|
on Banking |
| By: | Gary Richardson; David W. Wilcox |
| Abstract: | Congressional intent concerning the independence of the Federal Reserve matters because it protects the public from the politicization of monetary policy. Attempts to subordinate monetary policy to the President could easily end up in front of the Supreme Court. The outcome of such a case would depend importantly on the historical record. Understanding what Congress intended when it designed the decision-making structure of the Fed requires a clear understanding Marriner Eccles’ proposal for the structure of monetary policymaking in Title II of the Banking Act of 1935 and the Congressional response. Eccles' proposal vested monetary policymaking in a body beholden to the President. Eccles argued that leaders of the Fed should serve at the discretion of the President and implement the President's monetary program. The Senate and House rejected Eccles' proposal and explicitly designed the Fed's leadership structure to limit politicians'—particularly the President's—influence on monetary policymaking. |
| JEL: | B22 B26 E5 G2 N12 N22 N42 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33174 |
| By: | Kenneth S. Rogoff; Zhiheng He; Yang You |
| Abstract: | Digitalization led to a rapid expansion of loyalty tokens typically bundled as part of product price. An open question is whether issuers are incentivized to make loyalty tokens tradable, raising regulation issues for monetary and banking authorities. This paper argues that an issuer earns more revenue by making tokens non-tradable even though consumers would pay a higher price for tradable tokens. We further show that an issuer with stronger market power makes its revenue more token-dependent. We test the model’s predictions with data on airline mileage and hotel reward programs and document consistent empirical results that align with our theory. |
| JEL: | G12 G32 G51 M20 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33201 |
| By: | Ricardo J. Caballero; Tomás E. Caravello; Alp Simsek |
| Abstract: | We present evidence that noisy financial flows influence financial conditions and macroeconomic activity. How should monetary policy respond to this noise? We develop a model where it is optimal for the central bank to target and (partially) stabilize financial conditions beyond their direct effect on output and inflation gaps, even though stable financial conditions are not a social objective per se. In our model, noise affects both financial conditions and macroeconomic activity, and arbitrageurs are reluctant to trade against noise due to aggregate return volatility. Our main result shows that Financial Conditions Index (FCI) targeting—announcing a (soft and temporary) FCI target and setting the policy rate in the near future to maintain the actual FCI close to the target—reduces the FCI volatility and stabilizes the output gap. This improvement occurs because a more predictable FCI enables arbitrageurs to trade more aggressively against noise shocks, thereby "recruiting" them to insulate FCI from financial noise. FCI targeting is similar to providing forward guidance about the FCI, and in our framework it is strictly superior to providing forward guidance about the policy interest rate. Finally, we extend recent policy counterfactual methods to incorporate our model's endogenous risk reduction mechanism and apply it to U.S. data. We estimate that FCI targeting could have reduced the variance of the output gap, inflation, and interest rates by 36%, 2%, and 6%, respectively, and decreased the conditional variance of the FCI by 55%. When compared with interest rate forward guidance, it would have reduced output gap variance by 21%. We also show that a significant share of the gains from FCI targeting can be attained by an augmented version of a Taylor rule that gives a large weight to a simplified financial conditions target. |
| JEL: | E12 E32 E44 E52 G10 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33206 |
| By: | Laurence M. Ball; Junnan Zhang |
| Abstract: | This paper derives the optimal monetary-policy rule in a simple model with anchored inflation expectations and an effective lower bound (ELB) on interest rates, assuming a long-run inflation goal of 2%. With fully anchored expectations, the optimal policy is a version of average inflation targeting: to offset periods when the ELB forces inflation below 2%, policymakers target a fixed inflation rate above 2% whenever they are unconstrained. With expectations that are partially but not fully anchored, the inflation target away from the ELB varies with the state of the economy. For some parameter values, the target is highest after a period when inflation has been low. |
| JEL: | C61 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33160 |
| By: | Shan Ge; Stephanie Johnson; Nitzan Tzur-Ilan |
| Abstract: | As climate change exacerbates natural disasters, homeowners’ insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers’ mortgage and credit outcomes using new data on home insurance policies for 6.7 million borrowers. We find that higher premiums increase the probability of mortgage delinquency, as well as prepayment (driven mainly by relocation). The results hold using a novel instrumental variable. The delinquency effect is greater for borrowers with higher debt-to-income ratios. Both delinquency and prepayment effects are present in both GSE and non-GSE mortgages. We also find that higher premiums significantly raise the probability of credit card delinquency and worsen borrowers’ creditworthiness. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system. |
| Keywords: | climate change; insurance; mortgage; delinquency; prepayment; credit cards |
| JEL: | G21 G22 G5 G52 G53 R21 Q54 D14 R3 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99475 |
