r=ban |
| By: | Rohan Kekre; Moritz Lenel; Federico Mainardi |
| Abstract: | We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates. When arbitrageurs’ portfolio features positive duration, an unexpected rise in the short rate lowers their wealth and raises term premia. A calibration to the U.S. economy accounts for the transmission of monetary shocks to long rates. We discuss the additional implications of our framework for state-dependence in policy transmission, the volatility and slope of the yield curve, and trends in term premia accompanying trends in the natural rate. |
| JEL: | E44 E63 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32324&r=ban |
| By: | Tabaqchali, Ahmed |
| Abstract: | The Central Bank of Iraq’s (CBI) dollar auction has been a continuous source of controversies and conspiracy theories. The main accusations facing it include: the siphoning of dollars to Iran, money laundering, and currency smuggling. Missing from this melee is an understanding of the economy’s key structural imbalances: mainly that the Iraqi economy is wholly dependent on oil export revenues, and demand for goods and services is met through imports handled by a largely informal private sector. Consequently, the government’s oil revenues are the economy’s major source of dollars, and the private sector depends on the auction as a significant source of dollars to pay for these imports. As such, it is the inherent imbalances in the economy’s structure that led to contradictory and unsustainable compromises within the functioning of the auction, and not unsubstantiated conspiracies. This piece aims to demystify the role and the functioning of the auction. It does so through reviewing (1) the oil and dollar lifecycle within Iraqi economy, (2) the private sector’s dollar supply-demand dynamics, and (3) the causes of the currency’s upheavals in November 2022, and their aftermath. It concludes that the measures undertaken in response to the upheavals have helped resolve most of the compromises that bedevilled the dollar auction in the past. However, lasting change requires addressing the economy’s structural imbalances head-on through implementing fundamental economic reforms centred around redefining the oversized role of the government in the economy and society. |
| JEL: | F3 G3 E6 N0 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122652&r=ban |
| By: | Barbara Casu; Laura Chiaramonte; Doriana Cucinelli |
| Abstract: | This study investigates the effect of the introduction of the net stable funding ratio (NSFR) on South African domestic banks lending. We decompose total lending by customer type (corporate vs household) and by loan categories (instalments, mortgages, credit cards, overdrafts and other loans) to account for different risk profiles and maturities (short-, medium- and long-term lending). Our results show that NSFR regulations in South Africa are largely compliant with Basel III standards. While total lending does not appear to have been affected, our results indicate that the introduction of the NSFR has influenced loan composition and maturity profiles. We find that South African banks have increased the proportion of short-term lending in their loan portfolios, decreasing long-term lending, especially in residential mortgages. This effect aligns with the NSFRs aim to reduce maturity transformation but could nonetheless impact households ability to obtain long-term credit. |
| Date: | 2024–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11063&r=ban |
| By: | Hibiki Ichiue (Faculty of Economics, Keio University) |
| Abstract: | The Bank of Japan (BoJ) purchased equity index exchange-traded funds (ETFs), including Nikkei 225 ETFs, for over a decade and has not sold any ETFs it purchased. On March 31, 2021, the BoJ’s ETF holdings were more than 10% of the free float of the First Section of the Tokyo Stock Exchange. Primarily because the Nikkei index is price-weighted, the BoJ’s indirect holdings as a percentage of the market capitalization vary widely among individual stocks. To identify the effects of the uneven demand shocks, this paper runs instrumental-variable cross-sectional regressions of cumulative returns between September 30, 2010, a few days before the first announcement of ETF purchases, and March 31, 2021, when the BoJ terminated Nikkei 225 ETF purchases. The results suggest that the price multiplier is around 6 to 9; a 1 percentage point higher BoJ share in a stock’s market capitalization is associated with a roughly 6 to 9 percentage point higher return. The estimated multiplier is much higher than a typical estimate of 1 based on U.S. data. There is no evidence of a return reversal in the 9 months after Nikkei 225 ETF purchases ended. Various analyses, including monthly return regressions, support the analysis of cumulative returns and provide additional insights. |
| Keywords: | Asset pricing; Unconventional monetary policy; Exchange-traded funds |
| JEL: | E52 E58 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:049&r=ban |
| By: | Manuel Amador; Javier Bianchi |
| Abstract: | We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts. |
