nep-ban New Economics Papers
on Banking
Issue of 2024‒04‒29
forty-one papers chosen by
Sergio Castellanos-Gamboa, Tecnológico de Monterrey

  1. Climate stress tests, bank lending, and the transition to the carbon-neutral economy By Fuchs, Larissa; Ngyuen, Huyen; Nguyen, Trang; Schaeck, Klaus
  2. Understanding money using historical evidence By Adam Brzezinski; Nuno Palma; François R. Velde
  3. Nowcasting Italian GDP growth: a Factor MIDAS approach By Donato Ceci; Orest Prifti; Andrea Silvestrini
  4. Government Debt Management and Inflation with Real and Nominal Bonds By Lukas Schmid; Vytautas Valaitis; Alessandro T. Villa
  5. Risky firms and fragile banks: Implications for macroprudential policy By Gasparini, Tommaso; Lewis, Vivien; Moyen, Stéphane; Villa, Stefania
  6. AI in ESG for Financial Institutions: An Industrial Survey By Jun Xu
  7. Core Inflation Requiem: Paving the Way for a Dual-Component CPI in FPAS Central Banks By Shalva Mkhatrishvili; Douglas Laxton; Tamta Sopromadze; Mariam Tchanturia; Ana Nizharadze; Sergo Gadelia; Giorgi Gigineishvili; Jared Laxton
  8. Open-Ended Treasury Purchases: From Market Functioning to Financial Easing By Stefania D'Amico; Max Gillet; Sam Schulhofer-Wohl; Tim Seida
  9. Learning by Bouncing: Overdraft Experience and Salience By Donald P. Morgan; Wilbert Van der Klaauw
  10. Uncertainty in the financial market and application to forecastabnormal financial fluctuations By Shige Peng; Shuzhen Yang; Wenqing Zhang
  11. Financial Intermediation versus Direct Financing : A Meta-Analytic Comparison of the Growth-Enhancing Effect By IWASAKI, Ichiro; ONO, Shigeki
  12. Valuing Safety and Privacy in Retail Central Bank Digital Currency By Zan Fairweather; Denzil Fiebig; Adam Gorajek; Rochelle Guttmann; June Ma; Jack Mulqueeney
  13. The Role of Financial Literacy in Anchoring Inflation Expectations: The Case of Ukraine By Andriy Tsapin; Oleksandr Faryna
  14. The independence of central banks: a reductio ad absurdum By Ion Pohoață; Delia-Elena Diaconașu; Ioana Negru
  15. Private Debt Funds: What They Are and Trends under Interest Rate Hikes By Koichi Kuroda; Akira Hasebe; Satoshi Ito; Daisuke Ikeda
  16. Digital Payment, Household Consumption Behavior, and Financial Literacy By Anusorn Minphimai
  17. Inflation Expectations, Liquidity Premia and Global Spillovers in Japanese Bond Markets By Jens H. E. Christensen; Mark M. Spiegel
  18. Unintended Consequences of the Home Affordable Refinance Program By Phoebe Tian; Chen Zheng
  19. The Riskiness of Credit Origins and Downside Risks to Economic Activity By Claudio Raddatz; Dulani Seneviratne; Mr. Jerome Vandenbussche; Peichu Xie; Yizhi Xu
  20. Blended Finance By Caroline Flammer; Thomas Giroux; Geoffrey Heal
  21. Book Value Risk Management of Banks: Limited Hedging, HTM Accounting, and Rising Interest Rates By João Granja; Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  22. Deposit Insurance, Uninsured Depositors, and Liquidity Risk During Panics By Matthew S. Jaremski; Steven Sprick Schuster
  23. The impact of the Countercyclical Capital Buffer on credit: Evidence from its accumulation and release before and during COVID-19 By Mikel Bedayo; Jorge E. Galán
  24. Market perceptions, monetary policy, and credibility By Vincenzo Cuciniello
  25. Reflections on the Performance of Regional Rural Banks (RRBs) and the Need for their Revitalization on the lines of Enhanced Access and Service Excellence (EASE) By Kumar B, Dr Pradeep Kumar B
  26. Monetary-Fiscal Forward Guidance By Kopiec, Paweł
  27. Impact of the Central Bank's Communication on Macrofinancial Outcomes By Tetiana Yukhymenko; Oleh Sorochan
  28. Nearly Cashless: Digital Transformation or Cultural Transmission? By Arina Wischnewsky
  29. Energy price shocks, unemployment, and monetary policy By Nicolò Gnocato
  30. Central Bank Exit Strategies Domestic Transmission and International Spillovers By Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Haroon Mumtaz; Pawel Zabczyk
  31. Mobile Internet, Collateral, and Banking By Angelo D’Andrea; Patrick Hitayezu; Mr. Kangni R Kpodar; Nicola Limodio; Mr. Andrea F Presbitero
  32. Oil price shocks in real time By Andrea Gazzani; Fabrizio Venditti; Giovanni Veronese
  33. Do public bank guarantees affect labor market outcomes? Evidence from individual employment and wages By Baessler, Laura; Gebhardt, Georg; Gropp, Reint; Güttler, André; Taskin, Ahmet
  34. Online Monitoring of Policy Optimality By Bjarni G. Einarsson
  35. A Q-Theory of Banks By Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
  36. Debt taxes during crises, a blessing in disguise? By Julian A. Parra-Polania; CarmiÒa O. Vargas
  37. A Macroeconomic Model of Central Bank Digital Currency By Pascal Paul; Mauricio Ulate; Jing Cynthia Wu
  38. E-Money and Monetary Policy Transmission By Zixuan Huang; Ms. Amina Lahreche; Mika Saito; Ursula Wiriadinata
  39. Monetary financing does not produce miraculous fiscal multipliers By Christiaan van der Kwaak
  40. Optimal Monetary Policy with r* By Billi, Roberto; Galí, Jordi; Nakov, Anton
  41. Housing Speculation, GSEs, and Credit Market Spillovers By Natee Amornsiripanitch; Philip E. Strahan; Song Zhang; Xiang Zheng

  1. By: Fuchs, Larissa; Ngyuen, Huyen; Nguyen, Trang; Schaeck, Klaus
    Abstract: Does banking supervision affect borrowers' transition to the carbon-neutral economy? We use a unique identification strategy that combines the French bank climate pilot exercise with borrowers' carbon emissions to present two novel findings. First, climate stress tests actively facilitate borrowers' transition to a low-carbon economy through a lending channel. Stress-tested banks increase loan volumes but simultaneously charge higher interest rates for brown borrowers. Second, additional lending is associated with some improvements in environmental performance. While borrowers commit more to reduce carbon emissions and are more likely to evaluate environmental effects of their projects, they neither reduce direct carbon emissions, nor terminate relationships with environmentally unfriendly suppliers. Our findings establish a causal link between bank climate stress tests and borrowers' reductions in transition risk.
