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on Banking |
| By: | Ben S. Bernanke (Brookings Institution); Olivier J Blanchard (Peterson Institute for International Economics) |
| Abstract: | In a collaborative project with ten central banks, Bernanke and Blanchard investigate the causes of the pandemic-era global inflation, building on their work for the United States. Globally, as in the United States, pandemic-era inflation was due primarily to supply disruptions and sharp increases in the prices of food and energy; however, the inflationary effects of these supply shocks have not been persistent, in part due to the credibility of central bank inflation targets. As the effects of supply shocks have subsided, tight labor markets, and the resulting rises in nominal wages, have become relatively more important sources of inflation in many countries. In a number of countries, including the United States, curbing wage inflation and returning price inflation to target may require a period of modestly higher unemployment. |
| Keywords: | Inflation, monetary policy, aggregate demand, Beveridge curve, commodity prices, energy prices, food prices, shortages, inflation expectations |
| JEL: | E30 E31 E52 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp24-11&r= |
| By: | Thorsten Hens (University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute); Trine Nordlie (Norwegian School of Economics (NHH)) |
| Abstract: | This study compares OpenAI’s ChatGPT-4 and Google’s Bard with bank experts in determining investors’ risk profiles. We find that for half of the client cases used, there are no statistically significant differences in the risk profiles. Moreover, the economic relevance of the differences is small. However, the LLMs are not good in explaining the risk profiles. |
| Keywords: | Large Language Models, ChatGPT, Bard, Risk Profiling |
| JEL: | D8 D14 D81 G51 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2430&r= |
| By: | Jung, Alexander |
| Abstract: | This study re-assesses the validity of the quantity theory of money (QTM) for the very long sample, 1870 to 2020, for 18 industrial countries using the dataset from Jordà et al. (2017). It considers structural changes in the economic and financial sectors and changes in monetary policy rameworks. Three findings are presented. First, the results from panel cointegration tests show that the long-run relationship between excess money growth and inflation holds if longer runs of data are used. Second, panel regressions confirm the presence of long and variable lags in the monetary policy transmission, as predicted by Milton Friedman. For the full sample, the average speed of adjustment from excess money growth to inflation in industrial countries was about two years amid heterogeneity across time and countries. Third, the results show that over recent decades, structural change - coinciding with the Great Moderation and, in part, reflecting changes in payment technologies - has led to a collapse of QTM. JEL Classification: B16, B23, E40, E50, N1 |
| Keywords: | excess money growth, great moderation, panel cointegration tests, payment technologies, structural change |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242940&r= |
| By: | Adam Looney; Constantine Yannelis |
| Abstract: | At a time when the returns to college and graduate school are at historic highs, why do so many students struggle with their student loans? The increase in aggregate student debt and the struggles of today’s student loan borrowers can be traced to changes in federal policies intended to broaden access to federal aid and educational opportunities, and which increased enrollment and borrowing in higher-risk circumstances. Starting in the late 1990s, policymakers weakened regulations that had constrained institutions from enrolling aid-dependent students. This led to rising enrollment of relatively disadvantaged students, but primarily at poor-performing, low-value institutions whose students systematically failed to complete a degree, struggled to repay their loans, defaulted at high rates, and foundered in the job market. As these new borrowers experienced similarly poor outcomes, their loans piled up, loan performance deteriorated, and with it the finances of the federal program. The crisis illustrates the important role that educational institutions play in access to postsecondary education and student outcomes, and difficulty of using broadly-available loans to subsidize investments in education when there is so much heterogeneity in outcomes across institutions and programs and in the ability to repay of students. |
| JEL: | G0 G5 G50 G59 H81 I20 I22 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32469&r= |
| By: | Manz, Florian; Müller, Birgit; Schiereck, Dirk |
| Abstract: | Recent empirical evidence raises doubt about the ability of financial market participants to generate information efficient valuations for capital market instruments whose cash flows are related to residual claims and dependent on real estate income. We contribute to this literature with the examination of value implications of non-performing loan (NPL) divestitures in the banking industry during the period 2012–2018. In a first step, we provide descriptive statistics of the European NPL market, which lacks transparency and publicly available basic information on portfolio size and components. We then analyze wealth effects of distressed loan sale announcements for a uniquely large transaction database with 317 NPL deals, which is largely driven by real estate collateral. Our results show positive stock market reactions for vendor banks following NPL divestitures that tend to be driven by real estate collateral and a size effect. |
| Date: | 2024–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:144672&r= |
| 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:safewp:295233&r= |
| By: | Michael Boutros; Andrej Mijakovic |
| Abstract: | In the United States, 30% of households are coholders who simultaneously borrow on credit cards and hold liquid assets. This generates a rich distribution of gross wealth positions that underpins the distribution of net wealth often used to calibrate macroeconomic models. We show that, beyond their role in constructing net wealth, gross positions in liquid assets and liquid debt are important in determining how households consume, save, and repay debt in response to positive income shocks. We build a quantitative model that generates the coholding observed in the data and matches observed marginal propensities to consume, save, and repay debt. The model highlights that fiscal transfers are more effective in stimulating demand if targeted at households with low gross positions instead of low net liquid wealth, while debt relief is less effective overall in the short run but achieves large consumption gains in the long run. |
| Keywords: | Central bank research; Fiscal policy; Monetary policy; Economic models |
| JEL: | E21 E44 E62 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-16&r= |
| By: | Tänzer, Alina |
