nep-cba New Economics Papers
on Central Banking
Issue of 2012‒06‒25
forty papers chosen by
Maria Semenova
Higher School of Economics

  1. Does Central Bank Financial Strength Matter for Inflation? An Empirical Analysis By Sona Benecka; Tomas Holub; Narcisa Liliana Kadlcakova; Ivana Kubicova
  2. When capital adequacy and interest rate policy are substitutes (and when they are not) By Stephen G Cecchetti; Marion Kohler
  3. Monetary Conditions and Banks' Behaviour in the Czech Republic By Adam Gersl; Petr Jakubik; Dorota Kowalczyk; Steven Ongena; Jose-Luis Peydro Alcalde
  4. Evaluating Macroeconomic Forecasts:A Concise Review of Some Recent Developments By Philip Hans Franses; Michael McAleer; Rianne Legerstee
  5. Money, Financial Stability and Efficiency By ALLEN, Franklin; CARLETTI, Elena; GALE, Douglas
  6. Euro area inflation as a predictor of national inflation rates By Antonella Cavallo; Antonio Ribba
  7. A New Model Of Trend Inflation By Chan, Joshua; Koop, Gary; Potter, Simon
  8. Bank systemic risk and the business cycle: Canadian and U.S. evidence By Christian Calmès; Raymond Théoret
  9. Inflation Tracking Portfolios By Christopher T. Downing; Francis A. Longstaff; Michael A. Rierson
  10. The Failure of Financial Macroeconomics and What to Do About it By Jean-Bernard Chatelain; Kirsten Ralf
  11. Inferring monetary policy objectives with a partially observed state By Givens, Gregory; Salemi, Michael
  12. Credit Market Competition and Liquidity Crises By CARLETTI, Elena; LEONELLO, Agnese
  13. The Role of Institutional and Political Factors in the European Debt Crisis By Carlo Panico; Francesco Purificato
  14. The changing international transmission of US monetary policy shocks: is there evidence of contagion effect on OECD countries By Irfan Akbar Kazi; Hakimzadi Wagan; Farhan Akbar
  15. Bank deleveraging : causes, channels, and consequences for emerging market and developing countries By Feyen, Erik; Kibuuka, Katie; Otker-Robe, Inci
  16. Measuring systemic funding liquidity risk in the Russian banking system By Andrievskaya, Irina
  17. Bank leverage cycles By Galo Nuño; Carlos Thomas
  18. The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter By Christian Calmès; Raymond Théoret
  19. Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy By Caterina Mendicino
  20. Money Still Talks - Is Anyone Listening? By David Laidler
  21. Channels of Monetary Transmission in the CIS By Jamilov, Rustam
  22. A primer on market discipline and governance of financial institutions for those in a state of shocked disbelief By Joseph P. Hughes; Loretta J. Mester
  23. Measuring complementarity in financial systems. By Adeline Saillard; Thomas Url
  24. Were multinational banks taking excessive risks before the recent financial crisis? By Luis Mohamed Azzim Gulamhussen; Carlos Pinheiro; Alberto Franco Pozzolo
  25. Persistence in Real Exchange Rate Convergence By Thanasis Stengos; M. Ege Yazgan
  26. Universal banking, competition and risk in a macro model By Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
  27. The Bank of Spain: a national financial institution By Pablo Martín-Aceña; Elena Martinez-Ruiz; Pilar Nogués-Marco
  28. Shaping the international financial system in century of globalization By Viktor O. Ledenyov; Dimitri O. Ledenyov
  29. What assets should banks be allowed to hold? By V.V. Chari; Christopher Phelan
  30. A Network model of systemic risk: identifying the sources of dependence across institutions By Carlos Castro; Juan Sebastian Ordoñez
  31. Why do UK banks securitize? By Cerrato, Mario; Choudhry, Moorad; Crosby, John; Olukuru, John
  32. International Stock Market Integration: Central and South Eastern Europe Compared By Roman Horvath; Dragan Petrovski
  33. Financial Literacy, Information Acquisition and Asset Pricing Implications By Yuri Pettinicchi
  34. A Positive Analysis of Deposit Insurance Provision: Regulatory Competition Among European Union Countries By Merwan Engineer; Paul Schure; Mark Gillis
  35. Resolving the African Financial Development Gap: Cross-country comparisons and a within-country study of Kenya By ALLEN, Franklin; CARLETTI, Elena; CULL, Robert; QIAN, Jun; SENBET, Lemma; VALENZUELA, Patricio
  36. An Explanation of the Greek Crisis: "The Insiders - Outsiders Society" By Kollintzas, Tryphon; Papageorgiou, Dimitris; Vassilatos, Vanghelis
  37. Households’ position in the financial crisis in Iceland. Analysis based on a nationwide household-level database By Thorvardur Tjörvi Ólafsson; Karen Áslaug Vignisdóttir
  38. Financial inclusion in Africa : an overview By Demirguc-Kunt, Asli; Klapper, Leora
  39. Does Finance Cause Growth? Evidence from the Origins of Banking in Russia By Daniel Berkowitz; Mark Hoekstra; Koen Schoors
  40. Shadow banking in China By Li, Jianjun; Hsu, Sara

  1. By: Sona Benecka; Tomas Holub; Narcisa Liliana Kadlcakova; Ivana Kubicova
    Abstract: This paper analyses empirically the link between central bank financial strength and inflation. The issue has become very topical in recent years as many central banks have accumulated large financial exposures and the risk of losses has risen. We conclude that even though some estimates show a statistically significant and potentially non-linear negative relationship between several measures of central bank financial strength and inflation, this link appears rather weak and not as robust as suggested by the previous - very limited - literature. In general, other inflation determinants play a much more important and robust role.