    Keywords: climate change, climate stress test, green finance, syndicated loans
    JEL: G21 G28 K11
    Date: 2024
  2. By: Adam Brzezinski; Nuno Palma; François R. Velde
    Abstract: Debates about the nature and economic role of money are mostly informed by evidence from the 20th century, but money has existed for millennia. We argue that there are many lessons to be learned from monetary history that are relevant for current topics of policy relevance. The past acts as a source of evidence on how money works across different situations, helping to tease out features of money that do not depend on one time and place. A close reading of history also offers testing grounds for models of economic behavior and can thereby guide theories on how money is transmitted to the real economy.
    Keywords: monetary policy, monetary history, natural experiments, policy experiments, identification in macroeconomics
    JEL: E40 E50 N10
    Date: 2024–04
  3. By: Donato Ceci (Bank of Italy); Orest Prifti (Università degli Studi di Roma-Tor Vergata); Andrea Silvestrini (Bank of Italy)
    Abstract: This paper examines the role of weekly financial data in nowcasting the quarterly growth rate of Italian real GDP, with a specific focus on the impact of the COVID-19 pandemic. It combines factor models and MIxed DAta Sampling (MIDAS) regression models to set up Factor MIDAS specifications, which leverage a large set of higher-frequency financial variables to exploit the information flow within the quarter. The analysis is performed using a comprehensive dataset that includes monthly macroeconomic data and weekly financial data. The predictive accuracy is assessed by conducting a pseudo out-of-sample nowcast exercise and evaluating the performance of the models with and without the inclusion of factors derived from financial indicators. Financial variables improve the nowcast of real GDP growth in Italy, particularly in the first month of the quarter, when few macroeconomic data are available. The models incorporating financial variables consistently exhibit high nowcasting accuracy throughout the quarter.
    Keywords: nowcasting, mixed frequency, factor models, variable selection, financial markets, factor MIDAS
    JEL: C22 C43 C53 C55 E32 E37
    Date: 2024–03
  4. By: Lukas Schmid (Marshall School of Business, University of Southern California; Centre for Economic Policy Research (CEPR)); Vytautas Valaitis (University of Surrey); Alessandro T. Villa (Federal Reserve Bank of Chicago)
    Abstract: Can governments use Treasury Inflation-Protected Securities (TIPS) to tame inflation? We propose a novel framework of optimal debt management with sticky prices and a government issuing nominal and real state-uncontingent bonds. Nominal debt can be monetized giving ex-ante flexibility, whereas real bonds are cheaper but constitute a commitment ex-post. Under Full Commitment, the government chooses a leveraged and volatile portfolio of nominal liabilities and real assets to use inflation to smooth taxes. With No Commitment, it reduces borrowing costs ex-ante using a stable real debt share strategically to prevent future governments from monetizing debt ex-post. Such policies rationalize the small and persistent real debt share in U.S. data, with higher TIPS shares effectively curbing inflation. Reducing future governments’ temptation to monetize debt renders debt and inflation endogenously sticky.
    Keywords: Optimal Fiscal Policy, Monetary Policy, Debt Management, TIPS, Incomplete Markets, Inflation, Limited Commitment, Time-consistency, Markov-perfect Equilibria
    Date: 2024–03
  5. By: Gasparini, Tommaso; Lewis, Vivien; Moyen, Stéphane; Villa, Stefania
    Abstract: Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks' balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks.
    Keywords: bank default, capital buffer, firm risk, macroprudential policy
    JEL: E44 E52 E58 E61 G28
    Date: 2024
  6. By: Jun Xu
    Abstract: The burgeoning integration of Artificial Intelligence (AI) into Environmental, Social, and Governance (ESG) initiatives within the financial sector represents a paradigm shift towards more sus-tainable and equitable financial practices. This paper surveys the industrial landscape to delineate the necessity and impact of AI in bolstering ESG frameworks. With the advent of stringent regulatory requirements and heightened stakeholder awareness, financial institutions (FIs) are increasingly compelled to adopt ESG criteria. AI emerges as a pivotal tool in navigating the complex in-terplay of financial activities and sustainability goals. Our survey categorizes AI applications across three main pillars of ESG, illustrating how AI enhances analytical capabilities, risk assessment, customer engagement, reporting accuracy and more. Further, we delve into the critical con-siderations surrounding the use of data and the development of models, underscoring the importance of data quality, privacy, and model robustness. The paper also addresses the imperative of responsible and sustainable AI, emphasizing the ethical dimensions of AI deployment in ESG-related banking processes. Conclusively, our findings suggest that while AI offers transformative potential for ESG in banking, it also poses significant challenges that necessitate careful consideration. The final part of the paper synthesizes the survey's insights, proposing a forward-looking stance on the adoption of AI in ESG practices. We conclude with recommendations with a reference architecture for future research and development, advocating for a balanced approach that leverages AI's strengths while mitigating its risks within the ESG domain.