| Abstract: | Central bank intervention in the form of quantitative easing (QE) during times of low interest rates is a controversial topic. This paper introduces a novel approach to study the effectiveness of such unconventional measures. Using U.S. data on six key financial and macroeconomic variables between 1990 and 2015, the economy is estimated by artificial neural networks. Historical counterfactual analyses show that real effects are less pronounced than yield effects. Disentangling the effects of the individual asset purchase programs, impulse response functions provide evidence for QE being less effective the more the crisis is overcome. The peak effects of all QE interventions during the Financial Crisis only amounts to 1.3 pp for GDP growth and 0.6 pp for inflation respectively. Hence, the time as well as the volume of the interventions should be deliberated. |
| Keywords: | Artificial Intelligence, Machine Learning, Neural Networks, Forecasting and Simulation: Models and Applications, Financial Markets and the Macroeconomy, Monetary Policy, Central Banks and Their Policies |
| JEL: | C45 E47 E44 E52 E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:295732&r= |
| By: | Meri Papavangjeli (Institute of Economic Studies, Charles University, Prague, Czech Republic & Bank of Albania, Tirana, Albania); Adam Gersl (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Given the prevailing global circumstances, characterized by tightening global financial conditions and substantial macro-financial vulnerabilities, the significance of monitoring financial conditions becomes even more pronounced and calls for heightened attention to the assessment and surveillance of financial indicators. This paper introduces a Financial Conditions Index (FCI) tailored for Albania, spanning from 2000 to 2022, using a factor augmented vector autoregressive models with time-varying coefficients (TVP-FAVAR) and incorporating a wide range of indicators, grounded in the empirical literature. By aligning with the main financial dynamics during this timeframe, the constructed index emerges as a robust gauge for monitoring and assessing the financial landscape of the country. Additionally, through a threshold Bayesian VAR model, the paper examines the transmission of monetary policy and financial conditions shocks to the real economy, by capturing non-linear dynamics through differentiating between periods characterized by different stands of financial fragilities. The findings suggest that the credit-to-GDP gap could potentially function as an early warning indicator of financial vulnerabilities, with a positive gap possibly reflecting excessive risk-taking by financial institutions. Furthermore, the transmission of monetary policy and financial conditions shocks to the real economy depends non-linearly on the private nonfinancial sector credit and is not symmetric throughout the considered period, with monetary policy transmission being attenuated during periods of heightened vulnerabilities. |
| Keywords: | financial conditions, monetary policy, credit gap stance, macro-financial vulnerabilities |
| JEL: | E52 E51 E61 E63 E65 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_20&r= |
| By: | Bingxin Ann Xing; Bruno Feunou; Morvan Nongni-Donfack; Rodrigo Sekkel |
| Abstract: | This paper investigates the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden and the United Kingdom. We follow two complementary approaches: First, we apply a regression-based framework that aggregates the impact of daily macroeconomic news on bond yields to a lower quarterly frequency. Next, we estimate a macro-finance affine term structure model linking the daily news to lower-frequency changes in bond yields and their expectations and term premia. Both approaches show that U.S. macroeconomic news is an important source of lower-frequency quarterly fluctuations in bond yields in these small open economies—even more important than the respective countries’ domestic macroeconomic news. Furthermore, the macro-finance model shows that U.S. macroeconomic news is particularly important to explain low-frequency changes in the expectation components of the nominal, real and break-even inflation rates. |
| Keywords: | Central bank research, Econometric and statistical methods |
| JEL: | E43 E44 E47 G14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-12&r= |
| By: | Joanna Stavins |
| Abstract: | Buy now, pay later (BNPL), a short-term, interest-free credit option for retail purchases, is becoming increasingly popular. At roughly 9 percent (as of fall 2023), the share of all consumers using BNPL is still relatively low, but it has grown by about 40 percent from two years earlier. This brief shows that BNPL use is significantly higher among financially vulnerable consumers and disproportionately high among women, Black, and Latino consumers. |
| Keywords: | consumer credit; payments; BNPL |
| JEL: | G21 G51 D14 E42 |
| Date: | 2024–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbcq:98288&r= |
| By: | Okan Akarsu; Altan Aldan; Huzeyfe Torun |
| Abstract: | Financial constraints may hamper firm exports since firms may have to bear export-related costs before they obtain export revenues. Hence, export credits are widely used around the world to mitigate the negative effects of financial constraints. This paper focuses on a specific type of subsidized export credit, namely the export rediscount credit scheme implemented by the Central Bank of the Republic of Türkiye (CBRT), and investigates whether credit-using firms' exports increase more than they do for firms that do not use this credit in the short run without implying a causal relationship. To achieve this, we combine four datasets: the firm-level monthly data on rediscount credit, firm-level monthly data on exports, firms’ annual balance sheet and income statements, and firm-level annual data on employment. We find that receiving rediscount credit is positively correlated with export growth in the short run. This correlation is robust to using alternative measures of credit use, such as a discrete measure of receiving the rediscount credit and the amount of credit. Second, we discover that the correlation between the use of rediscount credits and export growth is stronger among small and medium-sized enterprises (SMEs). Third, we investigate whether the association between rediscount credits and firm exports is non-linear and find that exports increase less proportionately for a higher level of rediscount credits. Finally, we find that both FX- and TL-denominated credits are positively correlated with exports. |
| Keywords: | Rediscount credit, Exports, Türkiye |
| JEL: | D22 F14 O16 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2407&r= |
| By: | Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta |
| Abstract: | We test for state-dependent bias in the European Central Bank's inflation projections. We show that the ECB tends to underpredict when the observed inflation rate at the time of forecasting is higher than an estimated threshold of 1.8%. The bias is most pronounced at intermediate forecasting horizons. This suggests that inflation is projected to revert towards the target too quickly. These results cannot be fully explained by the persistence embedded in the forecasting models nor by errors in the exogenous assumptions on interest rates, exchange rates or oil prices. The state-dependent bias may be consistent with the aim of managing inflation expectations, as published forecasts play a central role in the ECB's monetary policy communication strategy. |