| By: | Lin William Cong; Ke Tang; Danxia Xie; Weiyi Zhao |
| Abstract: | We conceptually identify and empirically verify using marketplace lending data the features distinguishing FinTech platforms from non-financial platforms: (i) Long-term contracts introducing default risk at both the individual and platform levels; (ii) Lenders’ investment diversification to mitigate individual default risk; (iii) Platform-level default risk leading to greater asymmetric user stickiness and rendering platform-level cross-side network effects (p-CNEs), a novel metric we introduce, crucial for adoption and market dynamics. We incorporate these features into a model of two-sided FinTech platform with potential failures and endogenous participation/fees. The model predicts lenders’ single-homing, occasional lower fees for borrowers, asymmetric p-CNEs, and the predictive power of lenders’ p-CNEs in forecasting platform failures. Marketplace lending in China empirically corroborate our model predictions in this dynamic industry characterized by entries, exits, and network externalities. Specifically, lenders’ p-CNEs are empirically lower on declining or more established platforms compared to growing or new ones. Moreover, lenders’ p-CNEs predict platforms’ survival likelihood among others, even at very early stages. Our findings provide novel economic insights on multi-sided FinTech platforms for both practitioners and regulators. |
| JEL: | G19 G23 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33173 |
| By: | Peter Lindner; Mr. Ananthakrishnan Prasad; Jean-Marie Masse |
| Abstract: | This paper reviews the main types of credit enhancement approaches used to support climate debt issuances by EMDE borrowers. Fragmentation on the part of the providers of credit enhancements was identified as a major factor impeding scalability of credit-enhanced debt. The acceptance of credit-enhanced debt is also hampered by the structural characteristics of the capital markets, especially the fragmentation of the investor base. To place significant amounts of credit-enhanced climate debt with private sector investors, MDBs, DFIs, and other stakeholders should focus on simple and replicable debt structures. Securitizations and investment funds could help fund private sector climate investments in EMDEs. |
| Keywords: | Credit enhancements; blended finance; debt-for-climate swaps; climate mitigation; climate adaptation; climate finance; guarantees; securitization. |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/002 |
| By: | Wenlong Bian; Lin William Cong; Yang Ji |
| Abstract: | The rise of super-app digital wallets provides not only a conduit to banks but also internal payment options, including Buy-Now-Pay-Later (BNPL). We examine, for the first time, transactions matched with merchant and consumer information, from a leading e-wallet super-app, and complement the analyses with a randomized experiment. We document that BNPL serves as a dominant form of “digital cash” and expands payment and credit access to underserved consumers without increasing indebtedness or delinquencies despite their spending more. The findings crucially depend on the cross-sale capacity and inherent disciplinary incentives of super-app ecosystems. Our findings underscore the synergy between credit and payments and provide novel insights for economies transitioning to cashless via super-app-driven platforms, where FinTech credit sees the greatest potential. |
| JEL: | E42 G20 G23 G51 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33178 |
| By: | Tran Huynh (Durham University) |
| Abstract: | This paper examines the extent to which local newspaper closures affect discrimination against minority borrowers in mortgage lending. I Ä„nd that following a newspaper closure, interest rate differentials between minority (black or Hispanic) and comparable non-minority borrowers increase by 5.5 basis points, widening the existing gap in mortgage outcomes between the two groups. This effect cannot be explained by differences in credit risk or underlying economic conditions. My Ä„ndings suggest that the local press plays an important role in monitoring lending practices and reducing information asymmetries in the mortgage market. |
| Keywords: | lending, discrimination, minority, GSE mortgages, local newspapers |
| JEL: | G21 J15 R31 |
| Date: | 2025–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:jrp:jrpwrp:2025-0002 |
| By: | Wenying Sun; Zhen Xu; Wenqing Zhang; Kunyuan Ma; You Wu; Mengfang Sun |
| Abstract: | This paper aims to study the prediction of the bank stability index based on the Time Series Transformer model. The bank stability index is an important indicator to measure the health status and risk resistance of financial institutions. Traditional prediction methods are difficult to adapt to complex market changes because they rely on single-dimensional macroeconomic data. This paper proposes a prediction framework based on the Time Series Transformer, which uses the self-attention mechanism of the model to capture the complex temporal dependencies and nonlinear relationships in financial data. Through experiments, we compare the model with LSTM, GRU, CNN, TCN and RNN-Transformer models. The experimental results show that the Time Series Transformer model outperforms other models in both mean square error (MSE) and mean absolute error (MAE) evaluation indicators, showing strong prediction ability. This shows that the Time Series Transformer model can better handle multidimensional time series data in bank stability prediction, providing new technical approaches and solutions for financial risk management. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.03606 |
| By: | Kochen, Federico |