    Date: 2024–02
  7. By: Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Douglas Laxton (NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project); Tamta Sopromadze (Head of Monetary Policy Division, National Bank of Georgia); Mariam Tchanturia (Macroeconomic Research Division, National Bank of Georgia); Ana Nizharadze (Macroeconomic Research Division, National Bank of Georgia); Sergo Gadelia (Macroeconomic Research Division, National Bank of Georgia); Giorgi Gigineishvili (Macroeconomic Research Division, National Bank of Georgia); Jared Laxton (Economist at Advanced Macro Policy Modelling (AMPM))
    Abstract: We advocate for a novel approach to decomposing the Consumer Price Index, critiquing the traditional core inflation distinction (which omits volatile items like food and energy) for lacking a solid economic basis. Our proposed method, inspired by practices in economies like the United States, New Zealand and Armenia, categorizes prices into "flexible, " which adjust quickly and are influenced by external factors, and "sticky" non-tradables, which adjust more slowly, offering a clearer view of medium-term inflation expectations. This approach underscores the importance of economic analysis over simplistic statistical methods that exclude volatile CPI components. It emphasizes the need for economists to understand the dynamics driving both sticky and flexible price inflation, with the latter often signifying initial signs of excess demand pressures. Recognizing the impact of dollarization, where exchange rate depreciations quickly affect nontraded sticky prices, becomes crucial. This understanding is vital for formulating monetary policies that prevent long-term inflation expectations from escalating, highlighting the significance of studying the interplay between exchange rate movements and domestic price dynamics in dollarized economies.
    Keywords: Non-tradable sticky prices; Monetary policy credibility; Core inflation
    JEL: E10 E31 E52 E58
    Date: 2024–04
  8. By: Stefania D'Amico; Max Gillet; Sam Schulhofer-Wohl; Tim Seida
    Abstract: We exploit the Fed’s Treasury purchases conducted from March 2020 to March 2022 to assess whether asset purchases can be tailored to accomplish different objectives: restoring market functioning and providing stimulus. We find that, on average, flow effects are significant in the market-functioning (MF) period (March-September 2020), while stock effects are strong in the QE period (September 2020-March 2022). In the MF period, the elevated frequency and size of the purchase operations allowed flow effects to greatly improve relative price deviations, especially at the long-end of the yield curve. But stock effects remained localized, thus not large enough to be stimulative. In contrast, in the QE period, stock effects were stimulative because cross-asset price impacts got larger as the Fed communication and implementation moved toward “traditional” QE, increasing purchases’ predictability. Lower uncertainty about the expected size and duration of total purchases facilitated their impounding into prices. Overall, these findings suggest that communication and implementation can be used to tailor the goals of asset purchases.
    Keywords: Monetary policy tools; Qualitative Easing; Asset purchases
    JEL: E43 E44 E52 E58
    Date: 2024–03–26
  9. By: Donald P. Morgan; Wilbert Van der Klaauw
    Abstract: Overdraft credit, when banks and credit unions allow customers to spend more than their checking account holds, has many critics. One fundamental concern is whether overdrafts are salient—whether account holders know how often they overdraw and how much it costs them. To shed light on this question, we asked participants in the New York Fed’s Survey of Consumer Expectations about their experience with and knowledge of their banks’ overdraft programs. The large majority knew how often they overdrew their account and by how much. Their overdraft experience, we find, begets knowledge; of respondents who overdrew their account in the previous year, 84 percent knew the fee they were charged, roughly twice the share for other respondents. However, even experienced overdrafters were relatively unaware of other overdraft terms and practices, such as the maximum overdraft allowed or whether their financial institution processed larger transactions first.
    Keywords: overdraft; bounced checks; salience; regulation
    JEL: D1 G21 G5
    Date: 2024–04–01
  10. By: Shige Peng; Shuzhen Yang; Wenqing Zhang
    Abstract: The integration and innovation of finance and technology have gradually transformed the financial system into a complex one. Analyses of the causesd of abnormal fluctuations in the financial market to extract early warning indicators revealed that most early warning systems are qualitative and causal. However, these models cannot be used to forecast the risk of the financial market benchmark. Therefore, from a quantitative analysis perspective, we focus on the mean and volatility uncertainties of the stock index (benchmark) and then construct three early warning indicators: mean uncertainty, volatility uncertainty, and ALM-G-value at risk. Based on the novel warning indicators, we establish a new abnormal fluctuations warning model, which will provide a short-term warning for the country, society, and individuals to reflect in advance.
    Date: 2024–03
  11. By: IWASAKI, Ichiro; ONO, Shigeki
    Abstract: This study is the first meta-analysis to compare financial intermediation and direct financing in terms of their growth-promoting effects. Meta-synthesis of 1693 estimates extracted from 168 previous studies strongly suggest that, in general, financial development has a positive effect on economic growth and the synthesized effect size of the direct financing study exceeding that of the financial intermediation study. The two exceptions are when the average estimation year is limited to 1989 or before and when the target region is restricted to Latin America and the Caribbean. Results from metaregression analysis and tests for publication selection bias show, however, that some synthesis results cannot be reproduced when literature heterogeneity and publication selection bias are taken into consideration.