| Keywords: | Inflation Forecasts, Forecast Evaluation, ECB, Central Bank Communication |
| JEL: | C12 C22 C53 E31 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:295738&r= |
| By: | Olena Kostyshyna; Tolga Özden; Yang Zhang |
| Abstract: | Elevated inflation can threaten the credibility of central banks and increase the risk that inflation expectations do not remain anchored. Wage-price spirals might develop in such an environment, and high inflation could become entrenched. We quantitively assess the risks of a wage-price spiral occurring in Canada over history by using a medium-scale dynamic stochastic general equilibrium model enhanced with heterogenous expectation and learning. This mechanism generates time-varying propagation of inflationary shocks that improves forecasting performance of inflation and wage growth. Central bank credibility is endogenous in our model and depends on several notions of the learning mechanism. Weaker credibility and a higher risk of inflation expectations not remaining anchored increase the risk of a wage-price spiral. |
| Keywords: | Business fluctuations and cycles; Credibility; Inflation and prices; Monetary policy |
| JEL: | E00 E7 E47 C22 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-14&r= |
| By: | Kaiser, Tim (University of Kaiserslautern); Lusardi, Annamaria (Stanford University) |
| 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. |
| Keywords: | financial education, financial literacy, financial behavior |
| JEL: | G53 D14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16926&r= |
| By: | Lorenz Emter; Peter McQuade; Swapan-Kumar Pradhan; Martin Schmitz |
| Abstract: | This paper provides insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The UK is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit. Offshore financial centres are pivotal for US dollars loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies. The empirical analysis suggests that euro-denominated loans face the "tyranny of distance", in line with predictions of gravity models of trade, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar. |
| Keywords: | dominant currency paradigm, currency denomination, cross-border banking, gravity |
| JEL: | F31 F33 F34 F36 G21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1184&r= |
| By: | Tendai Gwatidzo |
| Abstract: | Using data on South Africas commercial banks in the period 20052018, this paper investigates the impact of bank regulation on bank performance. The study uses a fixed effects model to run the regression model as well as the data envelopment analysis approach to estimate efficiency scores. We find a number of interesting results. First, we find a negative relationship between capital stringency and bank performance, suggesting that increased capital requirements force banks to increase their reserves, adversely affecting their performance. Second, we find a positive relationship between activity restrictions and bank performance, indicating that this kind of regulation, which may well be good for the public, as argued by the public interest view of regulation, is also good for the regulated banks. Third, we find a negative and significant relationship between supervisory power and bank performance. Fourth, we find a positive and significant relationship between the market discipline index and bank performance, suggesting that by creating environments characterised by high market discipline, the regulatory regime enhances the ability and incentives of private investors to efficiently monitor banks. This ensures better management of banks, ultimately increasing profitability. Overall, the study finds that regulation matters for bank performance. |
| Date: | 2024–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11064&r= |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | We examine public trust in the European Central Bank (ECB) and its determinants using data from the Bundesbank Household Panel survey for Germany. Employing an interdisciplinary approach that integrates insights from political science and psychology, we offer a fresh perspective on the factors influencing central bank trust that is more holistic than the conventional one. Our primary findings can be summarized as follows. Households who state that competence, which we define as the ECB’s performance in maintaining stable prices and making decisions grounded in rules, science, and data, matters for their trust in the ECB, tend to express higher trust in the ECB. Conversely, those who place greater importance on values, particularly the integrity of top central bankers, honest communication and broader concern, tend to trust the ECB less. Trust in the ECB also hinges on trust in political institutions more generally and, to a lesser extent, on generalized trust (i.e. trust in others). |
| Keywords: | central banks, trust, survey, trust, central bank communication, values, experiences, credibility |
| JEL: | E7 E58 E59 C93 D84 Z13 Z18 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-31&r= |
| By: | Andrew F. Haughwout; Donghoon Lee; Daniel Mangrum; Joelle Scally; Wilbert Van der Klaauw; Crystal Wang |
| Abstract: | This morning, the New York Fed’s Center for Microeconomic Data released the Quarterly Report on Household Debt and Credit for the first quarter of 2024. Household debt balances grew by $184 billion over the previous quarter, slightly less than the moderate growth seen in the fourth quarter of 2023. Housing debt balances grew by $206 billion. Auto loans saw a $9 billion increase, continuing their steady growth since the second quarter of 2020, while balances on other non-housing debts fell. Credit card balances fell by $14 billion, which is typical for the first quarter. However, an increasing number of borrowers are behind on credit card payments. In this post, we explore the relationship between credit card delinquency and changes in credit card “utilization rates.” |
| Keywords: | Consumer Credit Panel (CCP); household finance |
| JEL: | D12 |
| Date: | 2024–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:98231&r= |
| By: | Bertoletti, Lucía; Borraz, Fernando; Sanroman, Graciela |
| Abstract: | This paper examines the disparity in default risk between vulnerable and non-vulnerable populations in consumer lending. We merge an exhaustive registry of loans granted in the financial system with microdata on vulnerable individuals applying for social programs. We estimate the sources of this disparity and how loan and individual characteristics influence the probability of default. We find that vulnerable individuals have a higher risk than non-vulnerable individuals. However, this difference is reduced when individual debt characteristics, particularly the interest rate, are considered. Specifically, interest rates explain at least 30 percent of the risk gap. We also find that the default probabilities faced by lending firms are higher than those faced by banks, but we show that this effect is partly due to interest rate divergences. Our study underscores the importance of considering individual characteristics, loan characteristics, and interest rates when assessing default risk. While recognizing their limitations, these results suggest the need for policy interventions to promote financial inclusion, fair interest rate practices, and financial education, especially for vulnerable populations. |