    Keywords: Central bank financial strength, central bank independence, inflation, monetary policy, seigniorage.
    JEL: E31 E52 E58
    Date: 2012–05
  2. By: Stephen G Cecchetti; Marion Kohler
    Abstract: Prudential instruments are commonly seen as the tools that can be used to deliver the macroprudential policy goals of reducing the frequency and severity of financial crises. And interest rates are traditionally viewed as the means to deliver the macroeconomic stabilisation goals of low, stable inflation and sustainable, stable growth. But, at the macroeconomic level, these two sets of policy tools have quite a bit in common. We use a simple macroeconomic model to study the extent to which capital adequacy requirements and interest rates might be substitutes in meeting the objective of stabilising the economy. We find that in our model both are substitutes for achieving conventional monetary policy objectives. In addition, we show that, in principle, they can both be used to meet financial stability objectives. This implies a need to coordinate the use of macroprudential and traditional monetary policy tools, a need that has clear implications for the construction of the policy framework designed to deliver the joint objectives of macroeconomic and financial stability.
    Keywords: Monetary policy, capital adequacy policy, financial stability policy
    Date: 2012–05
  3. By: Adam Gersl; Petr Jakubik; Dorota Kowalczyk; Steven Ongena; Jose-Luis Peydro Alcalde
    Abstract: This paper examines the impact of monetary conditions on the risk-taking behaviour of banks in the Czech Republic by analysing the comprehensive credit register of the Czech National Bank. Our duration analysis indicates that expansionary monetary conditions promote risk-taking among banks. At the same time, a lower interest rate during the life of a loan reduces its riskiness. While seeking to assess the association between banks’ appetite for risk and the short-term interest rate we answer a set of questions related to the difference between higher liquidity versus credit risk and the effect of the policy rate conditioned on bank and borrower characteristics.
    Keywords: Business cycle, credit risk, financial stability, lending standards, liquidity risk, monetary policy, policy interest rate, risk-taking.
    JEL: E5 E44 G21
    Date: 2012–01
  4. By: Philip Hans Franses (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam); Michael McAleer (Erasmus University Rotterdam,Tinbergen Institute,Kyoto University,Complutense University of Madrid); Rianne Legerstee (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam, Tinbergen Institute The Netherlands)
    Abstract: Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are typically based on econometric model forecasts jointly with human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC.
    Keywords: Macroeconomic forecasts, econometric models, human intuition, biased forecasts, forecast performance, forecast evaluation, forecast comparison.
    JEL: C22 C51 C52 C53 E27 E37
    Date: 2012–06
  5. By: ALLEN, Franklin; CARLETTI, Elena; GALE, Douglas
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Date: 2012
  6. By: Antonella Cavallo; Antonio Ribba
    Abstract: The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA.
    Keywords: Inflation differentials, euro area, structural Cointegrated VARs, permanent-transitory decompositions
    JEL: E31 C32
    Date: 2012–05
  7. By: Chan, Joshua; Koop, Gary; Potter, Simon
    Abstract: This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.
    Keywords: Constrained inflation, non-linear state space model, underlying inflation, inflation targeting, inflation forecasting, Bayesian,
    Date: 2012
  8. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty, and more specifically the way banks systemic risk evolves over the business cycle. Adopting the methodology of Beaudry et al. (2001), our results clearly suggest that the dispersion across banks traditional portfolios has increased through time. We introduce an estimation procedure based on EGARCH and refine Baum et al. (2002, 2004, 2009) and Quagliariello (2007, 2009) framework to analyze the question in the new industry context, i.e. shadow banking. Consistent with finance theory, we first confirm that banks tend to behave homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that the cross-sectional dispersions of loans to assets and non-traditional activities shrink essentially during downturns, when the resilience of the banking system is at its lowest. More importantly, our results also suggest that the cross-sectional dispersion of market-oriented activities is both more volatile and sensitive to the business cycle than the dispersion of the traditional activities.