    Keywords: financial intermediation, direct financing, growth-promoting effect, meta-synthesis, meta-regression analysis, publication selection bias
    JEL: E44 G10 O40 P43
    Date: 2024–04
  12. By: Zan Fairweather (Reserve Bank of Australia); Denzil Fiebig (University of New South Wales); Adam Gorajek (Reserve Bank of Australia); Rochelle Guttmann (Reserve Bank of Australia); June Ma (Harvard University); Jack Mulqueeney (Reserve Bank of Australia)
    Abstract: This paper explores the merits of introducing a retail central bank digital currency (CBDC) in Australia, focusing on the extent to which consumers would value having access to a digital form of money that is even safer and potentially more private than commercial bank deposits. To conduct our exploration we run a discrete choice experiment, which is a technique designed specifically for assessing public valuations of goods without markets. The results suggest that the average consumer attaches no value to the added safety of a CBDC. This is consistent with bank deposits in Australia already being perceived as a safe form of money, and physical cash issued by the Reserve Bank of Australia continuing to be available as an alternative option. Privacy settings of a CBDC, which can take various forms, look more consequential for the CBDC value proposition. We find no clear relationship between safety or privacy valuations and the degree of consumers' cash use.
    Keywords: central bank digital currency; data privacy; financial safety; willingness to pay
    JEL: C90 E42 E50 G21
    Date: 2024–04
  13. By: Andriy Tsapin (National Bank of Ukraine; National University of Ostroh Academy); Oleksandr Faryna (National Bank of Ukraine; National University of Kyiv-Mohyla Academy)
    Abstract: Using survey data from the USAID Financial Sector Transformation Project, this paper examines whether or not financial literacy influences households' expectations about future prices and whether or not it anchors inflation expectations to the central bank's target. We find that higher financial literacy lowers average uncertainty about one-year inflation, but increases three-year inflation expectations. The results from quantile regressions confirm the asymmetric effects of financial literacy and its components on inflation. Inverse effects of financial literacy on expected inflation are at work for the upper end of the distribution (unanchored expectations), while positive effects are seen in the lower end of the distribution (anchored expectations). Our findings also suggest that financial literacy significantly improves inflation perceptions and the accuracy of individuals' predictions about inflation. The conclusions from this research are beneficial and have strong policy implications for the central bank's monetary policy.
    Keywords: c inflation expectations, inflation perceptions, financial literacy, monetary policy
    JEL: C81 D80 D82 E31 E52 E58
    Date: 2024–03
  14. By: Ion Pohoață (UAIC - Alexandru Ioan Cuza University of Iași [Romania]); Delia-Elena Diaconașu (UAIC - Alexandru Ioan Cuza University of Iași [Romania]); Ioana Negru (ULBS - "Lucian Blaga" University)
    Abstract: This paper testifies to the fact that the proclaimed independence of central banks, as conceived by its founders, is nothing more than a chimera. We demonstrate that the hypothesis ‘inflation is a purely monetary phenomenon' does not substantiate the case for independence. Further, the portrayal of the conservative central banker, the imaginary principal-agent contract, the alleged financial autonomy, along with the ban on budgetary financing, amount to flawed logic in arguing for the independence of the central bank. We also highlight that the idea of independence is not convincing due to the absence of well-defined outlines in its operational toolbox and the system of rules it relies upon.
    Keywords: inflation, conservative banker, Principal-Agent contract, financial autonomy, budgetary financing
    Date: 2024–03–11
  15. By: Koichi Kuroda (Bank of Japan); Akira Hasebe (Bank of Japan); Satoshi Ito (Bank of Japan); Daisuke Ikeda (Bank of Japan)
    Abstract: Private Debt (PD) funds are those that specialize in providing loans mainly to middle-market firms with low creditworthiness. Their assets under management (AUM) have expanded mainly in the U.S., as their borrower-investor bases have broadened, against the background of growing investment needs in the low interest rate environment and the strengthening of financial regulations after the global financial crisis. However, with the recent interest rate hikes in the U.S. and Europe, both the average time required to raise new funds and concentration in major PD funds have increased, and the amount of fundraising for new funds has declined. In Japan the market size of PD funds is extremely limited relative to the U.S. and Europe. Potential risks of PD funds include opacity due to lack of disclosed information, the interconnectedness within the financial system, the accumulation of vulnerabilities associated with rapid credit growth, and the liquidity risk of open-end funds. It is necessary to pay close attention to these developments, including their impact on the efficient allocation of resources for sustainable economic growth in the longer run.
    Date: 2024–04–12
  16. By: Anusorn Minphimai
    Abstract: This study examines the impact of innovations in the payment system on household finance, focusing on consumption behaviors and financial literacy among low-income households. The investigation utilizes Thailand’s introduction of the cashless State Welfare Card to low-income households in 2017 as a quasi-experiment setting. The primary data sources for this study include the large-scale countrywide household socioeconomic survey (SES) conducted by Thailand’s National Statistical Office (NSO) and survey data from individuals in four provinces of Thailand. The empirical strategy in this study is primarily fuzzy regression discontinuity design. The results of the study reveal that individuals who receive the cashless State Welfare Card experience effective increases in consumption of the food and beverage items that are the target of the policy. Contrary to concerns about adverse impacts, such as overconsumption or using the card for unintended items like cigarettes, there is no evidence supporting these claims. Instead, people using the state welfare card exhibit better financial literacy and reduced risk-taking consumption behavior. The result underscores the importance of financial literacy training provided alongside the card. However, the study does not find sufficient evidence to suggest a significant impact on trust in the financial system.
    Keywords: Household Finance; Financial Technology; State Welfare Card; Fuzzy Regression Discontinuity Design
    JEL: E12 D12 D14
    Date: 2024–04
  17. By: Jens H. E. Christensen; Mark M. Spiegel
    Abstract: We provide market-based estimates of Japanese inflation expectations using an arbitrage-free dynamic term structure model of nominal and real yields that accounts for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. We find that JGBi liquidity premia exhibit significant variation, and even switch sign. Properly accounting for them significantly lowers the estimated value of the indexed bonds’ deflation protection and affects inflation risk premium estimates. After liquidity adjustment, long-term Japanese inflation expectations have remained relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to confirm the existence of statistically significant and economically meaningful spillovers to the JGBi market from global bond market illiquidity, as proxied by periods of low U.S. Treasury market depth.
