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on Banking |
| By: | Sami Ben Naceur; Bertrand Candelon; Farah Mugrabi |
| Abstract: | This study contributes to the literature by analyzing the impact of financial inclusion (FI) on various bank risk dimensions, including systemic risk, which has been underexplored. We expand on recent research by examining not only the type of financial services, but also the source of FI, particularly the role of non-commercial banks (NCB). Our findings reveal that contrary to developed countries, credit expansions are linked to lower commercial banking risks, underscoring the benefits of loan diversification in developing and emerging economies, . However, while FI in deposits generally reduces individual banking risks, its effect on systemic risk is weaker in these countries, likely due to limited asset diversification. Moreover, NCBs tend to increase systemic and idiosyncratic risks for commercial banks through competitive pressures in the loan and deposit markets. Our results suggest that coordinating macroprudential policies with credit developments further reduces systemic risk by discouraging excessive risk-taking when banks’ capital is more at stake. Banks with stronger Basel capital ratios show reduced idiosyncratic risks, yet there is evidence that banks may relax these ratios to accommodate lending demands. These insights underscore the necessity for regulators to synchronize macroprudential policies with FI developments and consider NCBs’ role in financial stability. |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/203 |
| By: | Carl White |
| Abstract: | Though the Federal Reserve has begun its easing cycle, U.S. banks continue to face the impact of having to pay higher interest rates on their deposits, a key funding source. |
| Keywords: | interest rates; deposit costs; banking |
| Date: | 2024–09–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:98911 |
| By: | Ahnert, Toni (European Central Bank); Bertsch, Christoph (Research Department, Central Bank of Sweden); Leonello, Agnese (European Central Bank); Marquez, Robert (University of California, Davis) |
| Abstract: | Shocks to banks’ ability to raise liquidity at short notice can lead to depositor panics, as evidenced by recent bank failures. Why don’t banks take a more active role in managing these risks? In a standard bank-run model, we show that risk management failures are most prevalent when exposures are more severe and managing risk would be particularly valuable. Bank capital and deposit insurance coverage act as substitutes for risk management on the intensive margin but as complements on its extensive margin, encouraging the adoption of risk management operations. We provide insights for the appropriate regulation of bank risk-management operations. |
| Keywords: | Banking crises; depositor withdrawals; asset valuations; risk management |
| JEL: | G01 G21 G23 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0441 |
| By: | Carolina Celis (Inter-American Development Bank); Arturo Galindo (Inter-American Development Bank); Liliana Rojas-Suarez (Center for Global Development) |
| Abstract: | This paper presents findings from a comprehensive survey of 18 central banks and banking supervisor authorities in Latin America and the Caribbean, including major economies like Argentina, Brazil, Chile, Colombia, and Mexico. The survey aimed to assess the adoption of the Basel III standards across the region and revealed significant diversity in regulatory capital frameworks. Notably, while 75 percent of respondent countries have adopted Basel III for some financial intermediaries, 44 percent still maintain hybrid systems allowing for Basel I or II standards. These results highlight the region's varied approach to financial regulation, pointing to both progress in adopting international standards and the persistence of legacy regulatory regimes. The detailed findings and constructed indexes provide valuable insights into the state of financial regulation in the region, reflecting a landscape of both convergence and divergence in banking supervision practices. |
| Keywords: | Financial Regulation, Banking Supervision, Basel III Adoption |
| JEL: | E58 G21 G28 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:wpaper:705 |
| By: | Cœuré, Benoît; König, Elke; Krahnen, Jan Pieter; Huizinga, Harry; Schlegel, Jonas |
| Abstract: | In 2023, both the US and Europe witnessed banking crises, notably involving Silicon Valley Bank and Credit Suisse. Relevant authorities intervened to prevent contagion, and distressed banks were sold at seemingly deflated prices. We identify three primary factors contributing to elevated profits in distressed bank mergers, particularly in Europe: the absence of a robust backstop, ineffective use of the bail-in tool in loss allocation, and a lack of competition among bidders during the sale of distressed bank assets. These findings lead to concrete policy recommendations addressing backstop mechanisms, bail-in debt, and the strengthening of auction-like settings in asset sales. In the longer term, the European resolution framework and deposit guarantee system need to be transformed along the lines of the FDIC. |
| Keywords: | Bank Resolution, Bank Acquisition, SRM, FDIC |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:303520 |
| By: | Alberto Botta; Eugenio Caverzasi; Daniele Tori |
| Abstract: | In this paper, we analyze the role of financialization, namely securitization and the production of structured financial products, within the functioning of a monetary capitalist economy of production. We do this by embedding such ‘financial innovations’ in an extended financialized monetary circuit. We complement this theoretical analysis with data about the evolution of the commercial banks in the US economy since the end of World War II. We show how the ‘financial side of financialization’, by allowing commercial banks to extend more credit to the economy, and household sector in particular, may have significantly contributed to the monetization of surplus value in neoliberal capitalist regimes. In this sense, we stress how financialization appears to be fully consistent rather than dysfunctional to the needs of capitalist economies. We also note that this may come at the cost of heightened systemic fragility. While financialization may enable capitalist system to monetize profits more easily, it also modifies the structure of the pyramid of money hierarchy and favor the expansion of what has been defined as ‘fictitious liquidity’ relative to bank money. In our view, this last contradiction, can make capitalist economies more exposed to in-depth macro-financial instability as soon as financial turmoil emerges. |
| Keywords: | monetary circuit theory, financialization, profits, class conflict |