| Abstract: | To what extent can private firms’ external equity substitute for debt financing in a banking crisis? To answer this question, I use firm-level data and firm-bank linkages to estimate the causal effect of an imported lending cut from a large German bank on firms’ capital structure and real outcomes. The estimates imply that for every 1 euro reduction in debt, private firms in Germany received 0.27 euros of external equity. Firm-owner linkages indicate that outsiders provided equity funds in 40% of the firms that received an equity injection, while existing owners provided the funds in the rest. These findings highlight the importance of multiple sources of financing that can serve as backup facilities when the primary source of intermediation fails. The results also have implications for Macro-Finance heterogeneous firm models that typically overlook the role of equity financing. JEL Classification: G01, G21, G32, E32, E44 |
| Keywords: | banking crisis, capital and ownership structure, equity financing |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253008 |
| By: | Dück, Alexander; Verona, Fabio |
| Abstract: | We offer a contribution to the analysis of optimal monetary policy. The standard approach to determine what policy rule a central bank should follow is to take a single structural model and minimize the unconditional volatilities of inflation and real activity. In this paper, we propose monetary policy rules that perform robustly across a broad range of structural models, focusing on minimizing volatility at the frequencies most relevant for policymakers' stabilization goals. Our findings indicate that robust rules, which account for model uncertainty, advocate significantly less aggressive policy responses. Moreover, incorporating frequency-specific stabilization preferences further moderates the optimal policy actions. Ignoring model uncertainty imposes significant costs, while the cost of insuring against this uncertainty is relatively low. This cost-benefit analysis strongly supports adopting a robust-model approach to monetary policy. |
| Keywords: | monetary policy rules, policy evaluation, model comparison, model uncertainty, frequency domain, design limits, DSGE models |
| JEL: | C49 E32 E37 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:308813 |
| By: | Elias Demetriades (Audencia Business School); Panagiotis Politsidis (Audencia Business School) |
| Abstract: | How do banks react to firms' climate risks? Using almost 80, 000 global syndicated loans originated from 2001 to 2021, we study bank lending to fossil fuel firms vis-à-vis other firms. We find that loans to fossil fuel firms are at least 7% more costly compared to other firms, and even more so toward the end of our sample. However, loan amounts to fossil fuel firms are approximately 22% larger, implying heavy financing of brown activities. We show that the pricing effects are even stronger for banks with higher reliance on ESG considerations, consistent with the shifts driven by the supply side (bank behaviour). Overall, our findings corroborate the view that banks price in climate risks but continue to heavily lend to polluting firms in the medium term (with an average maturity of four and one quarter years). |
| Keywords: | Fossil fuel lending, Syndicated loans, Bank lending, Oil and gas sector, ESG ratings |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04804492 |
| By: | Olivier Armantier; Marco Cipriani; Asani Sarkar |
| Abstract: | The rapidity of deposit outflows during the March 2023 banking run highlights the important role that the Federal Reserve’s discount window should play in strengthening financial stability. A lack of borrowing, however, has plagued the discount window for decades, likely due to banks’ concerns about stigma—that is, their unwillingness to borrow at the discount window because it may be viewed as a sign of financial weakness in the eyes of regulators and market participants. The discount window has been reformed several times to alleviate this problem. Although the presence of stigma during the great financial crisis has been documented empirically, we do not know whether stigma has remained since then. In this post, based on a recent Staff Report, we fill this gap by using transaction-level data from the federal funds market to examine whether the discount window remains stigmatized today. |
| Keywords: | discount window; stigma; federal funds |
| JEL: | E52 G21 G28 |
| Date: | 2025–01–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99466 |
| By: | Manju Puri; Yiming Qian; Xiang Zheng |
| Abstract: | We hypothesize and find evidence that banks use venture investments in fintech startups as a strategic approach to navigate fintech competition. We show that banks’ venture investments have increasingly focused on fintech firms in systematic ways. We find that banks facing greater fintech competition are more likely to make venture investments in fintech startups. Banks target fintech firms that exhibit higher levels of asset complementarities with their own business. Finally, instrumental variable analyses show that venture investments increase the likelihood of operational collaborations and knowledge transfer between the bank investor and the fintech investee. |
| JEL: | G21 G24 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33297 |
| By: | H. Burcu Gürcihan |