| Keywords: | consumer lending, default, interest rate, poverty |
| JEL: | G21 G23 G51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1439&r= |
| By: | James Graham |
| Abstract: | I study a novel institutional feature of Australian housing markets: the widespread use of mortgage offset accounts. These accounts reduce mortgage interest costs and increase the liquidity of mortgage balances. I build a heterogeneous agent life-cycle model of the Australian housing market to study who benefits from these accounts and by how much. Households in middle age, with high incomes, and with more expensive houses are most likely to use offset accounts and derive larger benefits from their use. I show that a social planner could maintain mortgage profitability, improve household welfare, and more evenly distribute benefits by adjusting the price structure of offset accounts. |
| Keywords: | housing, mortgage, offset account, hetereogeneous agents, life-cycle model |
| JEL: | E21 E44 G21 G51 R21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-35&r= |
| By: | Samuel Fiifi Eshun (Institute of Economic Studies, Charles University, Prague, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Charles University, Prague, Czech Republic; CESifo, Munich, Germany; IOS, Regensburg, Germany; Department of Banking and Insurance, Faculty of Finance and Accounting; Institute of Information Theory and Automation of the CAS, Prague; the Euro Area Business Cycle Network) |
| Abstract: | This study explores the dynamic relationship between financial inclusion and green sustainability across 38 African countries. We constructed an environmental pollution index and a financial inclusion index covering the period 2000-2021 to account for the several dimensions within both indicators and employed them in the System GMM approach. We also tested for intra-regional heterogeneity in Africa. Our empirical results show that financial inclusion, while economically beneficial, poses a significant risk of environmental degradation and has a distinctive inverted U-shaped relationship. A direct link between increases in financial inclusion and pollution alters at a turning point, beyond which further increments in financial inclusion enhance green sustainability. The same pattern is observed for aggregate output. The results hold even when we control for a score of macro-level determinants. Our findings indicate the existence of an intra-regional heterogeneity in that Southern and Western African states exhibit a more significant negative impact on environmental pollution than Eastern Africa. These results remain robust for alternative proxies of green sustainability. We offer valuable insights for policymakers to promote sustainability through inclusive financial practices and policies in Sub-Saharan Africa. |
| Keywords: | Environmental Pollution Index, Financial Inclusion Index, Green Sustainability, Sub-Saharan Africa (SSA), System Generalized Methods of Moments (GMM) |
| JEL: | C23 E44 F64 K32 O55 Q43 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_23&r= |
| By: | Jonathan Reuter; Antoinette Schoar |
| Abstract: | In this review, we argue that access to financial advice and the quality of this advice is shaped by a broad array of demand-side and supply-side constraints. While the literature has predominantly focused on conflicts of interest between advisors and clients, we highlight that the transaction costs of providing advice, mistaken beliefs on the demand side or supply side, and other factors can have equally detrimental effects on the quality and access to advice. Moreover, these factors affect how researchers should assess the impact of financial advice across heterogeneous groups of households. While households with low levels of financial literacy are more likely to benefit from advice—potentially including conflicted advice—they are also the least likely to detect misconduct, and perhaps the least likely to understand the value of paying for advice. Regulators should consider not only how regulation changes the quality of advice, but also the fraction of households who are able to receive it and how different groups would have invested without any advice. Financial innovation has the potential to provide customized advice at low cost, but also to embed conflicts of interest in algorithms that are opaque to households and regulators. |
| JEL: | G11 G4 G5 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32452&r= |
| By: | Tanju Capacioglu; Hakan Kara |
| Abstract: | We analyze the impact of a unique macroprudential regulation, which has been implemented in Türkiye since May 2018. The regulation requires that, for firms holding total FX loans below USD 15 million, FX loans should be capped by their past three years’ FX revenues. The regulation aims to contain corporate FX mismatches through a natural hedging requirement by linking their FX borrowing to FX revenues. Using a rich data set at the firm-bank level and their matched universe, we find that, following the regulation, FX loans of the firms targeted by the regulation (exposed firms) declined more, and non-renewed FX loans were only partly replaced with local currency loans, suggesting imperfect substitution between local currency and FX borrowing. Exposed firms exhibit weaker investment but stronger export growth. The regulation has indirect effects on the composition of bank balance sheets in the form of increased currency swaps and/or reduced external FX borrowing. Overall, our findings suggest that macroprudential tools that directly target corporate balance sheet mismatches can be viable alternatives to lender-based restrictions in mitigating currency risk. |
| Keywords: | Macroprudential regulation, FX mismatch, Natural hedging, Currency risk, Corporate sector, Banking sector |
| JEL: | F31 F34 G30 G38 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2406&r= |
| By: | Emre Yoldas |
| Abstract: | Most central banks tightened monetary policy considerably over the past few years as inflation surged globally. Though effects of the COVID pandemic on global supply chains and labor markets was a common factor driving inflation higher across economies, domestic factors led to notable variation in the timing and extent of monetary policy responses. |
| Date: | 2024–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-10-2&r= |
| By: | Philemon Kwame Opoku |