    Keywords: Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty; Markov switching regime; EGARCH.
    JEL: C32 G20 G21
    Date: 2012–04–27
  9. By: Christopher T. Downing; Francis A. Longstaff; Michael A. Rierson
    Abstract: We propose a new approach to constructing inflation tracking portfolios. The key to this approach is the insight that asset returns track expected inflation far better than they track current realized inflation. Thus, we can construct portfolios that track next month's inflation much more closely than they track this month's inflation. We show this staggered hedging approach can eliminate nearly 90 percent of the tracking error of more conventional inflation hedging strategies. We also find that long-short positions in equities play a dominant role in the effective hedging of inflation risk over extended horizons. These results suggest that the goal of protecting portfolios against inflation may be more feasible that is commonly believed.
    JEL: G11
    Date: 2012–06
  10. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE)
    Abstract: The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight stylized facts of the ongoing crisis. We therefore suggest two complementary assumptions : (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its "fundamental long term value". Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.
    Keywords: Asset prices, liquidity trap, monetary policy, financial stability, business cycles, economic growth, dynamic stochastic, general equilibrium models.
    Date: 2012–05
  11. By: Givens, Gregory; Salemi, Michael
    Abstract: Accounting for the uncertainty inherent in real-time perceptions of the state of the economy is believed to be critical for the analysis of historical monetary policy. We investigate this claim through the lens of a small-scale new-Keynesian model with optimal discretionary policy and partial information about the state. The model is estimated using maximum likelihood on US data over the Volcker-Greenspan-Bernanke regime. A comparison of our estimates to those from a version of the model with complete information reveals that under partial information: (i) the Federal Reserve demonstrates a significant concern for stabilizing fluctuations in the output gap, and (ii) the discrepancy between optimal and observed policy behavior is smaller.
    Keywords: Partial Information; Optimal Monetary Policy; Central Bank Preferences
    JEL: E58 E52 E37
    Date: 2012–05–30
  12. By: CARLETTI, Elena; LEONELLO, Agnese
    Abstract: We develop a two-period model where banks invest in reserves and loans, and are subject to aggregate liquidity shocks. When banks face a a shortage of liquidity, they can sell loans on the interbank market. Two types of equilibria emerge. In the no default equilibrium, banks keep enough reserves and remain solvent. In the mixed equilibrium, some banks default with positive probability. The former equilibrium exists when credit market competition is intense, while the latter emerges when banks exercise market power. Thus, competition is beneficial to financial stability. The effect of default on welfare depends on the exogenous risk of the economy as represented by the probability of the good state of nature.
    Keywords: Interbank market; default; price volatility
    JEL: G01 G21
    Date: 2012
  13. By: Carlo Panico; Francesco Purificato
    Abstract: Panico and Purificato argue that before 2007, flaws in the European institutional organization affected the cyclical and growth performance of the euro countries. After that date they contributed to an intensification of the conflicts among national political bodies and between them and the European authorities. These conflicts have favored the speculative attacks against some Government debts and exposed the peculiar conditions under which central banking is carried out in the euro area. <p></p>They conclude that the institutional organization of the euro area must be reformed in such a way as to allow it to effectively pursue the objectives for which it was created, i.e. to protect the economies and the citizens from the instability of the international financial markets. The reforms must remove, as has been done in monetary policy, the cause of the “moral hazard” problem, i.e. the uncertainty as to the actual conduct of fiscal policy, and transform the current defensive attitudes of the different actors of the coordination process (i.e. the national political authorities and the central bank) into a cooperative and positive search for the most convenient mix of monetary and fiscal policy for the whole area.
    Date: 2012
  14. By: Irfan Akbar Kazi; Hakimzadi Wagan; Farhan Akbar
    Abstract: We study the changing international transmission of US monetary policy shocks to 14 major OECD countries over the period 1981Q1-2010Q4. We use a time-varying parameter factor augmented VAR approach to study the effective federal funds rate shocks together with a large data set of 265, major financial, macroeconomic and trade variables. Our main findings are as follows. First, negative US monetary policy shocks have considerable negative impact on GDP growth in the US, Canada, Japan and Sweden whereas there is positive impact on GDP growth in the most of the other member countries. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. Third, the transmission of US monetary policy shocks to major economic and financial variables varies in magnitude during financial turmoil periods than normal periods such as the gross fixed capital formation residential, turned most negative over the second quarter after the initial shock in the US, Canada, Germany, Japan, Switzerland and New Zealand mainly during 2008Q4. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.
    Keywords: Monetary policy shocks, financial markets, international transmission channels, global integration, turmoil periods, time-varying parameter factor augmented VAR.