    Keywords: affine arbitrage-free term structure model; deflation risk; deflation protection; Liquidity Spillovers
    JEL: C32 E43 E52 G12 G17
    Date: 2024–04–08
  18. By: Phoebe Tian; Chen Zheng
    Abstract: We study the unintended effects of the Home Affordable Refinance Program (HARP) on mortgage borrowers. Originally designed to help financially distressed borrowers refinance after the 2008–09 global financial crisis, HARP inadvertently amplified the market power of incumbent lenders by introducing a cost differential between incumbents and their competitors. To assess the welfare implications of this cost advantage, we develop and estimate a structural model of dynamic refinancing decisions with lenders’ offers arising from a search and negotiation process. Our findings reveal that although the cost asymmetry was rectified by a 2013 policy, it still resulted in a welfare loss exceeding the impact of search frictions
    Keywords: Financial institutions
    JEL: G21 G51 L51
    Date: 2024–04
  19. By: Claudio Raddatz; Dulani Seneviratne; Mr. Jerome Vandenbussche; Peichu Xie; Yizhi Xu
    Abstract: We construct a country-level indicator capturing the extent to which aggregate bank credit growth originates from banks with a relatively riskier profile, which we label the Riskiness of Credit Origins (RCO). Using bank-level data from 42 countries over more than two decades, we document that RCO variations over time are a feature of the credit cycle. RCO also robustly predicts downside risks to GDP growth even after controlling for aggregate bank credit growth and financial conditions, among other determinants. RCO’s explanatory power comes from its relationship with asset quality, investor and banking sector sentiment, as well as future banking sector resilience. Our findings underscore the importance of bank heterogeneity for theories of the credit cycle and financial stability policy.
    Keywords: Private sector debt; credit growth; credit origin; credit cycle; bank soundness; credit risk; financial vulnerability; investor sentiment; financial stability
    Date: 2024–03–29
  20. By: Caroline Flammer; Thomas Giroux; Geoffrey Heal
    Abstract: Blended finance---the use of public and philanthropic funding to crowd in private capital---is a potential way to finance a more sustainable world. While blended finance holds the promise of being catalytic in mobilizing vast amounts of private capital, little is known about this practice. In this paper, we provide a conceptual framework that formalizes the decision-making of development finance institutions (DFIs) that engage in blended finance. We then provide empirical evidence on blended finance using data from a major DFI. The key variable we study is the level of concessionality, which captures the subsidy from the blended co-investment. Our findings indicate that DFIs provide higher concessionality for projects that have a higher sustainability impact per dollar invested. Moreover, the concessionality is higher for projects in countries with higher political risk and a higher degree of information asymmetries. In such cases, the blending tends to also include risk-management provisions. These findings are consistent with the predictions from our conceptual framework, in which DFIs have a limited budget that they allocate across projects to create societal value.
    JEL: G23 H41 O1 Q01 Q14
    Date: 2024–03
  21. By: João Granja; Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.’s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation’s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector.
    JEL: G2 G21 G28
    Date: 2024–03
  22. By: Matthew S. Jaremski; Steven Sprick Schuster
    Abstract: The lack of universal deposit insurance coverage can create liquidity risk during financial crises. This aspect of deposit insurance is hard to test in modern data because of the broad coverage of most systems. We, therefore, study the role that the U.S. Postal Savings System played in commercial bank closures during the Great Depression. The system offered households a federally insured deposit account at post offices throughout the nation, and its structure provides a near-ideal environment to identify this competitive liquidity risk during a crisis. We find that banks that operated nearby a post office that accepted deposits were more likely to close between 1929 and 1935. We further make use of a structural change in the availability of postal depositories in the early 1910 to estimate an IV regression that confirms the results. In either model, the effect is strongest for those banks with low reserves, suggesting that the mechanism was through depositor withdrawals rather than other factors.
    JEL: G21 H42 N22
    Date: 2024–03
  23. By: Mikel Bedayo (Banco de España); Jorge E. Galán (Banco de España)
    Abstract: The countercyclical capital buffer (CCyB) has become a very important macroprudential tool to strengthen banks’ resilience. However, there is still limited evidence of its impact on lending over the cycle. Using data of 170 banks in 25 European Union countries, we provide a comprehensive assessment of how the CCyB release during the pandemic and its earlier accumulation impacted lending activity. We find that the CCyB has significant effects on lending, but that these effects are highly dependent on banks’ capitalization levels and, more importantly, on their headroom over regulatory requirements. We show that the release of the CCyB in response to the pandemic had a positive impact on lending, especially for banks with the lowest headroom over requirements, and that this effect was larger than the negative impact of its previous accumulation. While the CCyB accumulation had a short-term negative impact on lending for the most capital-constrained banks, this effect quickly diluted due to their enhanced solvency position, potentially allowing them to lower their cost of equity. Our results provide evidence of the benefits of the CCyB, especially in supporting lending during adverse events, while emphasising the need for policymakers to consider the heterogeneous effects across banks when deploying this tool.