| Abstract: | This paper uses a structural vector autoregressive model (SVAR) to study the effect of monetary policy and bank lending standards on business loans. The results are consistent with a dynamic model of bank behaviour that explicitly considers a bank’s soundness position. According to the results of the empirical estimation and prediction of the theoretical model, increases in loans, particularly non-performing loans or delinquency rates due to a monetary policy shock, deteriorate a bank’s health, causing it to apply more stringent lending standards. Thus, the results show that banks raise their lending standards in response to the tightness of money, defined as increases in the demand for the bank’s loans while its resources (reserves or deposits) remain constant. Furthermore, lending standards dominate loan rates in explaining loans and output dynamics. |
| Keywords: | Monetary Policy, Credit Standards, Bank Behaviour, SVAR model; Monetary Policy, Credit Standards, Bank Behaviour, SVAR model. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03232024&r= |
| By: | Maddalena Davoli; Uschi Backes-Gellner |
| Abstract: | We analyse financial literacy in Switzerland and its relationship with various economic outcomes using novel survey data collected in 2023. While the overall financial literacy levels are high in an international comparison, with over 50% of the respondents correctly answering the Big Three financial literacy questions about interest, inflation and risk diversification, there is significant heterogeneity within the population. Women, the young, the less educated and French and Italian-speaking respondents exhibit particularly low financial literacy. Women have lower financial literacy than men. The young have lower financial literacy than respondents in their working age, and Italian-speaking respondents exhibit particularly low financial literacy as compared to French- or German-speaking respondents. Financial literacy is also correlated with higher educational levels. We also find that financial literacy is positively linked to respondents' ability to cope with adverse economic outcomes: more financially literate individuals are better able to manage their expenses, save, and face economic shocks. |
| Keywords: | inancial literacy, personal finance, financial fragility, Switzerland |
| JEL: | G53 D1 I3 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:iso:educat:0220&r= |
| By: | Wauters, Joris (National Bank of Belgium); Zekaite, Zivile (Central Bank of Ireland); Garabedian, Garo (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:cbi:wpaper:3/rt/24&r= |
| By: | Ajit Desai; Anneke Kosse; Jacob Sharples |
| Abstract: | We propose a flexible machine learning (ML) framework for real-time transaction monitoring in high-value payment systems (HVPS), which are a central piece of a country’s financial infrastructure. This framework can be used by system operators and overseers to detect anomalous transactions, which—if caused by a cyber attack or an operational outage and left undetected—could have serious implications for the HVPS, its participants and the financial system more broadly. Given the substantial volume of payments settled each day and the scarcity of actual anomalous transactions in HVPS, detecting anomalies resembles an attempt to find a needle in a haystack. Therefore, our framework uses a layered approach. In the first layer, a supervised ML algorithm is used to identify and separate “typical” payments from “unusual” payments. In the second layer, only the unusual payments are run through an unsupervised ML algorithm for anomaly detection. We test this framework using artificially manipulated transactions and payments data from the Canadian HVPS. The ML algorithm employed in the first layer achieves a detection rate of 93%, marking a significant improvement over commonly used econometric models. Moreover, the ML algorithm used in the second layer marks the artificially manipulated transactions as nearly twice as suspicious as the original transactions, proving its effectiveness. |
| Keywords: | Digital currencies and fintech; Financial institutions; Financial services; Financial system regulation and policies; Payment clearing and settlement systems |
| JEL: | C45 C55 D83 E42 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-15&r= |
| By: | Rösl, Gerhard |
| Abstract: | We create an alternative version of the present utility value formula to explicitly show that every store-of-value in the economy bears utility-interest (non-pecuniary income) for its holder regardless of possible interest earnings from financial markets. In addition, we generalize the well-known welfare measures of consumer and producer surplus as present value concepts and apply them not only for the production and usage of consumer goods and durables but also for money and other financial assets. This helps us, inter alia, to formalize the circumstances under which even a producer of legal tender might become insolvent. We also develop a new measure of seigniorage and demonstrate why the well-established concept of monetary seigniorage is flawed. Our framework also allows us to formulate the conditions for liability-issued money such as inside money and financial instruments such as debt certificates to become - somewhat paradoxically - net wealth of the society. |
| Keywords: | Welfare, money, seigniorage, net wealth |
| JEL: | D14 D60 E41 E50 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:295241&r= |
| By: | Parinitha R. Sastry; Emil Verner; David Marques Ibanez |
| Abstract: | We use administrative credit registry data from Europe to study the impact of voluntary lender net zero commitments. We have two sets of findings. First, we find no evidence of lender divestment. Net zero banks neither reduce credit supply to the sectors they target for decarbonization nor do they increase financing for renewables projects. Second, we find no evidence of reduced financed emissions through engagement. Borrowers of net zero banks are not more likely to set decarbonization targets or reduce their verified emissions. Our estimates rule out even moderate-sized effects. These results highlight the limits of voluntary commitments for decarbonization. |
| JEL: | G2 G21 G3 Q5 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32402&r= |
| By: | Paolo Gelain; Marco Lorusso; Saeed Zaman |
| Abstract: | We document a sizable effect of oil price fluctuations on US banking variables by estimating an SVAR with sign restrictions as in Baumeister and Hamilton (2019). We find that oil market shocks that lead to a contraction in world economic activity unambiguously lower the amount of bank credit to the US economy, tend to decrease US banks' net worth, and tend to increase the US credit spread. The effects can be strong and long-lasting, or more modest and short-lived, depending on the source of the oil price fluctuations. The effects are stronger for smaller and lower leveraged banks. |
| Keywords: | oil market shocks; Bayesian SVAR models; sign restrictions; bank credit |
| JEL: | E32 E44 Q35 Q43 |
| Date: | 2024–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:98264&r= |
| By: | Gara Afonso; Gonzalo Cisternas; Will Riordan |
| Abstract: | A recent Liberty Street Economics post discussed who is borrowing and lending in the federal funds (fed funds) market. This post explores activity in two other markets for short-term bank liabilities that are often perceived as close substitutes for fed funds—the markets for Eurodollars and “selected deposits.” |
| Keywords: | Eurodollars; Selected Deposits; fed funds; federal funds |