| Abstract: | In this paper, we explore the interaction of monetary policy and a regulatory policy for controlling pollution within an economy populated with financially constrained producers exhibiting heterogeneity in production technology and pollution rates. Environment related components of the model include pollution externality, an abatement technology and environmental policy in the form of tax on pollutants. Our analysis is organized around two main topics: assessing the effect of monetary policy on social welfare in the presence of environmental concerns and investigating how the existence of pollution-type externality and environmental regulation influences optimal monetary policy. Our findings suggest that in the presence of heterogeneity, due to its distributional impact, monetary policy can play a role in enhancing social welfare and complementing regulatory efforts to mitigate pollution. In our model, featuring heterogeneity in productivity and pollution intensity, monetary policy influences social welfare through both pollution and consumption. The impact of monetary policy on pollution occurs indirectly through change in the allocation of production. The impact of monetary policy on consumption operates through real wage adjustments and money transfers. Furthermore, the indirect effect on consumption arises from the impact of monetary policy on optimal regulatory policy. Money growth that redirects production away from the pollutant agent creates a room for looser regulatory policy, leading to higher consumption. |
| Keywords: | Monetary policy, Environmental policy, Pollution, Cash-in-advance |
| JEL: | E58 H23 Q52 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2502 |
| By: | Dean Karlan; Monica P. Lambon-Quayefio; Utsav Manjeer; Christopher R. Udry |
| Abstract: | Digital finance in agriculture is a nascent technology which could help improve rural financial inclusion. In an experimental evaluation of a digital lending product for farmers in Southern Ghana, credit increases farm investments but has few statistically significant average effects on downstream outcomes. However, logistical challenges generated imperfect compliance with the treatment assignment, with some loans delivered in a timely fashion for agricultural investments and others coming later. We cautiously exploit this unplanned non-experimental implementation heterogeneity and conclude that agriculturally-focused digital credit platforms have potential to tackle persistent rural financial market imperfections, but the timing seems critical and deserves further study. |
| JEL: | Q14 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33271 |
| By: | Henkler, Ruven; Schubart, Constantin |
| Abstract: | In the digital age, banks must urgently transform their traditional lending processes. This necessity is intensified by the growing competition from digital providers and customers' increasing expectations for efficiency and speed in financial services. Particularly in the business banking sector, traditional credit processes are often characterized by lengthy processing times and inefficient manual procedures, significantly limiting banks' ability to respond promptly to customer inquiries. This paper examines the role of open banking and automated transaction analysis as key factors in the digital transformation of lending. By integrating real-time data and advanced analytics, banks can make more informed credit decisions and greatly enhance customer satisfaction. At the same time, the risks and challenges associated with implementing these technologies, particularly regarding data protection, regulatory requirements, and technical infrastructure, are critically assessed. This investigation's findings provide valuable insights for financial institutions striving to remain competitive in a rapidly changing digital environment and underscore the need to rethink traditional lending processes fundamentally. |
| Keywords: | Open Banking, PSD2, FinTech, Business Banking, Digital Lending, Business Processes, Digital Transformation |
| JEL: | G20 G21 L86 M15 O32 O33 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iubhbm:308823 |
| By: | Michele Leonardo Bianchi; Dario Ruzzi; Anatoli Segura |
| Abstract: | We use granular regulatory data on euro interest rate swap trades between January 2021 and June 2023 to assess whether derivative positions of Italian banks can offset losses on their debt securities holdings should interest rates rise unexpectedly. At the aggregate level of the banking system, we find that a 100-basis-point upward shift of the yield curve increases on average the value of swaps by 3.65% of Common Equity Tier 1 (CET1), compensating in part for the losses of 2.64% and 5.98% of CET1 recorded on debt securities valued at fair value and amortised cost. Variation exists across institutions, with some bank swap positions playing an offsetting role and some exacerbating bond market exposures to interest rate risk. Nevertheless, we conclude that, on aggregate, Italian banks use swaps as hedging instruments to reduce their interest rate exposures, which improves their ability to cope with the recent tightening of monetary policy. Finally, we draw on our swap pricing model to conduct an extensive data quality analysis of the transaction-level information available to authorities, and we show that the errors in fitting value changes over time are significantly lower compared to those in fitting the values themselves. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.15986 |
| By: | Vincent Lee Wai Seng; Shariff Abu Bakar Sarip Abidinsa |
| Abstract: | Since 2017, licensed money services business (MSB) operators in Malaysia report transactional data to the Central Bank of Malaysia on a monthly basis. The data allow supervisors to conduct off-site monitoring on the MSB industry; however, due to the increasing size of data and large population of the operators, supervisors face resource challenges to timely identify higher risk patterns, especially at the outlet level of the MSB. The paper proposes a weakly-supervised machine learning approach to detect anomalies in the MSB outlets on a periodic basis by combining transactional data with outlet information, including geolocation-related data. The test results highlight the benefits of machine learning techniques in facilitating supervisors to focus their resources on MSB outlets with abnormal behaviours in a targeted location. |