| JEL: | B50 E11 E12 E44 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2413 |
| By: | Kaufmann, Daniel; Stuart, Rebecca |
| Abstract: | Using newly collected discount rate data for six Swiss cities, we find no evidence of increasing integration during a 30-year period of lightly regulated free banking. We attribute this to two structural issues: banks had incentives to protect their local monopolies, and the inherent instability of free banking meant that there was always a risk (which varied across banks) of a bank run. We use a novel counterfactual to show that these risks increased discount rate dispersion, and argue that as a result, public regulation of payments infrastructure was necessary for money market integration. |
| Keywords: | Switzerland, discount rates, money market, financial integration, monetary union, 19th century |
| JEL: | E43 E44 F33 F45 N13 N23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qucehw:303522 |
| By: | Luis Fernando Colunga Ramos |
| Abstract: | In some advanced and emerging economies, contrary to expectations, it has been observed that increases in short-term interest rates are accompanied by increases in bank credit; a phenomenon referred to as "the loan puzzle." This study investigates, through the estimation of a structural vector autoregressive model using national and sectoral-level data, whether this phenomenon occurred in the Mexican economy between 2001 and 2019. The results suggest that, in response to a positive shock to short-term interest rates, the volume of bank credit to firms exhibits a positive and short-lived response but subsequently decreases. This response is primarily observed in sectors that had the lowest average delinquency rates during the analysis period. This suggests that banks would grant more loans to relatively safer companies, while, in response to such monetary tightening, they would reduce their investments in riskier and longer-term assets, such as consumer loans and loans to the real estate sector. |
| Keywords: | Monetary Policy;Bank Credit;Vector Autoregressive Model |
| JEL: | E51 E52 E58 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-15 |
| By: | Tatar, Balint; Wieland, Volker |
| Abstract: | This paper investigates the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank (ECB). It focuses on versions of the Taylor (1993) and Orphanides and Wieland (OW) (2013) rules. Rules that respond to recent outcomes of HICP Core or domestic inflation data called for raising interest rates in 2021 and well ahead of the rate increases implemented by the ECB. Thus, such simple outcome-based policy rules deserve more attention in the ECB's monetary policy strategy. Interestingly, the rules support the recent shift of the ECB to policy easing. Yet, they add a note of caution by suggesting that policy rates should not decline as fast as apparently anticipated by traded derivative-based interest rate forecasts. |
| Keywords: | Monetary policy, interest rates, European Central Bank, Taylor rule, OrphanidesWieland rule, New Keynesian macro-epidemic models |
| JEL: | E42 E43 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:303512 |
| By: | Toni Ahnert; Sebastian Doerr; Nicola Pierri; Yannick Timmer |
| Abstract: | We study the importance of information technology (IT) in banking for entrepreneurship. Guided by a parsimonious model, we establish that job creation by young firms is stronger in US counties more exposed to banks with greater IT adoption. We present evidence consistent with banks' IT adoption spurring entrepreneurship through a collateral channel: entrepreneurship increases by more in IT-exposed counties when house prices rise. Further analysis suggests that IT improves banks' ability to determine collateral values, in particular when collateral appraisal is more complex. IT also reduces the time and cost of disbursing collateralized loans. |
| Keywords: | Technology in banking; Entrepreneurship; Information technology; Collateral; Screening |
| JEL: | D82 G21 L26 |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-83 |
| By: | Catherine Casanova; Mr. Eugenio M Cerutti; Swapan-Kumar Pradhan |
| Abstract: | While Chinese banks have become the top cross-border lender to EMDEs, their expansion has slowed recently, both in terms of volume and market share. Also, the strong correlation of China’s bilateral trade and its banks’ cross-border lending has weakened, while during 2020-22 lending became more positively correlated with FDI. In our paper, we analyse these patterns and we explore the role of borrower risk variables and foreign policies. Our findings show that, although the shifting correlation from trade to FDI is a general EMDE phenomenon, China’s Belt and Road Initiative reinforces it. By contrast, borrowers that potentially benefit from geoeconomic fragmentation do not display stronger FDI-lending relationships. We also find that Chinese banks exhibit different levels of risk tolerance relative to other bank nationalities as borrower country risk variables are positively correlated with Chinese banks’ market shares, but not with their amounts of cross-border lending. |
| Keywords: | ross-border lending; Chinese banks; Trade; FDI; Borrower indebtedness; Pandemic; Sanctions; Geoeconomic fragmentation |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/205 |
| By: | Gara Afonso; Domenico Giannone; Gabriele La Spada; John C. Williams |
| Abstract: | As central banks shrink their balance sheets to restore price stability and phase out expansionary programs, gauging the ampleness of reserves has become a central topic to policymakers and academics alike. The reason is that the ampleness of reserves informs when to slow and then stop quantitative tightening (QT). The Federal Reserve, for example, implements monetary policy in a regime of ample reserves, whereby the quantity of reserves in the banking system needs to be large enough such that everyday changes in reserves do not cause large variations in short-term rates. The goal is therefore to implement QT while ensuring that reserves remain sufficiently ample. In this post, we review how to gauge the ampleness of reserves using the new Reserve Demand Elasticity (RDE) measure, which will be published monthly on the public website of the Federal Reserve Bank of New York as a standalone product. |
| Keywords: | ample reserves; monetary policy; implementation |
| JEL: | E41 E52 |
| Date: | 2024–10–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98984 |
| By: | Hans Degryse; Olivier De Jonghe; Leonardo Gambacorta; Cedric Huylebroek |