    JEL: F1 F4 F15 C3 C5
    Date: 2012
  15. By: Feyen, Erik; Kibuuka, Katie; Otker-Robe, Inci
    Abstract: Just before the 2008-09 global financial crisis, policymakers were concerned about the rapid growth of bank credit, particularly in Europe; now worry centers on a potential global credit crunch led by European banking institutions. Overall, credit conditions across Europe deteriorated markedly in late 2011. Spillover effects are being felt around the globe and imply significant channels through which deleveraging could have disruptive consequences for credit conditions in emerging markets, particularly in emerging Europe. Significant liquidity support provided by the European Central Bank was a"game changer,"at least in the short term, as it helped revive markets and limited the risk of disorderly deleveraging. However, the extent, speed, and impact of European bank deleveraging remain highly dependent on the evolution of economic growth and market conditions, which in turn are guided by the ultimate impact of European Central Bank liquidity support, resolution of the sovereign debt crisis within the Euro Area, and the ability of the European rescue fund to provide an effective firewall against contagion.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Financial Intermediation,Bankruptcy and Resolution of Financial Distress
    Date: 2012–06–01
  16. By: Andrievskaya, Irina (BOFIT)
    Abstract: The 2007-2009 global financial crisis demonstrated the need for effective systemic risk measurement and regulation. This paper proposes a straightforward approach for estimating the systemic funding liquidity risk in a banking system and identifying systemically critical banks. Focusing on the surplus of highly liquid assets above due payments, we find systemic funding liquidity risk can be expressed as the distance of the aggregate liquidity surplus from its current level to its critical value. Calculations are performed using simulated distribution of the aggregate liquidity surplus determined using Independent Component Analysis. The systemic importance of banks is then assessed based on their contribution to variation of the liquidity surplus in the system. We apply this methodology to the case of Russia, an emerging economy, to identify the current level of systemic funding liquidity risk and rank banks based on their systemic relevance.
    Keywords: systemic risk; liquidity surplus; banking; Russia
    JEL: G21 G28 P29
    Date: 2012–06–18
  17. By: Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: We study the cyclical fl uctuations of leverage and assets of fi nancial intermediaries and GDP in the United States. Leverage and assets are several times more volatile than GDP, and experience larger fl uctuations for unregulated (‘shadow’) intermediaries than for regulated ones. While the leverage of regulated intermediaries is rather acyclical with respect to their assets and to GDP, the leverage of unregulated intermediaries is strongly procyclical in relation to their assets, and mildly procyclical in relation to GDP. We then build a general equilibrium model with both regulated and unregulated fi nancial intermediaries. The latter borrow from investors in the form of short-term collateralized risky debt, and are subject to endogenous leverage constraints. We fi nd that volatility shocks are key to generating fl uctuations and comovements similar to those found in the data. Also, in a scenario with lower cross-sectional volatility, output is higher on average but more volatile, due to higher leverage of unregulated banks.
    Keywords: fi nancial intermediaries, short-term collateralized debt, limited liability, call option, put option, moral hazard, leverage
    JEL: E20 G10 G21
    Date: 2012–06
  18. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: Traditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.
    Keywords: Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty.
    JEL: C32 G20 G21
    Date: 2012–01–27
  19. By: Caterina Mendicino
    Abstract: What are the macroeconomic implications of higher leveraged borrowing? To address this question, we develop a business cycle model with credit frictions in which firms reallocate capital among themselves through the credit market. We find that looser collateral requirements moderate the sensitivity of investment and output to changes in productivity but sharpen the response to shocks originated in the credit market. This result poses a challenge to the design of a macro-prudential policy framework that aims to mitigate pro-cyclicality in the financial market and improve macroeconomic stability. We document that, contrary to discretionary lower caps on loan-to-value ratios, time-varying caps that counter-cyclically respond to indicators of financial imbalances are successful in smoothing credit-cycles without increasing the sensitivity of the economy to real shocks. Further, countercyclical loan-to-value ratios also dampen macroeconomic volatility without reducing the size of the economy.  
    JEL: E21 E22 E44 G20
    Date: 2012
  20. By: David Laidler (C.D. Howe Institute)
    Abstract: Monetary authorities should keep an eye on money growth in the economy to help stimulate and monitor the recovery. Money growth, meaning the pace of expansion in the quantity of money held by the public and readily accessible deposits at financial institutions, is proving prescient in the current situation. While skeptics of QE will be inclined to attribute the recent surge of US money growth and signs of recovery in its wake to coincidence, advocates will suggest that QE's first round in 2009 prevented a collapse of the money supply like the one that turned the initial downturn of 1929/30 into the Great Depression, and that its second round is now promoting recovery.