| JEL: | E32 E44 E58 G01 G21 G33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32341&r=ban |
| By: | Chris Becker (Reserve Bank of Australia); Anny Francis (Reserve Bank of Australia); Calebe de Roure (Reserve Bank of Australia); Brendan Wilson (Reserve Bank of Australia) |
| Abstract: | In Australia repurchase (repo) obligations are traded bilaterally 'over-the-counter' between parties, rather than on an exchange. As a result, it is difficult to obtain quotes of executable prices, trading volumes, and related data that are representative of the market. Market conditions are therefore not easy to assess and often dependent on anecdotal evidence. Over the years, the Reserve Bank of Australia has published data and analysis of the repo market by providing indirect perspectives using data from its own open market operations that are conducted using repos. This paper contributes to this work. The Reserve Bank conducts open market operations to manage liquidity in the interbank market, provide settlement balances for the smooth functioning of the payments system, and for the implementation of monetary policy. Repos are an integral part of these operations. The eligible private sector counterparties in these auctions have a variety of reasons for participating. We arrange their bids in an ascending order in a number of distinct phases so that they can be used to make inferences about the demand for repo and hence market operations. Several insights allow us to better understand the dynamics underpinning the repo market. The findings mainly relate to the period prior to the implementation of unconventional monetary policies in March 2020. |
| Keywords: | monetary policy; repurchase agreement; liquidity management; open market operations; money market |
| JEL: | E41 E42 E43 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-03&r=ban |
| By: | Luis Férnandez Lafuerza (Banco de España); Jorge E. Galán (Banco de España) |
| Abstract: | We provide compelling evidence of the association between credit standards at loan origination in the corporate sector and default risk, a topic that has received little attention in the literature in comparison to the study of this relationship in the mortgage market. Using data from the Spanish credit register merged with corporate balance sheet information spanning the last financial cycle, we demonstrate that leverage and debt burden ratios at loan origination are key predictors of future corporate loan defaults. We also show that the deterioration in lending standards is strongly correlated to the build-up of cyclical systemic risk during periods of financial expansions. Specifically, limits on the debt-to-assets ratio and the interest coverage ratio could serve as effective tools to mitigate credit risk during economic expansions. We identify that the strength of these associations varies significantly across different sectors and is dependent on firms’ size, age and the existence of prior relationships with the bank. Real estate firms and small and medium-sized enterprises exhibit the strongest relationship between credit standards and future default. Overall, our findings provide strong support for the effectiveness of macroprudential measures targeting the corporate sector and contribute to providing guidance for the implementation of borrower-based measures in key segments of corporate credit. |
| Keywords: | bank credit, defaults, lending standards, macroprudential policy, non-financial corporations |
| JEL: | C32 E32 E58 G01 G28 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2413&r=ban |
| By: | Karsten O. Chipeniuk (Economics Department, Reserve Bank of New Zealand); Eric M. Leeper (Department of Economics, University of Virginia); Todd B. Walker (Department of Economics, Indiana University) |
| Abstract: | We consider fiscal and monetary policy interactions in the continuous-time HANK framework. We find that heterogeneity fundamentally alters the way in which monetary policy shocks propagate in equilibrium. Fiscal shocks have inflationary consequences even when policy parameters are consistent with accommodating (passive) fiscal policy. By eliminating income effects through a complex transfers process, monetary policy can once again regain control of inflation. However, meaningful heterogeneity or heterogeneity in which a representative-agent approximation is poor, requires a complex set of transfers that do not resemble reality. With a realistic calibration for the distribution of wealth, fiscal policy will always impinge on inflation regardless of policy parameters. We thus conclude that monetary policy is fiscal policy according to HANK. |
| Keywords: | Heterogeneous Agents, Monetary and Fiscal Policy Interactions |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2024004&r=ban |
| By: | Muhamad Bhayuta Yudhi Putera; Melia Famiola |