| Abstract: | Theory offers conflicting predictions on whether and how lenders' sectoral specialization would affect firms' innovation activities. We show that the sign and magnitude of this effect vary with the degree of "asset overhang" across sectors, which is the risk that a new technology has negative spillovers on the value of a bank's legacy loan portfolio. Using both patent data and micro-level innovation survey data, we find that lenders' sectoral specialization improves innovation for firms operating in sectors with low asset overhang, but impedes innovation for firms operating in sectors with high asset overhang. These results hold for two distinct measures of asset overhang and using bank mergers as a source of exogenous variation in bank specialization. We further show that these heterogeneous effects arise through financial contracting. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation. |
| Keywords: | bank specialization, bank lending, corporate innovation, asset overhang, financial frictions |
| JEL: | G20 O30 L20 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1218 |
| By: | Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra; Iuri Lazier; Rodrigo Cesar de Castro Miranda |
| Abstract: | This paper uses a network-based framework to examine the propagation of exchange rate shocks through the economy. We use a comprehensive set of supervisory, granular, and unique datasets from Brazil to construct an economy-wide network of exposures from 2015 to 2022, which includes a representative set of financial institutions, both banking and nonbanking, the corporate sector, and bilateral exposure linkages encompassing credit and funding risks. Our findings reveal significant disparities in how exchange rate shocks impact different sectors. Financial institutions generally benefit from positive exchange rate shocks due to their net foreign-denominated assets, whereas nonfinancial firms incur losses, particularly those with substantial foreign debt. However, contagion effects indicate that even sectors that are initially better off can experience substantial indirect losses, highlighting the complexity of risks in the financial network. Despite vulnerabilities in segments such as development banks and non-bank financial institutions, adequate regulatory capital maintains and supports overall financial stability. These insights underscore the importance of incorporating network structures in regulatory frameworks and stress-testing methodologies, offering crucial implications for policymakers seeking to improve financial stability and mitigate systemic risks. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:605 |
| By: | Simon Dohn; Kristoffer Arnsfelt Hansen; Asger Klinkby |
| Abstract: | We study computational problems in financial networks of banks connected by debt contracts and credit default swaps (CDSs). A main problem is to determine \emph{clearing} payments, for instance right after some banks have been exposed to a financial shock. Previous works have shown the $\varepsilon$-approximate version of the problem to be $\mathrm{PPAD}$-complete and the exact problem $\mathrm{FIXP}$-complete. We show that $\mathrm{PPAD}$-hardness hold when $\varepsilon \approx 0.101$, improving the previously best bound significantly. Due to the fact that the clearing problem typically does not have a unique solution, or that it may not have a solution at all in the presence of default costs, several natural decision problems are also of great interest. We show two such problems to be $\exists\mathbb{R}$-complete, complementing previous $\mathrm{NP}$-hardness results for the approximate setting. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.18717 |
| By: | Tess C. Scharlemann; Eileen van Straelen |
| Abstract: | We study how the mortgage interest deduction (MID) constrains mortgage refinancing. Households who deduct mortgage interest from their taxes face a lower post-tax interest rate, reducing the interest savings from refinancing net of taxes. We estimate the effect of the MID on refinancing using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA doubled the standard deduction, dramatically reducing MID uptake and value. This policy affected borrowers differently based on their pre-existing mortgage interest, federal and state tax rates, and property taxes. We use heterogeneity in borrowers' pre-TCJA exposure to the policy to show that, following the TCJA, the refinancing rate amongst households who lose the MID increased by 25%. In response to a 19 basis point increase in the after-tax mortgage rate, we estimate that refinancing increases 25%. These results suggest that reductions in the MID may improve the pass-through of monetary policy. |
| Keywords: | Consumption; Household Finance; Monetary policy; Mortgages |
| JEL: | E52 G21 E21 D14 |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-82 |
| By: | Rafael S. M. Ribeiro; Gilberto Tadeu Lima; Gustavo Pereira Serra; Marina Sanches |
| Abstract: | This article examines the impact of restrictive monetary policy, specifically an increase in the benchmark interest rate (Selic), on inflation rates across different consumption groups in Brazil, as measured by the Extended National Consumer Price Index (IPCA). The Central Bank of Brazil uses the Selic rate to align inflation with its target. The study uses the Local Projections model on data from January 2007 to December 2023 to analyze how inflation in various groups and subgroups responds to changes in the Selic rate. Findings indicate that an increase in the Selic rate reduces inflation in groups like “Food and beverages†, “Household items†, and “Clothing†, but has little effect on “Housing†and “Communication†. This research highlights the need for tailored economic policies for different consumption segments, illustrated by a case during the COVID-19 pandemic. |
| Keywords: | Monetary policy; Selic rate; disaggregated inflation; Local Projections model |
| JEL: | E52 E31 C32 E58 |
| Date: | 2024–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:spa:wpaper:2024wpecon24 |
| By: | Andrej Cupak (National Bank of Slovakia); Pavel Gertler (National Bank of Slovakia); Daniel Hajdiak (National Bank of Slovakia); Jan Klacso (National Bank of Slovakia); Stefan Rychtarik (National Bank of Slovakia) |
| Abstract: | This paper presents the findings from a novel survey examining awareness and interest in the future usage of the digital euro in Slovakia. Approximately 34% of the respondents have already heard or read about the digital euro. Around 26% express an intention to use this new digital currency. The likelihood of its usage depends on political preferences, trust in institutions such as the central bank, and preferences for cash payments, in addition to standard socio-economic factors. The survey also reveals that privacy and transaction security are among the top concerns for potential users. The majority of respondents plan to allocate nearly 20% of their net monthly income to digital euro holdings. These insights may provide valuable guidance for shaping the operational framework of the digital euro and informing future communication strategy. |