| JEL: | E43 G21 |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:98223&r= |
| By: | Bartsch, Florian; Busies, Iulia; Emambakhsh, Tina; Grill, Michael; Simoens, Mathieu; Spaggiari, Martina; Tamburrini, Fabio |
| Abstract: | Amid the growing financial vulnerabilities posed by climate change, we investigate macroprudential capital buffers to mitigate systemic risks and increase the resilience of the banking sector. Leveraging granular data and state-of-the-art stress testing methods, we quantify potential bank losses attributed to climate-related transition risks. Focusing on short-term transition scenarios, we document a significant variance among banks in their risk exposure, with the most exposed institutions being those characterized by lower excess capital. Subsequently, we introduce a methodological framework for tailoring bank-specific buffer requirements to cover these losses, offering macroprudential authorities a practical method for calibrating climate-related macroprudential capital buffers, complementing microprudential policies. While we focus our application on transition risks, the framework can be extended to capture all climate risks in general. The study demonstrates the potential of macroprudential capital buffers to mitigate potential climate-related losses and contributes to the understanding of the appropriate prudential policy response to these challenges. JEL Classification: E61, G21, G28, Q54 |
| Keywords: | climate change, climate risk, macroprudential policy, transition risk |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242943&r= |
| By: | Ariadne Checo; Mr. Francesco Grigoli; Mr. Damiano Sandri |
| Abstract: | Doubts persist about the effectiveness of monetary transmission in emerging markets, but the empirical evidence is scarce due to challenges in identifying monetary policy shocks. In this paper, we construct new monetary policy shocks using novel analysts’ forecasts of policy rate decisions. Crucial for identification, analysts can update forecasts up to the policy meeting, allowing them to incorporate any relevant data release. Using these shocks, we show that monetary transmission in emerging markets operates similarly to advanced economies. Monetary tightening leads to a persistent increase in bond yields, a contraction in real activity, and a delayed reduction in inflation. Furthermore, monetary policy impacts leveraged firms more strongly. |
| Keywords: | Monetary policy shocks; financial markets; emerging markets. |
| Date: | 2024–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/093&r= |
| By: | Marco Di Maggio; Pulak Ghosh; Soumya Kanti Ghosh; Andrew Wu |
| Abstract: | Interest in central bank digital currencies (CBDCs) has been burgeoning with 134 countries now exploring its implementation. In December 2022, India started its CBDC pilot program to continue its transition towards a digitized payments economy. This paper presents the first empirical analysis utilizing detailed transaction data to explore the dynamics between CBDCs and existing digital payment methods, as well as the implications of increased CBDC usage on traditional bank deposits. Our findings reveal that policies which increase transaction costs for current digital payment methods catalyze a substitution effect, bolstering CBDC adoption. Furthermore, an uptick in CBDC usage is associated with a notable decline in bank, cash, and savings deposits, suggesting potential paths to bank disintermediation. This study contributes critical insights into the evolving competition between digital currencies and established financial infrastructures, highlighting the transformative potential of CBDCs on the broader economy. |
| JEL: | E42 G21 G38 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32457&r= |
| By: | Korhonen, Iikka; Newby, Elisa; Elonen-Kulmala, Jonna |
| Abstract: | This article looks into global central bank messaging on the Twitter social media platform. At the end of 2021, a total of 122 central banks and monetary authorities had registered accounts on Twitter At that time, approximately two-thirds of world's central banks and monetary author- ities were using Twitter. Drawing on a database of central bank tweets up to the end of 2021, we document Twitter interactions of central banks by such measures as influence, connections and hashtag use. In addition to similarities among central bank strategies, we also find striking differences in influence and willingness to connect with the public. Tweeting activity during the Covid-19 pandemic provides insight in central bank crisis responses. |
| Keywords: | central banks, communications, Twitter, Covid-19 |
| JEL: | E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:294868&r= |
| By: | António Afonso; Jorge Braga Ferreira |
| Abstract: | Using a panel data approach with bank-fixed effects, we study the impact of Targeted Longer-Term Refinancing Operations (TLTRO) on banks’ risk, given by their distance to default (DtD). The study aims to determine if the liquidity from TLTROs influences banks' risk-taking behaviour. For the period from 2012:Q1 to 2018:Q4, covering 90 listed banks from 16 Eurozone countries, our findings show that TLTRO is associated with an increase in banks' default risk. However, banks that participated in TLTRO experienced a positive effect on their default risk, indicating that they may have used liquidity to strengthen their financial position. Furthermore, we found no evidence that TLTRO liquidity encouraged banks to significantly increase lending or invest in riskier assets. Finally, our results also suggest that TLTRO’s impact is consistent across banks of different sizes and that the competition within the banking sector does not influence how banks utilize TLTRO liquidity. |
| Keywords: | ECB, TLTRO, Unconventional Monetary Policy, Bank Risk, Moral Hazard, Risk-Taking Channel |
| JEL: | C23 E52 E58 G21 G32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03202024&r= |
| By: | Aikman, David; Angotti, Romain; Budnik, Katarzyna |
| Abstract: | This paper proposes an operational approach to stress testing, allowing one to assess the banking sector’s vulnerability in multiple plausible macro-financial scenarios. The approach helps identify macro-financial risk factors of particular relevance for the banking system and individual banks and searches for scenarios that could push them towards their worst outcomes. We demonstrate this concept using a macroprudential stress testing model for the euro area. By doing so, we show how multiple-scenario stress testing can complement single-scenario stress tests, aid in scenario design, and evaluate risks in the banking system. We also show how stress tests and scenarios can be optimized to accommodate different mandates and instruments of supervisory and macroprudential agencies. JEL Classification: E37, E58, G21, G28 |
| Keywords: | banking sector risks, financial stability, macroprudential stress test, multiple scenarios, reverse stress testing, systemic risks |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242941&r= |
| By: | Mary Chen (Federal Reserve Bank of Boston); Seung Jung Lee (Federal Reserve Board of Governors); Daniel Neuhann (University of Texas at Austin); Farzad Saidi (University of Bonn & CEPR) |