    Keywords: Monetary Policy, quantitative easing (QE), Bank of Canada, interest rates
    JEL: E52 E58 E42
    Date: 2012–05
  21. By: Jamilov, Rustam
    Abstract: Twenty years have passed since the breakdown of the Soviet Union, and it is time to draw a concluding line for monetary policy efficiency in the Commonwealth of Independent States (CIS). We propose a comprehensive treatment of the subject for nine members of the CIS for the period of 2000-2009. Four transmission channels are investigated: interest rate channel, exchange rate channel, bank lending channel, and monetary channel. First, we design a VAR framework for each CIS member-state and investigate the short-run dynamics of the impact of each of the four transmission channels on domestic output and inflation. Second, we construct Auto Regressive Distributed Lag Models (ARDL) in order to study the country-wise efficiency of transmission channels in the long run. Finally, we employ a panel data fixed effects method to show how the CIS behaves as a region. Our short-run individual country analysis yields highly heterogeneous results. In the long run, however, it’s apparent that broad monetary base (M2) is the most influential determinant of aggregate output. Inflation is affected the most by the refinancing rate and the flow of remittances. For both output and inflation, exchange rate plays a role of a supporting channel.
    Keywords: CIS; Monetary Transmission; VAR; ARDL Cointegration; Panel Data
    JEL: O53 E5 E52 E40
    Date: 2012–06–20
  22. By: Joseph P. Hughes; Loretta J. Mester
    Abstract: Self regulation encouraged by market discipline constitutes a key component of Basel II’s third pillar. But high-risk investment strategies may maximize the expected value of some banks. In these cases, does market discipline encourage risk-taking that undermines bank stability in economic downturns? This paper reviews the literature on corporate control in banking. It reviews the techniques for assessing bank performance, interaction between regulation and the federal safety net with market discipline on risk-taking incentives and stability, and sources of market discipline, including ownership structure, capital market discipline, product market competition, labor market competition, boards of directors, and compensation.
    Keywords: Regulation ; Banks and banking
    Date: 2012
  23. By: Adeline Saillard (Centre d'Economie de la Sorbonne - Paris School of Economics); Thomas Url (WIFO - Austrian Institute of Economic Research)
    Abstract: The distinction between bank and market based economies has a long tradition in applied macroeconomics. The two types differ not only in the level of financial activity channeled through the stock market and private banking, but also in their institutional frameworks. We challenge this traditional distinction between the two types of financial architecture. We develop an index that accounts for complementarity between financial markets and banking systems that has been hypothesized by Sylla (1998) and Song and Thakor (2010). The theoretical foundation of our empirical approach is the general equilibrium framework by Freixas and Rochet (1997). We validate the proposed index and the underlying theory of complementary using a random coefficient and a Generalized estimating equations (GEE).
    Keywords: Bank-based, market-based, complementarity, efficiency, financial structure.
    JEL: E42 G20
    Date: 2012–06
  24. By: Luis Mohamed Azzim Gulamhussen (University Institute of Lisbon); Carlos Pinheiro (Caixa General de Dep˜sitos); Alberto Franco Pozzolo (Universita' degli Studi del Molise)
    Abstract: The recent financial crisis has clearly shown that the relationship between bank internationalization and risk is complex. Multinational banks can benefit from portfolio diversification, reducing their overall riskiness, but this effect can be offset by incentives going in the opposite direction, leading them to take on excessive risks. Since both effects are grounded on solid theoretical arguments, the answer of what is the actual relationship between bank internationalization and risk is left to the empirical analysis. In this paper, we study such relationship in the period leading to the financial crisis of 2007-2008. For a sample of 384 listed banks from 56 countries, we calculate two measures of risk for the period from 2001 to 2007 Ð the expected default frequency (EDF), a market-based and forward-looking indicator, and the Z-score, a balance-sheet-based and backward-looking measure Ð and relate them to their degree of internationalization. We find robust evidence that international diversification increases bank risk.
    Keywords: Banks, Risk, Multinational banking, Economic integration, Market structure.
    JEL: G21 G32 F23 F36 L22
    Date: 2012
  25. By: Thanasis Stengos (University of Guelph); M. Ege Yazgan (Istanbul Bilgi University)
    Abstract: In this paper we use a long memory framework to examine the validity of the Purchasing Power Parity (PPP) hypothesis using both monthly and quarterly data for a panel of 47 countries over a fifty year period (1957 to 2009). The analysis focusses on the long memory parameter d that allows us to obtain different convergence classifications depending on its value. Our analysis allows for the presence of smooth structural breaks and it does not rely on the use of a benchmark. Overall the evidence strongly points to the presence of a long memory process, where 0:5 ≤ d < 1. The implication of our results is that we find long memory mean reverting convergence, something that is also consistent with Pesaran et al (2009). In explaining the speed of convergence as captured by the estimated long memory parameter d we find impediments to trade such as distance between neighboring countries and sticky prices to be mainly responsible for the slow adjustment of real exchange rates to PPP rather than nominal rates for all country groups but Asia, where the opposite is true.
    Keywords: Purchasing Power Parity, Convergence, Long Memory, Pairwise Approach
    JEL: C23 E31 F41
    Date: 2012–06
  26. By: Damjanovic, Tatiana; Damjanovic, Vladislav; Nolan, Charles
    Abstract: A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.