| JEL: | D14 E42 E51 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1111 |
| By: | Germain, Arnaud (Université catholique de Louvain, LIDAM/ISBA, Belgium); Vrins, Frédéric (Université catholique de Louvain, LIDAM/LFIN, Belgium) |
| Abstract: | Despite its role in the global financial crisis, collateralized loan obligation (CLO) remains a powerful tool to direct funds towards the real economy. In particular, it enables development banks to increase credit supply to SMEs. Public financial institutions thus face the challenge of identifying a subset of credits to be pooled in a CLO for the sake of reaching a specific financial target. This is a mixed-integer nonlinear program, known to be NP-hard. In this paper, we provide an efficient method to tackle this problem by relying on the large pool approximation combined with clustering and linearization of ancillary variables. As illustration, we consider two objective functions. We rely on the celebrated one-factor Gaussian copula in the main examples, but make clear that this assumption is not a restriction and can be relaxed. Our results contribute to reduce the funding cost of SMEs and are of direct interest for securitization stakeholders such as public financial institutions, commercial banks and pension funds. |
| Date: | 2024–10–09 |
| URL: | https://d.repec.org/n?u=RePEc:ajf:louvlf:2024006 |
| By: | Vicente da Gama Machado |
| Abstract: | Since the adoption of inflation targeting in Brazil, the literature on core inflation has significantly expanded; however, a comprehensive survey has been lacking. This paper aims at filling this gap by providing a thorough overview of the academic developments and a historical guide to the core inflation measures employed by the Central Bank of Brazil (BCB). Additionally, the paper introduces a unified approach to evaluate the performance of core measures, which is then used to assess the set of official measures currently monitored by the BCB. This approach emphasizes the complementary nature of individual measures and demonstrates the overall favorable relative performance of the core average. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:602 |
| By: | Rapetti, Martin; Libman, Emiliano; Carrera, Gonzalo |
| Abstract: | By the mid-2000s, Latin American countries had achieved macroeconomic stability: inflation was low, fiscal results were balanced, and external accounts were on a sustainable path, far from the frequent threat of currency crises. Although the trajectories that had brought them there had broadly been similar, from that point onwards they began to diverge. Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay managed to maintain macroeconomic stability by gradually adopting macroeconomic schemes of “good practices” based on four pillars: 1) monetary policy frameworks based on inflation targeting, managed by independent and largely technocratic Central Banks; 2) exchange rate policies of managed floating and foreign exchange reserves accumulation; 3) institutional fiscal policies that seek to maintain a countercyclical bias and the sustainability of public debt; and 4) full integration with the international capital markets. On the other hand, Argentina, Bolivia, Ecuador, and Venezuela followed a different path, with more erratic macroeconomic policy strategies that favored short-term goals and relegated macroeconomic stability to the background. The evidence presented in this article suggests that countries that did not adopt the “good practices” framework experienced higher macroeconomic instability, lower growth, and less poverty reduction. |
| Keywords: | Latin America, Inflation Targets, Fiscal Rules, Central Bank Independence |
| JEL: | F40 N16 O54 |
| Date: | 2024–10–04 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122289 |
| By: | Ferreira, Alex (University of São Paulo); Mullen, Rory (Warwick Business School); Ricco, Giovanni (École Polytechnique, University of Warwick, OFCE & CEPR); Viswanath-Natraj, Ganesh (Warwick Business School); Wang, Zijie (Warwick Business School) |
| Abstract: | We study the impact of foreign exchange interventions during periods of tight credit constraints. Expanding on the Gabaix and Maggiori (2015) model, we predict that long-lived spot interventions have larger effects on exchange rates than shortlived swaps, unanticipated interventions are more impactful, and tighter credit constraints amplify effects. Using high-frequency data on Brazilian Central Bank interventions from 1999 to 2023, we find that unanticipated spot sales of USD reserves lead to significant domestic currency appreciation and reduced covered interest parity deviations. Spot interventions outperform swaps, especially when global intermediaries are constrained, and enhance market efficiency by lowering USD borrowing costs. |
| Keywords: | Exchange Rate ; Central Bank ; Interventions ; Yield Curve ; Asset Pricing JEL Codes: E44 ; E58 ; F31 ; G14 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1522 |
| By: | Marian Vavra (National Bank of Slovakia) |
| Abstract: | Monitoring financial conditions can provide central banks with valuable information about risks to future GDP growth and other macroeconomic variables. In this paper, we follow the recent literature on growth-at-risk and use a linear quantile regression model to exploit the information content of the financial conditions index for tail-risk forecasting of output growth in Slovakia. |
| JEL: | C15 C22 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1110 |
| By: | Antonio Diez de los Rios |
| Abstract: | The Bank of Canada’s Government of Canada Bond Purchase Program, launched in response to the COVID-19 pandemic, lowered the weighted average maturity of the Government of Canada’s debt by approximately 1.4 years. This in turn reduced Canadian 10-year and 5-year zero-coupon yields by 84 and 52 basis points, respectively. |
| Keywords: | Asset pricing; Central bank research; Coronavirus disease (COVID-19); Interest rates; Monetary policy |
| JEL: | E4 E43 E5 E52 G1 G12 H6 H63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-22 |
| By: | Adam Copeland; Sarah Wang |
| Abstract: | A central use of reserves held at Federal Reserve Banks (FRBs) is for the settlement of interbank obligations. These obligations are substantial—the average daily total reserves used on two main settlement systems, Fedwire Funds and Fedwire Securities, exceeds $6.5 trillion. The total amount of reserves needed to efficiently settle these obligations is an active area of debate, especially as the Federal Reserve’s current quantitative tightening (QT) policy seeks to drain reserves from the financial system. To better understand the use of reserves, in this post we examine the intraday flows of reserves over Fedwire Funds and Fedwire Securities and show that the mechanics of each settlement system result in starkly different intraday demands on reserves and differing sensitivities of those intraday demands to the total amount of reserves in the financial system. |