| Abstract: | Bank deregulation in the form of the repeal of the Glass-Steagall Act facilitated the entry of non-bank lenders into the market for syndicated loans during the pre-2008 credit boom. Institutional investors disproportionately purchase tranches of loans originated by universal banks able to cross-sell loans and underwriting services to firms (as permitted by the repeal). A shock to cross-selling intensity increases loan liquidity at origination and over time. The mechanism is that non-loan exposures ensure monitoring even when banks retain small loan shares. Our findings complement the conventional view that regulatory arbitrage caused the rise of non-bank lenders. |
| Keywords: | Non-bank lending, bank deregulation, credit supply, loan liquidity, industrial organization of financial markets |
| JEL: | G20 G21 G23 G28 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:303&r= |
| By: | Andrew F. Haughwout; Donggyu Lee; Daniel Mangrum; Belicia Rodriguez; Joelle Scally; Wilbert Van der Klaauw |
| Abstract: | The end of the Great Recession marked the beginning of the longest economic expansion in U.S. history. The Great Recession, with its dramatic housing bust, led to a wave of home foreclosures as overleveraged borrowers found themselves unable to meet their payment obligations. In early 2009, the New York Fed’s Research Group launched the Consumer Credit Panel (CCP), a foundational data set of the Center for Microeconomic Data, to monitor the financial health of Americans as the economy recovered. The CCP, which is based on anonymized credit report data from Equifax, gives us an opportunity to track individuals during the period leading to the foreclosure, observe when a flag is added to their credit report and then—years later—removed. Here, we examine the longer-term impact of a foreclosure on borrowers’ credit scores and borrowing experiences: do they return to borrowing, or shy away from credit use and homeownership after their earlier bad experience? |
| Keywords: | Consumer Credit Panel (CCP); household finance; foreclosure; housing |
| JEL: | G5 |
| Date: | 2024–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:98210&r= |
| By: | Gen Norman Thomas; Siti Mutiara Ramadhanti Nur; Lely Indriaty |
| Abstract: | This study aims to analyze the impact of financial literacy, social capital and financial technology on financial inclusion. The research method used a quantitative research method, in which questionnaires were distributed to 100 active students in the economics faculty at 7 private colleges in Tangerang, Indonesia. Based on the results of data processing using SPSS version 23, it results that financial literacy, social capital and financial technology partially have a positive and significant influence on financial inclusion. The results of this study provide input that financial literacy needs to be increased because it is not yet equivalent to financial inclusion, and reducing the gap between financial literacy and financial inclusion is only 2.74%. Another benefit of this research is to give an understanding to students that students should be independent actors or users of financial technology products and that students should become pioneers in delivering financial knowledge, financial behavior and financial attitudes to the wider community. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.06570&r= |
| By: | Stephen G. Cecchetti; Jens Hilscher |
| Abstract: | In response to the Global Financial Crisis, central banks engaged in large-scale asset purchases funded by the issuance of reserves. These “unconventional” policies continued during the pandemic, so that by 2022 central banks’ balance sheets had grown up to ten-fold. As a result of rapidly increasing interest rates, these massive portfolios began producing substantial losses. We interpret these losses as fiscal policy consequences of quantitative easing and stress that they must be balanced against the prior benefits of implementing purchase policies. Importantly, losses differ qualitatively depending on whether the central bank chooses to buy domestic or foreign assets, thus resulting in transfers either within or between countries. Effects of losses may differ due to accounting rules (when losses are realized) and when the fiscal authority compensates for losses (the structure of indemnification agreements). Data from the Federal Reserve, the Eurosystem, and the Bank of England show that maximum annual losses are between 0.3 and 1.5 percent of GDP. By contrast, the Swiss National Bank is sustaining losses up to 17 percent of GDP. |
| JEL: | E42 E52 E58 E63 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32478&r= |
| By: | Li, Boyao |
| Abstract: | Monetary policy operations affect bank balance sheets (BBSs). This study develops a balance sheet model to examine the impacts of monetary policy operations on banks’ ability to supply funds. That ability is assessed using the balance sheet capacities provided by regulatory risk management instruments. The balance sheet approach views a monetary policy operation as a transaction between the central bank and a commercial bank, modeling the transaction as multiple changes to the BBS. This study identifies and distinguishes the effects of multiple changes in the BBS on balance sheet capacity. A balance sheet change resulting from a monetary policy operation may positively or negatively affect balance sheet capacity. Thus, a monetary policy may have a positive and a negative effect simultaneously. Positive (negative) effects result from balance sheet changes that reduce (increase) bank risks, as measured by regulations. As regulatory stringency decreases, the positive effects increase, whereas the negative effects remain unchanged. A BBS capacity channel of monetary policy is also shown. |
| Keywords: | Balance sheet; Banking; Monetary policy; Monetary transmission; Regulation |
| JEL: | E51 E52 E58 G21 G28 |
| Date: | 2024–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120882&r= |
| By: | Sonia Jaffe; Anup Malani; Julian Reif |
| Abstract: | We analyze the value of insurance when individuals have access to credit markets. Loans allow consumers to smooth financial shocks over time, decreasing the value of consumption smoothing from insurance. We derive formulas for the value of insurance that can be taken to data, and show how that value depends on individual characteristics and features of loans. We estimate that access to a five-year loan decreases the values of community- and experience-rated insurance for the average beneficiary by $232-$366 (58--61%). Even for the sickest decile, this loan access reduces the value of community-rated insurance by $1, 099 (17%). |
| JEL: | D15 G22 G51 I13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32395&r= |
| By: | Sofia Priazhkina; Samuel Palmer; Pablo Martín-Ramiro; Román Orús; Samuel Mugel; Vladimir Skavysh |