| Keywords: | suptech, money services business transactional data, outlet geolocation, machine learning, supervision on money services business |
| JEL: | C38 C81 G28 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisiwp:23 |
| By: | Eduardo Nakasone; Máximo Torero; Angelino Viceisza |
| Abstract: | Migrant remittances are significant but remain relatively costly to send. Policymakers have argued that fintech, specifically, comparison websites like kayak.com but for sending money, can boost financial inclusion and reduce remittance prices. Yet, little is known about how migrants with limited education and trust in digital methods interact with fintech. We conduct a field experiment on a comparison website and vary remittance-company attributes shown to migrants, specifically, the time for delivery and customer reviews. We use visual attention data to explore search. We find that (1) while 10-28 percent of migrants exhibit some type of remittance habit, more than half experiment with companies once provided with fintech information; (2) while migrant response to information is rational and search seems targeted, there is considerable heterogeneity—those with low prior awareness of comparison sites, financial literacy, or information-processing capability are less responsive to fintech; and (3) when presented with fintech information, migrants are 44 percent more likely to behave counter to the preferences over attributes they exhibit outside of the study. As such, they pay 20-30 percent more despite typically shopping around for the cheapest company. The findings suggest a nuanced potential for fintech to improve financial inclusion and consumer welfare. |
| JEL: | C93 D87 F22 F24 G2 G53 O12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33183 |
| By: | Gauti B. Eggertsson; Sergey K. Egiev |
| Abstract: | This paper presents a unified framework to explain three major economic downturns: the U.S. Great Depression, the U.S. Great Recession, and Japan’s Long Recession. Temporary economic disruptions, such as banking crises and excessive debt accumulation, can drive natural interest rates into negative territory in the short term. At the same time, structural factors, including demographic decline and rising inequality, can depress natural interest rates over short and long horizons. A negative natural interest rate and the zero lower bound (ZLB) are necessary conditions for a liquidity trap. Credible monetary policy can counteract the adverse effects of short-run liquidity traps. Diminished monetary policy credibility or persistent negative natural rates may necessitate fiscal interventions. The framework sheds light on the macroeconomic challenges of low-interest-rate environments and underscores the central importance of policy regimes. We close by reflecting on the great macroeconomic question of our time: Will short-term interest rates collapse back to zero once the inflation surge of the 2020s moves to the back mirror and the political landscape in the US has dramatically changed? |
| JEL: | E0 E52 N12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33195 |
| By: | Divya Sharma |
| Abstract: | The paper presents findings from a comprehensive study examining the saving and credit behaviors of low-income households residing in unauthorized colonies within a metropolitan area. Utilizing a dual approach, the study engaged in prolonged fieldwork, including repeated fortnightly interviews with selected households and a one-time primary survey with a larger sample size. The research meticulously analyzed the financial lives of these households, focusing on their saving and credit behaviors and assessing the accessibility and intensity of usage of financial instruments available to them. Through suitable regression models, the study identified key factors influencing the usage of financial instruments among low-income households. Transaction costs, convenience, and financial knowledge emerged as significant determinants impacting both usage decisions and the intensity of usage. The research underscores the importance of addressing demand side factors to ensure widespread financial services usage among low-income groups. Efforts to reduce time costs, enhance product accessibility and liquidity, and augment financial literacy are essential for fostering financial inclusion in unauthorized colonies. The findings highlight the imperative of moving beyond mere financial access towards promoting universal usage to realize the full benefits of financial inclusion. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.03033 |
| By: | Jim Bullard (Purdue University); Alex Grimaud (Bank of Austria); Isabelle Salle (University of Amsterdam and Tinbergen Institute); Gauthier Vermandel (Ecole Polytechnique Paris) |
| Abstract: | We discuss the timing and strength of the Fed’s reaction to the recent inflation surge within an estimated macroeconomic model where long-run inflation expectations are heterogeneous and can lose their anchoring to the target. The resulting inflation scare worsens the real cost of disinflation. We derive a closed-form solution that retains the entire time-varying cross-sectional distribution of subjective inflation beliefs. We estimate the model using Bayesian techniques on both US macroeconomic time series and forecast data from the Survey of Professional Forecasters. Counterfactual simulations show that the timing – rather than the strength – of the policy reaction to the inflation surge is critical to contain the development of an inflation scare and prevent the entrenchment of above-target inflation. We show that the Fed fell behind the curve in 2021 since an earlier tightening could have reduced the inflation peak without triggering a recession. However, further delays would have unanchored inflation expectations, aggravated the inflation scare and strengthened the inflation surge, resulting in larger output losses. |