    Keywords: Risk in DSGE models, investment banking, financial intermediation, separating commercial and investment banking, competition and risk, moral hazard in banking, prudential regulation, systematic vs. idiosyncratic risks.,
    Date: 2012
  27. By: Pablo Martín-Aceña (Universidad de Alcalá, Spain); Elena Martinez-Ruiz (Universidad de Alcalá, Spain); Pilar Nogués-Marco (Universidad Carlos III de Madrid)
    Abstract: This paper explains the process by which the Bank of Spain became a national bank, first by obtaining the monopoly of issue in 1874 and then by extending its sphere of financial action by creating the country's only network of bank branches before 1900. The implementation of a "unified or national banknote" in 1884 and the creation of a system of free transfers for its clients were also decisive steps towards the Bank's transformation from a local Madrid-based institution into a Spanish national institution. The paper also argues that the transformation of the Bank of Spain into a genuine national financial institution contributed to the modernization of the Spanish administrative fabric.
    Keywords: Bank of Spain, financial history, banknote issue, banking modernization
    JEL: N23 N43 G21
    Date: 2012–06
  28. By: Viktor O. Ledenyov; Dimitri O. Ledenyov
    Abstract: We educe a perspective on how best to regulate the bank of tomorrow in frames of debate launched by the International Centre for Financial Regulation and Financial Times. Our goal is to create a conceptual framework for policymakers and regulators to shape the international financial system in century of globalization using the 1888 FT's motto: "Without fear and without favour." Our prospect employs an analytical approach, which focuses on the origins and evolution of banking system, its transformation over the recent decades, subsequent encountering the limits to growth and redefinition of new strategic boundaries of emerging financial industry. We identify the main reasons and limitations, which led to the global financial crisis. We propose the new research agendas with the aim to understand the situation in finances, evaluate the created systemic damages, and find the possible ways to resolve the existing problems through introduction of new banking regulation. We think that the global economic and financial systems are highly nonlinear systems. In our opinion, the frequency, phase and amplitude modulation during the mixing of waves, which characterize the Kitchin, Juglar, Kuznets, Kondratiev economic cycles, may result in origination of strong nonlinear dynamics in financial system, accompanied by chaos- induced phenomena. These nonlinear effects have to be taken to the account, when adding the liquidity to the financial system in small quantas in series over time period during the Quantitative Easing policy execution by central banks. We propose the Random Tax to be selectively imposed on the profits, obtained by market agents during high-risk high-profit speculative transactions. We expect that the Random Tax will stabilize the financial system in conditions of free market capitalism.
    Date: 2012–06
  29. By: V.V. Chari; Christopher Phelan
    Abstract: Banks are vulnerable to self-fulfilling panics because their liabilities (such as demand deposits and certificates of deposit) are short term and unconditional, and their assets (such as mortgages and business loans) are long term and illiquid. To prevent wider financial fallout from such panics, governments have strong incentive to bail out bank debtholders. Paradoxically, expectations of such bailouts can lead financial systems to rely excessively—from a societal perspective—on short-term debt to fund long-term assets. Fragile banking systems thus impose external costs, and regulation may therefore be socially desirable. ; In light of this fragility and cost, we examine two of the major theoretical benefits from the reliance of the banking system on short-term debt: (1) maturity transformation and (2) efficient monitoring of bank managers. We argue that while both justifications may be compelling, they point us to financial regulations very different from the ones currently in place. These theoretical justifications suggest that the assets funded by banks should not have close substitutes in publicly traded markets, as is currently the case.
    Date: 2012
  30. By: Carlos Castro; Juan Sebastian Ordoñez
    Abstract: Abstract: We design a financial network model that explicitly incorporates linkages across institutions through a direct contagion channel, as well as an indirect common exposure channel. In particular, common exposure is setup so as to link the financial to the real sector. The model is calibrated to balance sheet data on the colombian financial sector. Results indicate that commercial banks are the most systemically important financial institutions in the system. Whereas government owned institutions are the most vulnerable institutions in the system.
    Date: 2012–06–12
  31. By: Cerrato, Mario; Choudhry, Moorad; Crosby, John; Olukuru, John
    Abstract: The eight years from 2000 to 2008 saw a rapid growth in the use of securitization by UK banks. We aim to identify the reasons that contributed to this rapid growth. The time period (2000 to 2010) covered by our study is noteworthy as it covers the pre- financial crisis credit-boom, the peak of the fi nancial crisis and its aftermath. In the wake of the financial crisis, many governments, regulators and political commentators have pointed an accusing finger at the securitization market - even in the absence of a detailed statistical and economic analysis. We contribute to the extant literature by performing such an analysis on UK banks, focussing principally on whether it is the need for liquidity (i.e. the funding of their balance sheets), or the desire to engage in regulatory capital arbitrage or the need for credit risk transfer that has led to UK banks securitizing their assets. We show that securitization has been signi ficantly driven by liquidity reasons. In addition, we observe a positive link between securitization and banks credit risk. We interpret these latter findings as evidence that UK banks which engaged in securitization did so, in part, to transfer credit risk and that, in comparison to UK banks which did not use securitization, they had more credit risk to transfer in the sense that they originated lower quality loans and held lower quality assets. We show that banks which issued more asset-backed securities before the financial crisis suffered more defaults after the financial crisis.