    Keywords: bank credit, capital buffers, COVID-19, macroprudential policy, capital regulation
    JEL: C32 E32 E58 G01 G28
    Date: 2024–04
  24. By: Vincenzo Cuciniello (Bank of Italy)
    Abstract: This paper presents novel time-varying estimates of the monetary policy rule as perceived by financial markets, focusing on days of heightened inflation-linked swap rate volatility corresponding to preliminary inflation release dates in the euro area. My findings reveal significant fluctuations in the perceived responsiveness of monetary policy to inflation, reflecting shifts in the ECB's concerns regarding price stability risks. Moreover, the sensitivity of this perceived responsiveness to monetary shocks varies based on prevailing inflation expectations, with tighter policy having a greater impact in high-inflation environments. Lastly, a stronger perceived monetary policy response to inflation enhances policy credibility by dampening the sensitivity of long-term inflation expectations to short-term fluctuations.
    Keywords: European Central Bank, monetary policy rule, credibility, financial market expectations, macroeconomic data releases
    JEL: E50 G10 C10
    Date: 2024–03
  25. By: Kumar B, Dr Pradeep Kumar B
    Abstract: The decline in the Credit-Deposit Ratio in Regional Rural Banks (RRBs) over the years and the consequent increase in investment by RRBs in government securities and other approved securities clearly show that RRBs have deviated from their stated objective to a greater extent. In fact, RRBs are expected to cater to the credit needs of rural areas, and the lack of institutional organized credit supply in rural areas needs to be tackled with the active involvement of RRBs in the lending process. But, owing to the changes happening in the banking field especially since the onset of reforms, many RRBs have failed to live up to this spirit. Against this background, the Government of India has started attempts to reform the RRBs on the lines of the EASE (Enhanced Access and Service Excellence). With EASE being introduced to revitalize the RRBs in tune with technological changes and customer requirements, RRBs may be able to retain their position as the frontrunner of rural institutional finance in India.
    Keywords: Credit Deposit Ratio, Regional Rural Banks, EASE, Institutional Finance
    JEL: G21 G23
    Date: 2023–04–02
  26. By: Kopiec, Paweł
    Abstract: When central banks announce cuts to future interest rates, the expected costs of government debt service decrease, generating additional resources in future budgets. This paper demonstrates that if the rational-expectations assumption is dropped, fiscal authority can exploit those gains by spending them on future transfers and, by announcing those transfers to households today, can enhance the output effects of forward guidance. Employing a version of the New Keynesian setup featuring bounded rationality in the form of level-k thinking, I derive an analytical expression capturing the output effects of that additional fiscal announcement. Subsequently, a similar formula is derived in a tractable heterogeneous agent New Keynesian model with bounded rationality, uninsured idiosyncratic risk, and redistributive effects of transfers. Finally, I use these analytical insights to explore the effects of the forward-guidance-induced fiscal announcement in a fully-blown heterogeneous agent New Keynesian framework with level-k thinking calibrated to match US data. The findings suggest that fiscal communication can amplify the output effects of standard forward guidance by 66%. Moreover, those gains can reach 120% when the debt-to-GDP ratio doubles. This suggests that forward guidance enriched with fiscal announcements about future transfers can be considered an effective policy option when both monetary and fiscal policies are constrained, e.g., during liquidity trap episodes accompanied by high levels of public debt.
    Keywords: Forward Guidance, Monetary Policy, Fiscal Policy, Heterogeneous Agents, Bounded Rationality
    JEL: D31 D52 D81 E21 E43 E52 E58
    Date: 2024–03–27
  27. By: Tetiana Yukhymenko (National Bank of Ukraine); Oleh Sorochan (National Bank of Ukraine)
    Abstract: This study explores the impact of central bank communications on a range of macrofinancial indicators. Specifically, we examine whether information posted on the National Bank of Ukraine (NBU) website influences foreign exchange (FX) markets and the inflation expectations of experts. Our main results suggest that the NBU's statements and press releases on monetary policy issues do indeed matter. For instance, we find that exchange rate movements and volatility are negatively correlated with the volumes of publications of the NBU on its official website. However, this effect is noticeably larger for volatility than for exchange rate changes. The impact of communication on FX developments is strongest a week after a news release, and it persists further. Furthermore, the inflation expectations of financial experts, though indifferent to NBU updates overall, turn out to be sensitive to monetary policy announcements. The latter reduces the level of expectations and interest rate movement.
    Keywords: central bank communications, monetary policy, FX market, text analysis
    JEL: E58 E71 C55
    Date: 2024–02
  28. By: Arina Wischnewsky
    Abstract: As economies transition towards digitalization, the shift from cash to noncash alternatives becomes increasingly relevant. While this trend is rapidly advancing in some countries, others continue to rely heavily on cash, underlining the need for central banks to measure and understand cash usage accurately. Numerous studies have attempted to explain the dynamics behind the declining—or, in some instances, paradoxically increasing—utilization of cash in conjunction with the rise of digital payment systems. Yet, the question of what fundamental factors influence cash use and how one might accurately formulate policies for a Central Bank Digital Currency (CBDC), particularly in a diverse European context, remains unanswered. This paper enriches the discourse on digital payment systems and cash usage by exploring the underlying influences on these phenomena. Notably, it provides new cross-country evidence on cultural and behavioral factors being pivotal in shaping these trends. This study is the first to reveal that (social) trust plays a crucial role in the global shift from cash reliance to digital economy integration, outlining a distinctive non-linear relationship between trust and cash usage.
    Keywords: cash use, digital transformation, culture, national mobile payment system, cashless societies, trust, monetary systems
    JEL: E41 O33 E42 C33 Z1 E7
    Date: 2024
  29. By: Nicolò Gnocato (Bank of Italy)
    Abstract: This paper studies the optimal conduct of monetary policy in the presence of heterogeneous exposure to energy price shocks between the employed and the unemployed, as it is documented by data from the euro-area Consumer Expectations Survey: higher energy prices weigh more on the unemployed, who consume less and devote a higher proportion of their consumption to energy. I account for this evidence into a tractable Heterogeneous-Agent New Keynesian (HANK) model with Search and Matching (S&M) frictions in the labour market, and energy as a complementary input in production and as a non-homothetic consumption good: energy price shocks weigh more on the jobless, who consume less due to imperfect unemployment insurance and, since preferences are non-homothetic, devote a higher share of this lower consumption to energy. Households' heterogeneous exposure to rising energy prices induces an endogenous trade-off for monetary policy, whose optimal response involves partly accommodating core inflation so as to indirectly sustain employment and, therefore, prevent workers from becoming more exposed to the shock through unemployment.