| Keywords: | reserve balances; intraday; quantitative tightening (QT) |
| JEL: | G14 E42 |
| Date: | 2024–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98993 |
| By: | Atis Elsts; Kre\v{s}imir Klas |
| Abstract: | Concentrated liquidity (CL) provisioning is a way how to improve the capital efficiency of Automated Market Makers (AMM). Allowing liquidity providers to use leverage is a step towards even higher capital efficiency. A number of Decentralized Finance (DeFi) protocols implement this technique in conjunction with overcollateralized lending. However, the properties of leveraged CL positions have not been formalized and are poorly understood in practice. This article describes the principles of a leveraged CL provisioning protocol, formally models the notions of margin level, assets, and debt, and proves that within this model, leveraged LP positions possess several properties that make them safe to use. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.12803 |
| By: | Afees A. Salisu (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Ahamuefula E. Ogbonna (Centre for Econometrics & Applied Research, Ibadan, Nigeria.); Elie Bouri (School of Business, Lebanese American University, Lebanon.); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Using generalized autoregressive conditional heteroscedasticity-mixed data sampling (GARCH-MIDAS) model with monthly Economic Policy Uncertainty (EPU) index and daily stock volatility of 149 banks in the United States from August 2000 to August 2023, we show that EPU plays a significant role in predicting bank stock volatility. Across the groups of large, mid, and small cap banks, stock volatility tends to increase in response to EPU, suggesting that growing uncertainty induces higher volatility in bank stocks. EPU has a stronger impact on large-cap banks. The outperformance of the GARCH-MIDAS-EPU model holds in an out-of-sample analysis, regardless of market capitalization and forecast horizons. |
| Keywords: | Economic policy uncertainty (EPU), Bank-level stock returns volatility, GARCH-MIDAS model |
| JEL: | C32 C53 D80 G10 G21 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202444 |
| By: | Pablo Brañas-Garza (LoyolaBehLAB, Universidad Loyola Andalucía); Jaromír Kovárík (University of the Basque Country and University of West Bohemia); Ericka G. Rascon-Ramirez (Division of Economics, CIDE and Middlesex University London) |
| Abstract: | Although mobile banking is seen as a solution to limited access to banking and financial services in the developing world, its adoption rates-especially among women-fall well below expectations. Hence, how can we promote its adoption among the socially and economically disadvantaged? We compare the effectiveness of two strategies, seeded diffusion via incentivised local leaders and a traditional marketing campaign, to promote the adoption of mobile banking among poor women in rural Peru. For the first one, we exploit the existence of local leaders who were trained by a local firm to promote the diffusion of a mobile banking application. For the sec- ond, we take advantage of an on-going regional marketing campaign. Our findings show that the personalized seeded diffusion via local leaders is an effective promo- tion strategy. It significantly outperforms the traditional campaign, during which adoption rates are statistically indistinguishable from zero and similar to those in our control areas. We additionally show that the seeded incentivised diffusion relies on features of the underlying community networks known to promote trust. Our results emphasize the necessity of personalized approaches to promote technological products such a mobile banking among vulnerable populations. |
| Keywords: | VAmobile banking, field/natural experiments, network diffusion, marketing campaign, gender, innovation, word-of-mouth communication |
| JEL: | C93 D85 G21 O10 O33 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:emc:wpaper:dte641 |
| By: | Si-yao Wei; Wei-xing Zhou |
| Abstract: | Resilience serves to assess the ability of financial markets to resist external shocks. The intensity and duration, used to indicate resilience, are calculated for China's financial markets in this paper, focusing on the performance of each financial market during and after several crises. Given that climate issues have been recognized as an important source of risk by financial markets, we also investigate the spillover effects and mechanism of China's climate policy uncertainty on its financial markets resilience. We have found that the two resilience indicators of each market have a relatively consistent trend, but spillovers among markets have different sensitivities to the both. In addition, China's climate policy uncertainty shocks its financial markets resilience by increasing the investor sentiment index and the non-performing loan ratio of commercial banks and by reducing the capital and financial account balance. It is further found that China's financial markets' consensus on the unswerving implementation of climate policy, which provides the reference for other countries on how to balance climate policies introduction and financial markets development. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.18422 |
| By: | Hie Joo Ahn; Leland E. Farmer |
| Abstract: | We develop a model of the individual term structure of inflation expectations across forecasting horizons. Using the Survey of Professional Forecasters, we decompose disagreement about inflation expectations into individuals' long-term beliefs, private information, and public information. We find that in normal times, long-horizon disagreement is predominantly driven by individuals' long-term beliefs, while short-horizon disagreement stems from private information. During economic downturns, heterogeneous reactions to public information become a key driver of disagreement at all horizons. When forecasters disagree about public information, monetary policy exhibits a delayed response and a price puzzle emerges, underscoring the importance of anchoring inflation expectations. |
| Keywords: | Inflation Expectations; Term Structure; Disagreement; Monetary Policy |
| JEL: | E17 E31 E37 E52 E58 E65 |
| Date: | 2024–09–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-84 |
| By: | C, Prasanth; Chakraborty, Lekha; K Shihab, Nehla |