    Date: 2012
  32. By: Roman Horvath; Dragan Petrovski
    Abstract: We examine the international stock market comovements betweenWestern Europe vis-à-vis Central (the Czech Republic, Hungary and Poland) and South Eastern Europe (Croatia, Macedonia and Serbia) using multivariate GARCH models in 2006-2011. Comparing these two groups, we find that the degree of comovements is much higher for Central Europe. The correlation of South Eastern European stock markets with developed markets is essentially zero. The exemption to this regularity is Croatia with its stock market displaying a greater degree of integration towards Western Europe recently, but still below the levels typical for Central Europe. All stock markets fall strongly at the beginning of the global fi- nancial crisis and we do not find that the crisis altered the degree of stock market integration between this group of countries.
    Keywords: stock market comovements, Central and South Eastern Europe, GARCH
    JEL: C22 C32 G15
    Date: 2012–02–01
  33. By: Yuri Pettinicchi (Department of Economics, University Of Venice Cà Foscari)
    Abstract: In this paper I study the information acquisition process in a simple asset pricing model with heterogeneous beliefs about future prices. This is instrumental to investigate the effects of financial literacy on market volatility. I posit that financial literacy affects the cost of acquiring information on the asset payoff and show that the effect on the market volatility is non-monotone and depends on the uncertainty of the fundamentals. I conclude that policies aimed at reducing the financial information acquisition cost increase price informativeness and, in a scenario with high uncertainty of the fundamentals, reduce the market volatility. The main intuition is that lower information cost for the less literate households leads them to acquire more private information and to trade more actively. Having more private information revealed by the market price affects positively market volatility. On the other hand, with low uncertainty in the fundamental, the positive marginal effect is offset by the negative effect of having more traders with less precise beliefs.
    Date: 2012
  34. By: Merwan Engineer (University of Victoria, Canada); Paul Schure (University of Victoria, Canada); Mark Gillis (Commonwealth Bank of Australia, Australia)
    Abstract: We consider the provision of deposit insurance as the outcome of a non-cooperative policy game between nations. Nations compete for deposits in order to protect their banking systems from the destabilizing impact of potential capital flight. Policies are chosen to attract depositors who optimally respond to the expected return to deposits, which depends on both stability and deposit insurance levels. We identify both defensive and beggar-thy-neighbour policies. The model sheds light on the European banking crisis of 2008 in which individual nations ratcheted up their deposit insurance levels.
    Date: 2012–06
  35. By: ALLEN, Franklin; CARLETTI, Elena; CULL, Robert; QIAN, Jun; SENBET, Lemma; VALENZUELA, Patricio
    Abstract: With extensive country- and firm-level data sets we first document that the financial sectors of most sub-Saharan African countries remain significantly underdeveloped by the standards of other developing countries. We also find that population density appears to be considerably more important for banking sector development in Africa than elsewhere. To better understand how countries can overcome the high costs of developing viable banking sectors outside large metropolitan areas, we focus on Kenya, which has made significant strides in financial inclusion and development in recent years. We find a positive and significant impact of Equity Bank, a leading private commercial bank on financial access, especially for under-privileged households. Equity Bank’s business model—providing financial services to population segments typically ignored by traditional commercial banks and generating sustainable profits in the process—can be a potential solution to the financial access problem that has hindered the development of inclusive financial sectors in many other African countries.
    Keywords: Africa; Kenya; Finance and growth; population density; Equity Bank; financial access
    JEL: O5 K0 G0
    Date: 2012
  36. By: Kollintzas, Tryphon; Papageorgiou, Dimitris; Vassilatos, Vanghelis
    Abstract: In this paper we present stylized facts of the Greek economy that characterize the causes and the consequences of its ongoing crisis. Then, we offer an explanation that can account for those causes and consequences. This explanation is based on the view of Greek society as consisting of two groups with conflicting goals:'insiders' and 'outsiders'. Insiders are enjoying rightful and unrighteous benefits and the system is protecting them from their own potentially unlawful behavior, competition and meritocracy. Outsiders are the rest of society. The economic consequence of the 'insiders - outsiders society' is the accumulation of public and foreign debts as well as relatively low overall growth - features that characterize the Greek economy, for some time. Finally, following the insiders- outsiders explanation, we offer policy recommendations for an exit from the crisis and the resumption of growth.