| Abstract: | We build a network formation game of firms with trade flows to study the adoption and usage of a new digital currency as an alternative to correspondent banking. We document endogenous heterogeneity and inefficiency in adoption outcomes and explain why higher usage may correspond to lower adoption. Next, we frame the model as a quadratic unconstrained binary optimization (QUBO) problem and apply it to data. Method-wise, QUBO presents an extension to the potential function approach and makes broadly defined network games applicable and empirically feasible, as we demonstrate with a quantum computer. |
| Keywords: | Central bank research; Digital currencies and fintech; Digitalization; Economic models; Financial institutions; Payment clearing and settlement systems; Sectoral balance sheet |
| JEL: | E21 E44 E62 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-17&r= |
| By: | Marco Lorusso (University of Perugia, Newcastle University Business School); Francesco Ravazzolo (BI Norwegian Business School, Free University of Bozen-Bolzano, Italy); Claudia Udroiu (Free University of Bozen-Bolzano, Italy) |
| Abstract: | In this paper, we investigate the use of money supply issued by the central bank to support expansionary fiscal interventions. We develop and estimate a New Keynesian model using US data for the sample 1960Q1 - 2019Q4. We conduct a quantitative counterfactual analysis to assess the effects of a fiscal stimulus that does not result in an increase in public debt, as it is financed by money supply. Our impulse response analysis indicates that both increases in government spending and transfers that are monetary financed have positive effects on private consumption, investment and output. However, the expansionary impact of monetary-financed fiscal shocks comes at a cost: an increase in inflation. Our sub-sample analysis indicates that monetary-financed fiscal stimuli would have had a greater positive impact on the economy during the Great Moderation. Lastly, we find that as the debt burden increases, the positive effects of a monetary-financed fiscal stimulus diminish |
| Keywords: | Fiscal Policy, Monetary Policy, Bayesian Estimation. |
| JEL: | C11 E32 E52 E62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps105&r= |
| By: | Daniel Greenwald; John Krainer; Pascal Paul |
| Abstract: | We study the transmission of monetary policy through bank securities portfolios using granular supervisory data on U.S. bank securities, hedging positions, and corporate credit. Banks that experienced larger losses on their securities during the 2022-2023 monetary tightening cycle extended less credit to firms. This spillover effect was stronger for available-for-sale securities, unhedged securities, and banks that must include unrealized gains and losses in their regulatory capital. A structural model, disciplined by our cross-sectional regression estimates, shows that interest rate transmission is stronger the more banks are required to adjust their regulatory capital for unrealized value changes of securities. |
| JEL: | E32 E43 E44 E51 E52 E60 G21 G32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32449&r= |
| By: | Zattler, Jürgen |
| Abstract: | Many developing countries are still grappling with the consequences of the pandemic and the associated high debt burdens while facing huge financing needs, inter alia related to climate change. In response, the International Monetary Fund (IMF) issued $650 billion in Special Drawing Rights (SDRs). The G7 and G20 have committed to re-channelling SDR 100 billion of their allocation to developing countries (on-lending, recycling and re-channelling are used interchangeably in this policy brief). The question now is how to implement these commitments in a way that promotes the global transformation and at the same time supports debt sustainability. It is important to note that there are certain restrictions on the re-channelling of SDRs. Most importantly, the re-channelling must be consistent with the SDR's status as an international reserve asset. There are different interpretations of these requirements. The IMF has encouraged the use of the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST) for re-channelling. It has also signalled general support for re-channelling SDRs to the multilateral development banks (MDBs). The European Central Bank (ECB) has taken a more restrictive stance. Does the re-channelling of SDRs through the above-mentioned IMF trusts ('the current on-lending option') effectively support the global transformation? Measured against this objective, the current on-lending regime has two shortcomings. First, it does not sufficiently link foreign exchange support to deep structural transformation. Second, it does not allow funds to be leveraged in the private capital market. In this policy brief, we discuss a promising alternative: recycling SDRs for MDB hybrid capital ('the hybrid capital option'). This option can overcome the two drawbacks of the current system. At the same time, it has its own challenges. Moreover, both the current on-lending option and the hybrid capital option raise concerns about debt sustainability. If implemented in their current forms, they would risk exacerbating vulnerable countries' debt problems. It would therefore be desirable to modify these options to better integrate debt implications. This could be done by using the on-lent SDRs primarily for programmes that are not 'expenditure-based', but rather help to improve the composition of expenditure and revenue in a socially equitable manner, for example the introduction of regulatory standards, feebates and carbon pricing, or the phasing out of fossil fuel subsidies. Such an approach could have the added benefit of making previously sceptical member states more receptive to the hybrid capital proposal. The mid-term review of the RST, scheduled for May 2024, as well as the full review in 2025 provide good opportunities to further explore some of the issues raised in this policy brief. In addition, the brief identifies three ways in which interested shareholders of the IMF and MDBs could advance the debate on the hybrid capital option. |
| Keywords: | development finance, IMF, international financial system, special drawing rights |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:idospb:294856&r= |
| By: | Kwabena Aboah Addo (Utrecht University); Shams Pathan (University of Newcastle - Newcastle 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 whether overconfident bank CEOs mitigate or amplify risk amid increasing Economic Policy Uncertainty (EPU). Our findings indicate the latter—a risk-aggressive behavioural response to the rise in credit demand during EPU. Cross-sectional analyses reveal that overconfident CEOs contribute to high loan impairments during high EPU through excessive credit extension and under-provision of loan reserves. Therefore, we identify overconfident CEOs as a transmission channel that propagates a cycle of risky credit extension, which enhances bank performance. Considering our findings, investors, boards, and regulators, while acknowledging the value of overconfident CEOs during EPU, should be mindful of the systemic implications of their policies. |
| Keywords: | Economic Policy Uncertainty, CEO overconfidence, banking risk, bank lending, banking performance. |
| JEL: | G21 G28 G30 G38 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2431&r= |