| Abstract: | Against the backdrop of the new Monetary Policy Committee (MPC) decisions to maintain the status quo policy rates, we analyse the post-pandemic monetary policy stance in India. Using high-frequency data, the term structure of interest rate is analyzed incorporating monetary aggregates, fiscal deficit, inflation expectations and capital flows. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, which reinforces that term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows, and inflation expectations, while it was inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyse the efficacy of high interest rate regime on public debt management. Our results also refute the popular belief that deficits determine interest rates in the context of emerging economies. |
| Keywords: | Interest Rate Determination, Post Pandemic Monetary Policy, Fiscal Deficit, Monetary Policy Commitee |
| JEL: | C32 E43 E63 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122345 |
| By: | Emter, Lorenz; Setzer, Ralph; Zorell, Nico; Moura, Afonso S. |
| Abstract: | This paper analyses how country-specific institutional quality shapes the impact of monetary policy on downside risks to GDP growth in the euro area. Using identified high-frequency shocks in a growth-at-risk framework, we show that monetary policy has a higher impact on downside risks in the short term than in the medium term. However, this result for the euro area average hides significant heterogeneity across countries. In economies with weak institutional quality, medium-term growth risks increase substantially following contractionary monetary policy shocks. In contrast, these risks remain relatively stable in countries with high institutional quality. This suggests that improvements in institutional quality could significantly enhance euro area countries’ economic resilience and support the smooth transmission of monetary policy. JEL Classification: C23, E52, F45, G28, O43 |
| Keywords: | Euro area, growth-at-risk, institutional quality, monetary policy transmission |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242989 |
| By: | Klodiana Istrefi (BANQUE DE FRANCE); Florens Odendahl (BANCO DE ESPAÑA); Giulia Sestieri (BANQUE DE FRANCE) |
| Abstract: | This paper presents the Euro Area Communication Event-Study Database (EA-CED), a new dataset that tracks financial market movements around ECB Governing Council meetings (GC) and inter-meeting communication (IMC). Covering the period from 1999 to 2024, the EA-CED contains intraday changes in euro area financial variables around the time of 304 ECB GC policy announcements and 4, 400 IMC events, consisting mainly of speeches and interviews. We document several new empirical findings on the impact of IMC on financial markets. First, we show that many IMC events are associated with significant market movements, often of similar or larger magnitude than those associated with ECB policy announcements, particularly for yields at longer maturities. Significant effects are not limited to communication from the ECB’s President but extend to other members of the Governing Council. Second, the importance of IMC varies over time, peaking around tightening cycles, particularly in 2022-2023. Third, like ECB GC announcements, IMC events convey multi-dimensional information and lead to surprises regarding the path of monetary policy and the state of the economy. |
| Keywords: | monetary policy, ECB, communication, financial markets, euro area |
| JEL: | E03 E50 E61 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2431 |
| By: | Prasanth C. (National Institute of Public Finance and Policy); Chakraborty, Lekha (National Institute of Public Finance and Policy); Shihab, Nehla K. (National Institute of Public Finance and Policy) |
| Abstract: | Against the backdrop of the new Monetary Policy Committee (MPC) decisions to maintain the status quo policy rates, we analyse the post-pandemic monetary policy stance in India. Using high-frequency data, the term structure of interest rate is analyzed incorporating monetary aggregates, fiscal deficit, inflation expectations and capital flows. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, which reinforces that term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows, and inflation expectations, while it was inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyse the efficacy of high interest rate regime on public debt management. Our results also refute the popular belief that deficits determine interest rates in the context of emerging economies. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:24/419 |
| By: | Thiago Revil T. Ferreira; Nils M. Gornemann; Julio L. Ortiz |
| Abstract: | Household savings rose above trend in many developed countries after the onset of COVID-19. Given its link to aggregate consumption, the presence of these "excess savings" has raised questions about their implications for the transmission of monetary policy. Using a panel of euro-area economies and high-frequency monetary policy shocks, we document that household excess savings dampen the effects of monetary policy on economic activity and inflation, especially during the pandemic period. To rationalize our empirical findings, we build a New Keynesian model in which households use savings to self-insure against counter-cyclical unemployment and consumption risk. |
| Keywords: | Monetary Policy; Excess Savings; Precautionary Savings; Consumption Risk; Unemployment |
| JEL: | E12 E21 E24 E31 E52 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1397 |
| By: | Bora Durdu; Sergio Villalvazo |
| Abstract: | This paper investigates the impact of loan-to-value (LtV) borrowing constraints in models with occasionally binding credit constraints. These constraints give rise to a Fisherian debt-deflation mechanism, where exogenous shocks can trigger cascading effects resulting in significant declines in consumption, asset prices, and borrowing reversals—characteristic of financial crises. However, recent literature challenges traditional view by suggesting that collateral constraints may not always exacerbate financial disturbances but could instead foster dynamics leading to multiple equilibria. Building on this discussion, the paper explores equilibrium asset pricing models with LtV collateral constraints, identifying critical thresholds that govern asset price dynamics, consumption patterns, and current account behaviors. Our analysis uncovers that when the LtV limit is close to zero, tighter constraints induce smaller drops in consumption during crises. Conversely, when the LtV limit is close to one, we observe that tighter constraints induce larger drops in consumption during crises. The nonlinear relationship between the LtV ratio and adverse effects on macroeconomic outcomes aligns with cross-country evidence regarding the relationship between the level of financial development and the severity of consumption declines during crises. |