| Abstract: | This study in the banking industry examines the influence of attitudinal loyalty on customer advocacy and cross buying behavior, alongside the moderating roles of Quality of Life and Corporate Social Responsibility support in the CSR fit and loyalty relationship. Employing Structural Equation Modeling, it reveals that higher attitudinal loyalty significantly boosts customer advocacy and propensity for cross buying. The findings highlight the importance of nurturing customer loyalty through valuable and relevant offerings, as CSR fit alone does not define the loyalty of the banking customer. Banks are advised to target customers with a high Quality of Life and engage with those who support CSR initiatives aligning with the banks objectives, to enhance loyalty and deepen customer relationships. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.11063&r=ban |
| By: | Arno Botha; Tanja Verster; Roelinde Bester |
| Abstract: | A novel procedure is presented for finding the true but latent endpoints within the repayment histories of individual loans. The monthly observations beyond these true endpoints are false, largely due to operational failures that delay account closure, thereby corrupting some loans in the dataset with `false' observations. Detecting these false observations is difficult at scale since each affected loan history might have a different sequence of zero (or very small) month-end balances that persist towards the end. Identifying these trails of diminutive balances would require an exact definition of a "small balance", which can be found using our so-called TruEnd-procedure. We demonstrate this procedure and isolate the ideal small-balance definition using residential mortgages from a large South African bank. Evidently, corrupted loans are remarkably prevalent and have excess histories that are surprisingly long, which ruin the timing of certain risk events and compromise any subsequent time-to-event model such as survival analysis. Excess histories can be discarded using the ideal small-balance definition, which demonstrably improves the accuracy of both the predicted timing and severity of risk events, without materially impacting the monetary value of the portfolio. The resulting estimates of credit losses are lower and less biased, which augurs well for raising accurate credit impairments under the IFRS 9 accounting standard. Our work therefore addresses a pernicious data error, which highlights the pivotal role of data preparation in producing credible forecasts of credit risk. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.17008&r=ban |
| By: | Xintong Wu; Wanling Deng; Yuotng Quan; Luyao Zhang |
| Abstract: | In the evolving landscape of digital finance, the transition from centralized to decentralized trust mechanisms, primarily driven by blockchain technology, plays a critical role in shaping the cryptocurrency ecosystem. This paradigm shift raises questions about the traditional reliance on centralized trust and introduces a novel, decentralized trust framework built upon distributed networks. Our research delves into the consequences of this shift, particularly focusing on how incidents influence trust within cryptocurrency markets, thereby affecting trade behaviors in centralized (CEXs) and decentralized exchanges (DEXs). We conduct a comprehensive analysis of various events, assessing their effects on market dynamics, including token valuation and trading volumes in both CEXs and DEXs. Our findings highlight the pivotal role of trust in directing user preferences and the fluidity of trust transfer between centralized and decentralized platforms. Despite certain anomalies, the results largely align with our initial hypotheses, revealing the intricate nature of user trust in cryptocurrency markets. This study contributes significantly to interdisciplinary research, bridging distributed systems, behavioral finance, and Decentralized Finance (DeFi). It offers valuable insights for the distributed computing community, particularly in understanding and applying distributed trust mechanisms in digital economies, paving the way for future research that could further explore the socio-economic dimensions and leverage blockchain data in this dynamic domain. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.17227&r=ban |
| By: | Francesca Carapella; Jin-Wook Chang; Sebastian Infante; Melissa Leistra; Arazi Lubis; Alexandros Vardoulakis |
| Abstract: | A Central Bank Digital Currency (CBDC) is a form of digital money that is denominated in the national unit of account, constitutes a direct liability of the central bank, and can be distinguished from other central bank liabilities. We examine the positive and negative implications for financial stability of a CBDC under different design options. We base our analysis on the lessons derived from historical case studies as well as on analytical frameworks useful to characterize the mechanisms through which a CBDC can affect financial stability. We further discuss various policy tools that can be employed to mitigate financial stability risks. |
| Keywords: | CBDC; Financial stability; Runs; Stablecoins; Central bank liabilities; Regulation |
| JEL: | E40 E50 G01 G21 G23 G28 |
| Date: | 2024–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2024-21&r=ban |
| By: | Randrianarisoa, Radoniaina |