| Keywords: | Monetary Policy, Inflation scare, Heterogeneous expectations, Bayesian estimation |
| JEL: | C63 E31 E52 E70 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20250001 |
| By: | Adair Morse; Parinitha R. Sastry |
| Abstract: | Banks have voluntarily committed to align their lending portfolios with a net zero path toward a decarbonized economy. In this review, we explore the economic channels for why portfolio decarbonization might be consistent with lender profit maximization. We frame the question by positing that net zero lending may create differential value through the channels of risk and returns, where return topics span profit margins and lending book growth arguments. We then use the lens of the frame to survey the literature and speak to gaps in research knowledge. We uncover multiple roles for risk arguments influencing decarbonization. Moreover, decarbonization and green investment are tied to enhanced profitability through bank lending growth. Yet, the literature has many dots yet to connect. We suggest that future work may draw further connections between the literature in climate finance and the broader literature in banking, to enhance our understanding of the role that banks will play in the net zero transition. |
| JEL: | G21 G28 G31 Q54 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33148 |
| By: | Eduardo de Sá Fortes Leitão Rodrigues |
| Abstract: | Savings play a critical role in both individual financial well-being and economic development. This article examines the impact of financial literacy, income, educational level, and age on saving decisions across 136 countries, using data from the Global Financial Inclusion Database (2021). Financial literacy is conceptualized as a latent variable, constructed from five indicators related to financial knowledge, financial behaviour, and financial attitudes, aligned with the Organisation for Economic Co-operation and Development (OECD) pillars. Employing Generalised Structural Equation Modelling (GSEM), the analysis demonstrates that financial literacy is a fundamental driver for the decision to save in the short and long term. Education level and income are consistent predictors of savings, while age exhibits distinct effects depending on the savings objective. Regional differences emerge, with Latin American countries showing the strongest link between financial literacy and savings, whereas in high-income economies, its influence is less pronounced. These findings underscore the multifaceted role of financial literacy in shaping saving decisions and highlight its implications for tailored public policies promoting financial literacy. |
| Keywords: | financial literacy; savings; GSEM approach. |
| JEL: | D14 G53 I22 C38 O16 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03622025 |
| By: | Fabien Clive Ntonga Efoua (FSEG, UYII-Soa - Faculty of Economics and Management, University of Yaounde II - Soa, CEDIMES - CEDIMES - Centre d'Etudes sur le Développement International et les Mouvements Economiques et Sociaux, CEREG - University of Yaoundé II-SOA, Centre d'Etudes et de Recherche en Economie et Gestion); Françoise Okah Efogo (Faculty of Economics and Management, University of Ebolowa); Yanick Fredy Mvodo (UDa - Faculty of Economics and Applied Management, University of Douala) |
| Abstract: | This paper proposes a reflection on the opportunities and the challenges of the use of digital means of payment (decentralised and regulated ones) in the African economies. In this perspective, we structure our reasoning around three axes. First, we try to show that digital currencies can serve as a lever for financial inclusion and the revolution of means of payment in an increasing digitalization context. Second, we discuss the technical and the infrastructural constraints (deployment of the blockchain, electricity and Internet access) which condition the effective use of digital currencies. Third, we discuss the trade-offs and the possible implications that arise from the circulation of the Bitcoin, the Altcoins and the Stablecoins on the one hand, and the Govcoins on the other. In our view, the African authorities should first focus on overcoming infrastructural and institutional obstacles, rather than rushing the adoption of cryptocurrencies. Some policies implemented in this direction would in fact offer the continent the opportunity to anchor itself once and for all to progress. |
| Keywords: | Cryptocurrencies, Govcoins, Central Bank Crypto Currencies, African economies |
| Date: | 2024–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04784299 |
| By: | Altavilla, Carlo; Rostagno, Massimo; Schumacher, Julian |
| Abstract: | Banks are reluctant to tap central bank backup liquidity facilities and use the borrowed funds for loans to the real economy. We show that excessively parsimonious borrowing and lending can arise in a stigma-free model where the banking sector has an incentive to overissue deposits. Banks don’t heed the central bank’s call for more credit to finance investment because they simply ignore the collective gains from stronger activity in their atomistic decisions. Central banks can address this market failure by disintermediating market-based finance. A lender-of-last-resort (LOLR) system in which the central bank offers liquidity liberally but on non-concessionary conditions improves over a pure laissez-faire arrangement, where asset liquidation in the marketplace is the only source of emergency liquidity. But under LOLR banks remain reluctant to intermediate. Credit easing (CE) and quantitative easing (QE), instead, can stimulate bank borrowing and repair the broken nexus between liquidity provision and credit. Empirical analysis using bank-level and loan-by-loan data supports our model predictions. We find no empirical connection between loans and borrowed reserves obtained from conventional refinancing facilities. In contrast, there is a robust connection between loans and structural sources of liquidity: reserves borrowed under a CE program or non-borrowed, i.e. acquired from a QE injection. We also find that firms with greater exposure to banks borrowing in a CE program or holding larger volumes of non-borrowed reserves increase employment, sales, and investment. JEL Classification: E5, E43, G2 |