    Keywords: heterogeneous agents, New Keynesian, unemployment risk, energy shocks, optimal monetary policy, endogenous trade-off
    JEL: E21 E24 E31 E32 E52
    Date: 2024–03
  30. By: Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Haroon Mumtaz; Pawel Zabczyk
    Abstract: We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.
    Keywords: Monetary Policy; Quantitative Easing; International Spillovers
    Date: 2024–03–29
  31. By: Angelo D’Andrea; Patrick Hitayezu; Mr. Kangni R Kpodar; Nicola Limodio; Mr. Andrea F Presbitero
    Abstract: Combining administrative data on credit, internet penetration and a land reform in Rwanda, this paper shows that the complementarity between technology and law can overcome financial frictions. Leveraging quasi-experimental variation in 3G availability from lightning strikes and incidental coverage, we show that mobile connectivity steers borrowers from microfinance to commercial banks and improves loan terms. These effects are partly due to the role of 3G internet in facilitating the acquisition of land titles from the reform, used as a collateral for bank loans and mortgages. We quantify that the collateral's availability mediates 35% of the overall effect of mobile internet on credit and 80% for collateralized loans.
    Keywords: Banks; Credit; High-speed Internet; Mobile; Technological Change
    Date: 2024–03–29
  32. By: Andrea Gazzani (Bank of Italy); Fabrizio Venditti (Bank of Italy); Giovanni Veronese (Bank of Italy)
    Abstract: Oil prices contain information on global shocks of key relevance for monetary policy decisions. We propose a novel approach to identify these shocks at the daily frequency in a Structural Vector Autoregression (SVAR). Our method is devised to be used in real time to interpret developments in the oil market and their implications for the macroeconomy, circumventing the problem of publication lags that plagues monthly data used in workhorse SVAR models. This method proves particularly valuable for monetary policymakers at times when macroeconomic conditions evolve rapidly, like during the COVID-19 pandemic or the invasion of Ukraine by Russia.
    Keywords: oil prices, VAR, real time, monetary policy
    JEL: Q43 C32 E32 C53
    Date: 2024–03
  33. By: Baessler, Laura; Gebhardt, Georg; Gropp, Reint; Güttler, André; Taskin, Ahmet
    Abstract: We investigate whether employees in Germany benefit from public bank guarantees in terms of employment probability and wages. To that end, we exploit the removal of public bank guarantees in Germany in 2001 as a quasi-natural experiment. Our results show that bank guarantees lead to higher employment, but lower wage prospects for employees after working in affected establishments. Overall the results suggest that employees do not benefit from bank guarantees.
    Keywords: bank guarantees, credit, employment, public banks, wages
    JEL: E24
    Date: 2024
  34. By: Bjarni G. Einarsson
    Abstract: The paper presents a method for online evaluation of the optimality of the current stance of monetary policy given the most up to date data available. The framework combines estimates of the causal effects of monetary policy tools on inflation and the unemployment gap with forecasts for these target variables. The forecasts are generated with a nowcasting model, incorporating new data as it becomes available, while using entropy tilting to anchor the long end of the forecast at long run survey expectations. In a retrospective analysis of the Fed's monetary policy decisions in the lead up to the Great Recession the paper finds rejections of the optimality of the policy stance as early as the beginning of February 2008. This early detection stems from the timely nowcasting of the deteriorating unemployment outlook.
    JEL: C01 C32 C52 C53 C55 E31 E32 E37 E52 E58
    Date: 2024–04
  35. By: Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra
    Abstract: We introduce a dynamic bank theory featuring delayed loss recognition and a regulatory capital constraint, aiming to match the bank leverage dynamics captured by Tobin’s Q. We start from four facts: (1) book and market equity values diverge, especially during crises; (2) Tobin’s Q predicts future bank profitability; (3) neither book nor market leverage constraints are strictly binding for most banks; and (4) bank leverage and Tobin’s Q are mean reverting but highly persistent. We demonstrate that delayed loss accounting rules interact with bank capital requirements, introducing a tradeoff between loan growth and financial fragility. Our welfare analysis implies that accounting rules and capital regulation should optimally be set jointly. This paper emphasizes the need to reconcile regulatory dependence on book values with the market’s emphasis on fundamental values to enhance understanding of banking dynamics and improve regulatory design.
    Keywords: Bank Leverage Dynamics, Market vs. Book Values, Accounting Rules, Bank Regulation, Financial Stability
    Date: 2024–04
  36. By: Julian A. Parra-Polania; CarmiÒa O. Vargas
    Abstract: Models with an occasionally binding credit constraint have been used to analyze Önancial crises and previous literature has highlighted that the speciÖc form of this constraint is decisive for policymaking conclusions. What are the welfare e§ects of implementing a policy that is appropriate for a speciÖc type of constraint when the economy is actually facing a di§erent one? We provide an answer by analyzing the implementation either of ex ante (or macroprudential) vs. ex post debt taxes in four possible collateral constraint cases (depending on whether creditors assess current or future and total or disposable income of debtors). Our main conclusion is that a debt tax applied only during potentially constrained periods (i.e., ex post) is a more favorable intervention if the policymaker does not know which credit constraint is facing or if it is more likely to be facing a disposable-income constraint (either for current or future income). **** RESUMEN: Para analizar las crisis financieras, se han utilizado modelos con una restricción crediticia ocasionalmente vinculante y la literatura previa ha destacado que la forma específica de esta restricción es decisiva para la formulación de políticas. ¿Cuáles son los efectos en el bienestar de la implementación de una política que es apropiada para un tipo específico de restricción cuando la economía se enfrenta en realidad a otra diferente? Damos una respuesta analizando la implementación de impuestos ex-ante (o macroprudenciales) sobre la deuda frente a impuestos ex post sobre la deuda en cuatro posibles casos de restricción de colateral (dependiendo de si los acreedores evalúan la renta actual o futura y la renta total o disponible de los deudores). Nuestra principal conclusión es que un impuesto sobre la deuda aplicado sólo durante períodos de crisis (es decir, ex post) es una intervención más favorable si el formulador de políticas no saber a qué restricción crediticia se enfrenta o si es más probable que se enfrente a una que depende del ingreso disponible (ya sea para ingresos corrientes o futuros).