| Abstract: | This article presents an essay of a macroeconomic modeling dedicated on monetary policy, a Quarterly Projection Model for the case of Madagascar. Initially, we apply the canonical model, developed by Berg-Karam-Laxton (2006a, b), to the data of the Malagasy economy. Subsequently, we propose an extension of this version to further incorporate features of this economy. The results show simulations that closely replicate the stylized facts of the Malagasy economy and highlight the mechanisms of monetary policy transmission. This tool could be useful to the Monetary Authority of this country in its conduct of monetary policy. |
| Keywords: | monetary policy, inflation, core inflation, output gap, inflation targeting, quarterly projection model |
| JEL: | E52 |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120678&r=ban |
| By: | Carlos Cantú; Rocío Gondo; Berenice Martinez |
| Abstract: | We quantify the trade-offs of using reserve requirements (RR) as a financial stability tool. A tightening in RR reduces the amplitude of the credit cycle. This lowers the frequency and strength of financial stress episodes but at a cost of lower growth in credit and economic activity. We find that the gains from a lower probability and magnitude of financial stress episodes are greater than the costs from the initial reduction in economic activity. In addition, we find that RR have a stronger effect on emerging market economies than in advanced economies, both in terms of costs and benefits. Finally, we find that uniform RR have a stronger effect than RR that differenciate by maturity or currency. |
| Keywords: | reserve requirements, macroprudential policy, financial stress episodes, early-warning system, financial cycle |
| JEL: | E44 E58 F41 G01 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1182&r=ban |
| By: | William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Hyun Park (Department of Economics, Valparaiso University, Valparaiso, IN 46383, USA) |
| Abstract: | We use the New-Keynesian DSGE framework and VAR to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New-Keynesian framework: (1) the aggregation theoretic "true" monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate. We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple-sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New-Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect. |
| Keywords: | Credit-card-augmented Divisia monetary aggregates, New-Keynesian DSGE, credit card services, VAR. |
| JEL: | E12 E41 E51 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202408&r=ban |
| By: | Jacob P. Gramlich; Serafin J. Grundl |
| Abstract: | The U.S. banking industry is well suited to assess the common ownership hypothesis (COH), because thousands of private banks without common ownership (CO) compete with hundreds of public banks with high and increasing levels of CO. This paper assesses the COH in the banking industry using more comprehensive ownership data than previous studies. In simple comparisons of raw deposit rate averages we document that (i) private banks do offer substantially more attractive deposit rates than public banks, but (ii) the deposit rates of public banks are similar in markets without CO where a single public bank competes only with private rivals, and in markets with CO where multiple public banks compete with each other. Panel regressions of deposit rates on the profit weights implied by the COH are generally consistent with the COH if only quarter FEs (without other controls) are included but not if bank-quarter FEs are included. Estimates with bank-quarter FEs are “precise zeros†with 95% CIs suggesting that the threefold rise in CO among public banks between 2005 and 2022 moved their deposit rates by less than a quarter of a basis point in either direction. To assess the COH along non-price dimensions we also estimate the effect of CO on deposit quantities, and find that the estimates are also not consistent with the COH. |
| Keywords: | Bank competition; Common ownership |
| JEL: | L40 L10 G34 G21 L20 |
| Date: | 2024–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2024-22&r=ban |
| By: | Natalia ANDRIES (ERUDITE, Université Paris-Est); Steve BILLON (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper theoretically investigates the effect of bank cost-efficiency on the transmission of monetary policy impulses to bank lending rates. In a monopolistic competition setting that displays increasing marginal costs, we show that the distortion of the interest rate pass-through depends on the nature of the bank cost-efficiency shock. If banks increase their cost-efficiency on loan activities, the monetary policy transmission is strengthened. Instead, if banks experience an improvement in their cost-efficiency on deposit activities, the interest rate pass-through is weakened. |
| Keywords: | Bank cost-efficiency; Bank interest rates; Monetary policy transmission; Interest rate pass-through; Bank imperfect competition |
| JEL: | E43 E52 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2024-04&r=ban |