    Keywords: competitiveness; Greek crisis; growth; insiders-outsiders; total factor productivity; twin deficits
    JEL: D72 E62 E65 F34 O43 O52
    Date: 2012–05
  37. By: Thorvardur Tjörvi Ólafsson; Karen Áslaug Vignisdóttir
    Abstract: We utilise a unique nationwide household-level database to analyse how households’ financial position evolved in the run-up to and aftermath of the financial crisis in Iceland. The main focus of our analysis is to assess how the share of indebted households in financial distress evolved and how it was affected by debt restructuring measures and court decisions. We also analyse the share of indebted homeowners in negative housing equity and those in the highly vulnerable situation of being in distress and negative housing equity simultaneously. The analysis suggests that the share of indebted households in distress grew from 12½ per cent in early 2007 to 23½ per cent on the eve of the banking collapse in the autumn of 2008, when the lion’s share of the balance sheet shocks had already taken place. The extent of acute distress nearly quadrupled over the same period. Forbearance efforts provided temporary breathing space, but the share in distress is estimated to have peaked at 27½ per cent in autumn 2009, before declining to 20 per cent at yearend 2010 due to policy and legal interventions. Financial distress is found to be inversely related to income and age, as well as being higher among families with children and those with foreigndenominated debt than among childless couples and those with ISK-denominated loans only. Parents of every fifth child in Iceland were in distress at year-end 2010. The incidence of negative housing equity increased dramatically, from roughly 6 to 37 per cent of indebted homeowners, over the four-year period. Negative housing equity is more widespread among high-income than low-income households. The share of homeowners simultaneously in distress and negative equity rose from roughly 1 to 14 per cent but declined to 10 per cent by the end of the period. Middleincome families with children, most of which had foreign-denominated loans, and low-income singles seem especially vulnerable. Some of the seeds of households’ financial difficulties were sown by imprudent lending in 2007 and 2008, when 16 per cent of the total amount of new loans was granted to households already in distress. Up to 34 per cent of households in distress at yearend 2010 were granted loans in 2007-2008, when they were already financially distressed.
    Date: 2012–06
  38. By: Demirguc-Kunt, Asli; Klapper, Leora
    Abstract: This paper summarizes financial inclusion across Africa. First, it provides a brief overview of the African financial sector landscape. Second, it uses the Global Financial Inclusion Indicators (Global Findex) database to characterize adults in Africa that use formal and informal financial services and identify the barriers to formal account ownership. Next, it uses World Bank Enterprise Survey data to examine how the use of financial services by small and medium enterprises in Africa compares with small and medium enterprises in other developing regions in terms of account ownership and availability of lines of credit. The authors find that less than a quarter of adults in Africa have an account with a formal financial institution and that many adults in Africa use informal methods to save and borrow. Similarly, the majority of small and medium enterprises in Africa are unbanked and access to finance is a major obstacle. Compared with other developing economies, high-growth small and medium enterprises in Africa are less likely to use formal financing, which suggests formal financial systems are not serving the needs of enterprises with growth opportunities.
    Keywords: Access to Finance,Banks&Banking Reform,Emerging Markets,Debt Markets,E-Business
    Date: 2012–06–01
  39. By: Daniel Berkowitz; Mark Hoekstra; Koen Schoors
    Abstract: This paper examines the effect of banking on economic growth in modern Russia. To overcome simultaneity and selection, we exploit regional banking variation induced by the creation of “specialized banks” (spetsbanks) in the last years of the Soviet Union (1988-1991). Consistent with the qualitative work of Joel Hellman [1993] and Juliet Johnson [2000], we show that these reforms generated an ideal natural experiment in that the concentration of spetsbanks is jointly uncorrelated with 15 predictors of future growth, including pre-banking income, education, anti-market sentiment, institutional quality, and government interference in the economy. Results indicate that while the presence of one additional spetsbank per million inhabitants increased total within-state lending to private firms and individuals by 14 to 26 percent in the early 2000s, it had no effect on investment or per capita income. In contrast, we find that spetsbanks increased employment. Additional results indicate that spetsbanks increased growth in regions in which they were less connected to government and were generally more similar to non-spetsbanks, as well as in regions that were better at protecting property rights. Our results thus indicate that bank origins, political connections, and property rights are important determinants of effective finance.
    JEL: O16 O43 P3
    Date: 2012–06
  40. By: Li, Jianjun; Hsu, Sara
    Abstract: This is an English summary of a 300-page report produced by Jianjun Li, Sara Hsu and Guangning Tian, “The Annual Report of China Shadow Banking System,” Project Sponsored by the National Natural Science Foundation of China, Project Number 71173246,
    Keywords: Shadow Banking; China; Financial System; Informal Finance
    JEL: G2
    Date: 2012–06–05

This nep-cba issue is ©2012 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.