    Keywords: macroprudential policies, ex post policies, debt tax, financial constraint, financial crisis, sudden stops, política macroprudencial, políticas ex post, impuesto a la deuda, restricción financiera, crisis financieras, parada súbita
    JEL: E32 E44 F34 F38 F41 G01
    Date: 2024–04
  37. By: Pascal Paul; Mauricio Ulate; Jing Cynthia Wu
    Abstract: We develop a quantitative New Keynesian DSGE model to study the introduction of a central bank digital currency (CBDC): government-backed digital money available to retail consumers. At the heart of our model are monopolistic banks with market power in deposit and loan markets. When a CBDC is introduced, households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed. However, deposits also flow out of the banking system and bank lending contracts. We assess this welfare trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal interest rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%.
    Keywords: central banks; digital currencies; banks; DSGE models; monetary policy; central bank
    JEL: E3 E4 E5 G21 G51
    Date: 2024–04–08
  38. By: Zixuan Huang; Ms. Amina Lahreche; Mika Saito; Ursula Wiriadinata
    Abstract: E-money development has important yet theoretically ambiguous consequences for monetary policy transmission, because nonbank deposit-taking e-money issuers (EMIs) (e.g., mobile network operators) can either complement or substitute banks. Case studies of e-money regulations point to complementarity of EMIs with banks, implying that the development of e-money could deepen financial intermediation and strengthen monetary policy transmission. The issue is further explored with panel data, on both monthly (covering 21 countries) and annual (covering 47 countries) frequencies, over 2001 to 2019. We use a two-way fixed effect estimator to estimate the causal effects of e-money development on monetary policy transmission. We find that e-money development has accompanied stronger monetary policy transmission (measured by the responsiveness of interest rates to the policy rate), growth in bank deposits and credit, and efficiency gains in financial intermediation (measured by the lending-to-deposit rate spread). Evidence is more pronounced in countries where e-money development takes off in a context of limited financial inclusion. This paper highlights the potential benefits of e-money development in strengthening monetary policy transmission, especially in countries with limited financial inclusion.
    Keywords: Monetary policy transmission; banks; nonbank financial institutions; e-money; panel data
    Date: 2024–03–29
  39. By: Christiaan van der Kwaak (University of Groningen)
    Abstract: High levels of government debt raise the question to what extent the private sector will be willing to absorb the additional government debt that would finance future fiscal stimuli. One alternative is to money-finance such stimuli by letting the central bank buy the additional bonds and permanently retain these on its balance sheet. In this paper, I investigate the effectiveness of such money-financed fiscal stimuli when the central bank pays interest on reserves, and focus on the case where reserves and bonds are not perfect substitutes. I show for several New Keynesian models that money-financed fiscal stimuli have zero macroeconomic impact with respect to debt-financed stimuli, despite reducing funding costs for the consolidated government. Finally, I investigate the quantitative impact of money-financed fiscal stimuli for an extension where this 'irrelevance result' is broken, and find that the impact is substantially smaller than in the literature.
    Keywords: Monetary Policy, Fiscal Policy, Monetary-Fiscal Interactions, Monetary financing
    JEL: E32 E52 E62 E63
    Date: 2024–03
  40. By: Billi, Roberto (Monetary Policy Department, Central Bank of Sweden); Galí, Jordi (CREI, UPF and BSE); Nakov, Anton (European Central Bank)
    Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, when the steady state natural rate (r*) becomes permanently negative. We show that the optimal policy aims to approach gradually a new steady state with positive average inflation. Around that steady state, the optimal policy implies well defined (second-best) paths for inflation and output in response to shocks to the natural rate. Under plausible calibrations, the optimal policy implies that the nominal rate remains at its ZLB most of the time. Despite the latter feature, the central bank can implement the optimal outcome as a unique equilibrium by means of an appropriate nonlinear interest rate rule. In order to establish that result, we derive sufficient conditions for local determinacy in a general model with endogenous regime switches.
    Keywords: zero lower bound; New Keynesian model; decline in r*; equilibrium determinacy; regime switching models; secular stagnat
    JEL: E32 E52
    Date: 2024–03–01
  41. By: Natee Amornsiripanitch; Philip E. Strahan; Song Zhang; Xiang Zheng
    Abstract: In 2021, the U.S. Treasury reduced Government Sponsored Enterprises (GSEs) exposure to speculative mortgages. As a result, GSE purchases fell by about 20 percentage points. The policy reduced credit to speculative investors in housing, but increased credit to unaffected parts of the conforming-mortgage market. Banks responded by reallocating provision of speculative mortgage credit across their local markets, which in turn affected their provision of small business credit. These adjustments are most pronounced where banks do not own branches. The results suggest that banks manage credit provision not only in a macro sense – the focus of most research – but also market-by-market.
    JEL: G28
    Date: 2024–03

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