| By: | Ṣebnem Kalemli-Özcan; Filiz D. Unsal |
| Abstract: | Contrary to historical episodes, the 2022–2023 tightening of US monetary policy has not yet triggered financial crisis in emerging markets. Why is this time different? To answer this question, we analyze the current situation through the lens of historical evidence. In emerging markets, the financial channel–based transmission of US policy historically led to more adverse outcomes compared to advanced economies, where the trade channel fails to smooth out these negative effects. When the Federal Reserve increases interest rates, global investors tend to shed risky assets in response to the tightening global financial conditions, affecting emerging markets more severely due to their lower credit ratings and higher risk profiles. This time around, the escape from emerging market assets and the increase in risk spreads have been limited. We document that the historical experience of higher risk spreads and capital outflows can be largely explained by the lack of credible monetary policies and dollar-denominated debt. The improvement in monetary policy frameworks combined with reduced levels of dollar-denominated debt have helped emerging markets weather the recent Federal Reserve hikes. |
| JEL: | F30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32329&r=ban |
| By: | Paul De Grauwe; Yuemei Ji |
| Abstract: | In a world of radical uncertainty the frequency distributions of economic variables deviate from the normal distribution and typically exhibit fat tails. We show that this feature is obtained in simple models where agents have cognitive limitations and fail to understand the underlying model. Although the model is simple, we obtain great complexity. We analyse the implications for monetary policy. We show that in such models the central bank bears a much greater responsibility to stabilize an otherwise unstable system than in mainstream models that assume Rational Expectations. We also question the use of impulse responses to exogenous shocks when the distribution of these impulse responses is not normal. |
| Keywords: | radical uncertainty, monetary policy |
| JEL: | E52 E58 E70 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11068&r=ban |
| By: | Gary Richardson; Marco Del Angel; Michael Gou |
| Abstract: | During the Progressive Era (1900-29), economic growth was rapid but volatile. Boom and busts witnessed the formation and failure of tens of thousands of firms and thousands of banks. This essay uses new data and methods to identify causal links between failures of banks and bankruptcies of firms. Our analysis indicates that bank failures triggered bankruptcies of firms that depended upon banks for ongoing access to commercial credit. Firms that did not depend upon banks for credit did not fail in appreciably larger numbers after banks failed or during financial panics. |
| JEL: | E44 G21 N22 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32345&r=ban |
| By: | Hassan Afrouzi; Alexander Dietrich; Kristian Myrseth; Romanos Priftis; Raphael Schoenle |
| Abstract: | We document novel survey-based facts on preferred long-run inflation rates among U.S. consumers. Consumers on average prefer a 0.20% annual inflation rate, considerably below the Federal Reserve’s 2% target. Inflation preferences not only correlate with demographic and socioeconomic characteristics, but also with economic reasoning. A randomized control trial reveals that two narratives based on economic models—describing how inflation lowers the real value of wages as well as money holdings—affect inflation preferences. While our results can inform the design of central bank communication on inflation targets, they also raise questions about the alignment between such targets and consumer preferences. |
| JEL: | E58 E71 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32379&r=ban |
| By: | Salzer, Tim |
| Abstract: | This chapter offers a concise overview of China's endeavors towards establishing a state-backed digital currency from the early 2000s to the present, culminating in the digital yuan. Drawing on the social scientific literature concerned with large technical systems, we assert two main arguments. First of all, while many commentators have considered that the new payment infrastructure could overhaul the existing institutional arrangements in the realm of payments and in particular weaken private financial entities, its evolution actually follows a much more incremental logic and relies on both private and public institutions. Secondly, many foreign observers have assumed that the digital yuan represents a long-planned attempt at challenging the international currency hierarchy and American international hegemony. Contrary to this line of thinking, we argue that initially, currency digitalization in the PRC was first and foremost motivated by domestic factors. The project assumed an openly international dimension only after other foreign countries began to initiate their own attempts at currency digitalization under the new slogan of developing "Central Bank Digital Currencies". |