| Keywords: | credit easing, lending of last resort, loans, quantitative easing, reserves |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253009 |
| By: | Chase Englund; Zach Modig |
| Abstract: | This paper uses data on bank connections with service providers to construct a representation of an operational network used to facilitate the sending of Fedwire transactions. Our data contains 227 connections between 215 banks (mostly community banks, but also some large banks) and four unique payment products used by the firms to send and receive Fedwire transactions. By constructing such an operational network between banks and payment providers, we can perform multiple analyses that are useful in operational resilience considerations. First, we use the mean daily Fedwire volume for each bank to create a dollar estimate of the "operational risk exposure" associated with each service platform based on its bank clients. Second, we examine how these bank payment risk exposure estimates compare with other, publicly available benchmarks, since payment data are usually confidential. Last, we use the network model to conduct analysis on network concentration, which provides an example of how such networks could be used in analyzing the likely impact of operational outages. Our results indicate that data on service provider connections such as that we analyze can provide important insights into the extent to which payment network resilience mitigates risk to the financial sector. Our results also indicate that several publicly available benchmarks can serve as substitutes (with certain caveats) for payments data in estimating payment risk exposure. |
| Date: | 2025–01–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-01-03 |
| By: | Mishra, Mukesh Kumar |
| Abstract: | The study evaluates the current status of financial literacy and retirement planning trends in Saharsa district in Bihar through an empirical study. This study aims to examine the relationship between retirement benefits and saving behaviour after analysed a sample of 384 respondents to design a model that examines the relationship between retirement planning and financial literacy trends. The study reveals that behavioural, socio-economic, and financial factors significantly influence investment decisions, with financial literacy and risk also positively impacting these decisions. Financial literacy in India emerged in the 21st century, aiming to improve capital formation through saving and investment among rural households through a well-planned and promoted approach. The knowledge and abilities needed to manage financial resources in developing sectors are referred to as financial literacy. It improves abilities for more effective financial management and development economics policymaking. In welfare economics, this study investigates the connection between literacy and inclusion. The study in Saharsa district in Bihar reveals a significant lack of financial literacy and inclusion among the population, with varied attitudes and behaviours. Findings indicate that Respondents have low awareness of Retirement and Estate Planning, and feel their personal financial plans are imbalanced, requiring expert management and PMJDY is an important instrument for assessing financial literacy in India since it enhances Saharsa district's socioeconomic inclusion. |
| Keywords: | Financial Psychology, Economics and Development, Banking, Financial Literacy |
| JEL: | D12 D14 D63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esrepo:308691 |
| By: | Rik Ghosh (Chainrisk); Arka Datta (Chainrisk); Vidhi Aggarwal (Chainrisk); Sudipan Sinha (Chainrisk); Abhimanyu Nag (Chainrisk) |
| Abstract: | Decentralized Finance (DeFi) and smart contracts are the next generation and fast-growing market for quick and safe interaction between lenders and borrowers. However for maintaining a streamline ecosystem it is necessary to understand the risk associated with the particular user under consideration. In this paper we have developed 'On Chain Credit Risk Score' of a wallet is an answer to quantifying the risk of the particular wallet, namely the probability that the particular wallet may have a loan liquidated. 'On Chain Credit Risk Score (OCCR Score)' of wallets, will help lending borrowing protocols and other DeFi institutes to understand the risk involved in giving out loans to a wallet and may change the Loan-to-Value (LTV) Ratio and subsequently the Liquidation Threshold (LT) if required. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.00710 |
| By: | Laura Chioda; Paul Gertler; Sean Higgins; Paolina C. Medina |
| Abstract: | Despite the promise of FinTech lending to expand access to credit to populations without a formal credit history, FinTech lenders primarily lend to applicants with a formal credit history and rely on conventional credit bureau scores as an input to their algorithms. Using data from a large FinTech lender in Mexico, we show that alternative data from digital transactions through a delivery app are effective at predicting creditworthiness for borrowers with no credit history. We also show that segmenting our machine learning model by gender can improve credit allocation fairness without a substantive effect on the model’s predictive performance. |
| JEL: | G23 G5 O16 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33208 |