| Keywords: | Financial crises; Loan-to-value constraints; Debt-deflation |
| JEL: | E31 E37 E52 F41 G01 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-81 |
| By: | Alan S. Blinder (Princeton University) |
| Abstract: | There is little doubt that the Federal Reserve was late to start raising interest rates as inflation rose in 2021-22. The Federal Open Market Committee (FOMC) made a substantial, though perhaps understandable, error in failing to raise interest rates until March 2022. Much of that policy error can be attributed to faulty forecasts of inflation, which the Federal Reserve shared with many other forecasters. It was not an outlier. But the error was not quite as consequential as the Fed's sharpest critics allege. Even if the FOMC had started to hike rates earlier, the econometric evidence suggests that the effects on peak inflation would likely have been small. Supply constraints, not excess demand, ruled the roost. They came, driving inflation higher; and then they went, pulling inflation down. Blinder says that the FOMC's August 2020 framework shoulders more of the blame for the inflationary surge than it should--probably because the new wording revised both of the Fed's goals, low inflation and high employment, in dovish directions. For that reason alone, the framework will almost certainly be changed in 2025, given the high inflation since. But how? Blinder suggests that the August 2020 change in the employment goal, from symmetry to "shortfalls, " is sensible and probably not too important anyway. But the change in the inflation goal, from a 2 percent point target to flexible average inflation targeting (FAIT), was probably consequential. It may have made the FOMC slow on the draw as inflation gathered steam, and it may have kept monetary policy too tight for too long in 2024. In both directions, Blinder argues, a 1.5 to 2.5 percent target range would be a better choice. To answer the question in the title of this Policy Brief, that may be the structural flaw the Fed should fix. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb24-11 |
| By: | Lidia Cruces (GOETHE UNIVERSITY FRANKFURT); Isabel Micó-Millán (BANCO DE ESPAÑA); Susana Párraga (EUROPEAN CENTRAL BANK) |
| Abstract: | This paper studies the relationship between married couples’ portfolio choices and property division rules. Using rich household survey data, we exploit the regional variation in marital laws across Spain to estimate the causal effects of property division rules on household financial investment. We find that separate-property couples hold riskier financial portfolios than community-property ones when wives take charge of the household finances. To understand this gap in risky asset holdings, we develop a financial portfolio choice model where couples are subject to divorce risk but differ in their property division regimes and the gender of the spouse making the financial decisions. A model in which the costs of dissolving a community property regime in the event of divorce are sufficiently high for women is likely to replicate the empirical estimates. High dissolution costs of marital assets upon divorce reduce spouses’ future disposable income in the event of divorce, encouraging precautionary savings in the form of safe assets during marriage as compared with their separate-property counterparts who bear no cost. Greater transfers of savings between couples in divorce attenuate this mechanism, while lower income levels reinforce it. |
| Keywords: | personal finance, portfolio choice, marriage, gender, family law |
| JEL: | D14 G11 J12 J16 K36 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2434 |
| By: | Aswathi Rebecca Asok (University of Portsmouth); Joe Cox (University of Portsmouth) |
| Abstract: | There has been limited systematic exploration of the intersection of poverty, gender, and psychological well-being; particularly in developing countries. Analysing data from a representative sample of both male and female primary financial decision-makers of 608 rural poor households in Kerala, this exploratory study examines the gender dimensions of the relationship between three latent concepts—debt-related stress, debt attitudes, and debt literacy—under multiple economic constraints. Findings indicate that the debt attitudes of our respondents can be characterised by three dimensions; general acceptability of debt, circumstantial acceptability of debt, and debt prudence. Consistent with prior findings, significant gender differences in debt stress and debt literacy were observed, with females typically reporting higher degrees of debt stress and lower levels of debt literacy compared with males. The study highlights the role of gender in predicting debt stress; with debt attitudes being key predictors for males, while individual-level factors such as financial decision-making power, income, and educational attainment explain more of the variation in debt stress among females. The analysis further provides preliminary evidence for the potential influence of male decision-makers’ debt stress and debt attitudes on the level of debt stress experienced by female decision-makers within the same household. From a policy perspective, the study advocates gender-specific and targeted financial education and financial literacy programmes, complemented by public policies aimed at improving material conditions of the population to mitigate the overall debt stress experienced by the rural poor in developing countries. |
| Keywords: | Debt stress, Debt attitudes, Debt literacy, Gender |
| JEL: | I30 J16 O53 R51 Z13 |
| Date: | 2024–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:pbs:ecofin:2024-05 |
| By: | Christian Walter (LAP - Laboratoire d’anthropologie politique – Approches interdisciplinaires et critiques des mondes contemporains, UMR 8177 - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | If the crisis of 2008 has revealed a failure of the organizational model of finance and of the operating scheme of the funding of the economy, another failure has also existed, albeit less apparent, that of a mental model translating representations of chance into mathematical hypotheses on financial risk. The two models are linked insofar as specific mental choices about the representation of chance have led to particular organizational choices, attitudes towards uncertainty and ways of acting whose damaging consequences are precisely those that the international community has tried to remedy. It is therefore to an understanding of the role played by representations of chance in the triggering of the 2008 crisis that this appendix to this chapter invites us. |
| Keywords: | Chance in literature, Brownian Motion, Finance Discourse, Financial Mathematics, Performativity, 2008 Financial Crisis |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04702850 |