| Date: | 2024–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:5yq4r&r=ban |
| By: | Menzie D. Chinn; Jeffrey A. Frankel; Hiro Ito |
| Abstract: | We begin by examining determinants of aggregate foreign exchange reserve holdings by central banks (size of issuing country’s economy and financial markets, ability of the currency to hold value, and inertia). But understanding the determination of reserve holdings probably requires going beyond the aggregate numbers, instead observing individual central bank behavior, including characteristics of the holding country (bilateral trade with the issuing country, bilateral currency peg, and proxies for bilateral exposure to sanctions), in addition to the characteristics of the reserve currency issuer. On a currency-by-currency basis, US dollar holdings are somewhat well explained by several issuer characteristics; but the other currencies are less successfully explained. It may be that the results from currency-by-currency estimation are impaired by insufficient sample size. This consideration offers a motivation for pooling the data across the major currencies and imposing the constraints that reserve holdings are determined in the same way for each currency. In this setting, most economic determinants enter with significance: economic size as measured by GDP, size of financial markets as measured by foreign exchange turnover, bilateral currency peg, and bilateral trade share. However, geopolitical variables (bilateral alliance, bilateral sanctions) usually do not enter with significance. |
| JEL: | F33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32387&r=ban |
| By: | Joris Wauters (Economics and Research Department, National Bank of Belgium); Zivile Zekaite (Irish Economic Analysis Division, Central Bank of Ireland); Garo Garabedian (Monetary Policy Division, Central Bank of Ireland) |
| Abstract: | The ECB concluded its strategy review in 2021 with a plan to include owner-occupied housing (OOH) costs in its inflation measure in the future. This paper uses the Bundesbank’s online household panel to study how household expectations would react to this change. We conducted a survey experiment with different information treatments and compared long-run expectations for euro area overall inflation, interest rates, and OOH inflation. Long-run expectations are typically higher for OOH inflation than overall inflation, and both are unanchored from the ECB’s target at the time of the survey. We find significantly higher inflation expectations under the treatment where OOH costs are assumed to be fully included in the inflation measure. This information effect is heterogeneous as, among others, homeowners and respondents with low trust in the ECB react more strongly. However, inflation expectations remain stable when information about past OOH inflation is also given. Careful communication design could thus prevent expectations from becoming more de-anchored. |
| Keywords: | Owner-occupied housing costs, survey experiment, inflation measurement, inflation expectations, ECB |
| JEL: | D83 D84 E31 E50 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202405-449&r=ban |
| By: | Gonzalo Garcia-Atance Fatjo |
| Abstract: | A tool to improve the effectiveness and the efficiency of public spending is proposed here. In the 19th century banknotes had a serial number. However, in modern days the use of digital transactions that do not use physical currency has opened the possibility to digitally track almost each cent of the economy. In this article a serial number or tracking number for each cent, pence or any other monetary unit of the economy is proposed. Then, almost all cents can be tracked by recording the transactions in a public distributed ledger, rather than recording the amount of the transaction, the information recorded in the block of the transaction is the actual serial number or tracking number for each cent that changes ownership. In order to keep the privacy of the transaction, only generic identification of private companies and individuals are recorded along with generic information about the concept of transaction, the region and the date/time. A secondary public distributed ledger whose blocks are identified by a hash reference that is recorded in the bank statement available to the payer and the payee allows for checking the accuracy of the first public distributed ledger by comparing the transactions made in one day, one region and one type of concept. However, the transactions made or received by the government are recorded with a much higher level of detail in the first ledger and a higher level of disclosure in the second ledger. The result is a tool that is able to accurately track public spending, to keep privacy of individuals and companies and to make statistical analysis and experiments or real tests in the economy of a country. This tool has the potential to assist public policymakers in demonstrating the societal benefits resulting from their policies, thereby enabling more informed decision-making for future policy endeavours. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.13189&r=ban |