| By: | Masashige Hamano; Philip Schnattinger; Mototsugu Shintani; Iichiro Uesugi; Francesco Zanetti |
| Abstract: | We develop a simple model of financial intermediation with search and matching frictions between banks and firms. The model links credit market tightness –encapsulating the abundance of credit– to the search and opportunity costs of credit intermediation. Search costs generate lending to unprofitable firms (i.e., zombies) and the opportunity costs of searching exert countervailing forces on the incentives for banks and firms to participate in zombie lending, generating an inverted U-shaped relationship between credit market tightness and the share of zombie lending. High bargaining power of firms decreases the opportunity cost of firms foregoing credit relationships, reduces the share of zombie firms and increases the efficacy of capital injections to reduce zombie lending. Using data for 31 industries in Japan over the period 2000-2019, we test and corroborate our theoretical predictions by constructing theory-consistent measures of credit market tightness and bargaining power. Consistent with our theory, the findings reveal that capital injections are more effective in industries with higher credit market tightness and greater bargaining power of firms. |
| Date: | 2025–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1065 |
| By: | Lutz Honvehlmann |
| Abstract: | Weighted reciprocity between two agents can be defined as the minimum of sending and receiving value in their bilateral relationship. In financial networks, such reciprocity characterizes the importance of individual banks as both liquidity absorber and provider, a feature typically attributed to large, intermediating dealer banks. In this paper we develop an exponential random graph model that can account for reciprocal links of each node simultaneously on the topological as well as on the weighted level. We provide an exact expression for the normalizing constant and thus a closed-form solution for the graph probability distribution. Applying this statistical null model to Italian interbank data, we find that before the great financial crisis (i) banks displayed significantly more weighted reciprocity compared to what the lower-order network features (size and volume distributions) would predict (ii) with a disappearance of this deviation once the early periods of the crisis set in, (iii) a trend which can be attributed in particular to smaller banks (dis)engaging in bilateral high-value trading relationships. Moreover, we show that neglecting reciprocal links and weights can lead to spurious findings of triadic relationships. As the hierarchical structure in the network is found to be compatible with its transitive but not with its intransitive triadic sub-graphs, the interbank market seems to be well-characterized by a hierarchical core-periphery structure enhanced by non-hierarchical reciprocal trading relationships. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.10329 |
| By: | Bletzinger, Tilman; Lemke, Wolfgang; Renne, Jean-Paul |
| Abstract: | Inflation risk premiums tend to be positive in an economy mainly hit by supply shocks, and negative if demand shocks dominate. Risk premiums also fluctuate with risk aversion. We shed light on this nexus in a linear-quadratic equilibrium microfinance model featuring time variation in inflation-consumption correlation and risk aversion. We obtain analytical solutions for real and nominal yield curves and for risk premiums. While changes in the inflation-consumption correlation drive nominal yields, changes in risk aversion drive real yields and act as amplifier on nominal yields. Combining a trend-cycle specification of real consumption with hysteresis effects generates an upward-sloping real yield curve. Estimating the model on US data from 1961 to 2019 confirms substantial time variation in inflation risk premiums: distinctly positive in the earlier part of our sample, especially during the 1980s, and turning negative with the onset of the new millennium. JEL Classification: E43, E44, C32 |
| Keywords: | demand and supply, inflation risk premiums, risk aversion, term structure model |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253012 |
| By: | Motohiro Yogo; Andrew Whitten; Natalie Cox |
| Abstract: | We study retirement and bank account participation for the universe of U.S. households with a member aged 50 to 59 in the administrative tax data. ZCTA-level average income, income inequality, and racial composition predict retirement account participation for low-income households, conditional on household income and regional price parities. Income inequality also predicts bank account participation for low-income households. We estimate the causal effect of access to an employer retirement plan on participation. Recent policy proposals for universal access with automatic enrollment could increase participation by 19 percentage points in the lowest income quintile over ten years. |
| JEL: | D14 G51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33256 |
| By: | Burlon, Lorenzo; Ferrari, Alessandro; Kho, Stephen; Tushteva, Nikoleta |
| Abstract: | Exploiting the recalibration of ECB’s outstanding central bank funding in 2022, we show that a sharp reabsorption of bank liquidity induces a tightening impact on credit supply, as intended when centralbanks reduce their balance sheets. The tightening originates from the sudden relative convenience for banks accustomed to large liquidity holdings to more rapidly adapt to the new environment. Moreover, we show that the associated reduction in credit supply has real economic effects. JEL Classification: E51, E52, G21 |
| Keywords: | banking, credit supply, liquidity, monetary policy, QT |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253010 |