| By: | Anthony Brassil (Reserve Bank of Australia); Yahdullah Haidari (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Gulnara Nolan (Reserve Bank of Australia); Callum Ryan (Reserve Bank of Australia) |
| Abstract: | This paper explores the formation of households' wage and inflation expectations using a common dataset and framework, documenting a number of stylised facts. We find that households tend to form wage and inflation expectations somewhat differently. Households associate higher wages growth with good economic outcomes, but higher inflation with worse economic outcomes. Wages expectations also tend to be somewhat more forward looking, while inflation expectations are more backward looking, especially for lower income households, and place a disproportionate weight on past fuel prices. These findings paint a picture of households having a somewhat 'supply-side' view of inflation, where shocks that push up inflation also weaken the economy, but a more 'demand-side' view of wages, where shocks that push up wages also strengthen the economy, which may make communication of monetary policy and the outlook more challenging. |
| Keywords: | inflation expectations; wage growth |
| JEL: | D84 E31 J31 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-07 |
| By: | Dave Na; Ellie Newman; Bernd Schlusche |
| Abstract: | The Federal Reserve (Fed) utilized its balance sheet as a monetary policy tool in response to the Global Financial Crisis (GFC) and the COVID-19 pandemic, acquiring large quantities of Treasury and agency securities. In 2022, the Fed began to reduce the size of its securities portfolio held in the System Open Market Account (SOMA) by allowing securities to roll off its balance sheet in amounts up to specific monthly redemption caps for Treasury securities and agency securities. |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-20-2 |
| By: | Vito Cormun (Santa Clara University, USA); Kim Ristolainen (Turku School of Economics, University of Turku, Finland) |
| Abstract: | Leveraging Wall Street Journal news, recent developments in textual analysis, and generative AI, we estimate a narrative decomposition of the dollar exchange rate. Our findings shed light on the connection between economic fundamentals and the exchange rate, as well as on its absence. From the late 1970s onwards, we identify six distinct narratives that explain changes in the exchange rate, each largely non-overlapping. U.S. fiscal and monetary policies play a significant role in the early part of the sample, while financial market news becomes more dominant in the second half. Notably, news on technological change predicts the exchange rate throughout the entire sample period. Finally, using text-augmented regressions, we find evidence that media coverage explains the unstable relationship between exchange rates and macroeconomic indicators. |
| Keywords: | Exchange rates, big data, textual analysis, macroeconomic news, Wall Street Journal, narrative retrieval, scapegoat |
| JEL: | C3 C5 F3 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:tkk:dpaper:dp167 |
| By: | Oliver Zain Hannaoui; Hyeyoon Jung |
| Abstract: | As interest in understanding the economic impacts of climate change grows, the climate economics and finance literature has developed a number of indices to quantify climate risks. Various approaches have been employed, utilizing firm-level emissions data, financial market data (from equity and derivatives markets), or textual data. Focusing on the latter approach, we conduct descriptive analyses of six text-based climate risk indices from published or well-cited papers. In this blog post, we highlight the differences and commonalities across these indices. |
| Keywords: | climate; climate risk; climate risk index; textual analysis |
| JEL: | C1 G1 G2 G3 |
| Date: | 2024–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98933 |
| By: | Ludmila Fadejeva (Latvijas Banka); Valentin Jouvanceau (Lietuvos Bankas); Alari Paulus (Eesti Pank) |
| Abstract: | The Baltic states experienced the most substantial consumer price inflation of any of the EU countries shortly after the COVID-19 pandemic. The year-on-year all-items inflation rate averaged 11% from January 2021 to September 2023, peaking at around 22% in late 2022. This study examines how consumer price rigidity in the region during this period of high inflation differed from the preceding period of low inflation in 2019-2020. We use the detailed price records that underlie the official consumer price indexes to assess the frequency and the size margins of price changes. The average frequency of price changes increased by about four percentage points when inflation was high, as an increase of five percentage points in the frequency of price increases combined with a fall of one percentage point in the frequency of price cuts. The average size of price changes increased by 2.8 percentage points, mainly because the share of price increases changed. We further show that structural shocks in energy prices and aggregate demand contributed significantly to fluctuations in the inflation rate through the frequency of price changes during the period of high inflation. All this points to pricing being state-dependent in the Baltic states. |
| Keywords: | consumer price rigidity, price-setting, high inflation, frequency of price changes |
| JEL: | D40 E31 |
| Date: | 2024–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202403 |
| By: | Ko Munakata (Bank of Japan); Takeshi Shinohara (Bank of Japan); Shigenori Shiratsuka (Keio University); Nao Sudo (Bank of Japan); Tsutomu Watanabe (University of Tokyo) |
| Abstract: | Seasonality is among the most salient features of price changes, but it is notably less analyzed than seasonality of quantities and the business cycle component of price changes. To fill this gap, we use the scanner data of 199 categories of goods in Japan to empirically study the seasonality of price changes from 1990 to 2021. We find that the following four features generally hold for most categories: (1) The frequency of price increases and decreases rises in March and September; (2) Seasonal components of the frequency of price changes are negatively correlated with those of the size of price changes; (3) Seasonal components of the inflation rate track seasonal components of net frequency of price changes; (4) The seasonal pattern of the frequency of price changes is responsive to changes in the category-level annual inflation rate for the year. We use simple state-dependent price models and show seasonal cycles in menu costs play an essential role in generating seasonality of price changes. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:upd:utmpwp:052 |