nep-cba New Economics Papers
on Central Banking
Issue of 2012‒07‒08
forty-nine papers chosen by
Maria Semenova
Higher School of Economics

  1. Do bank characteristics influence the effect of monetary policy on bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  2. Interbank Market and Macroprudential Tools in a DSGE Model By Carrera, Cesar; Vega, Hugo
  3. Monetary Policy Transmission in the GCC Countries By Raphael A. Espinoza; Ananthakrishnan Prasad
  4. Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint By Stefanie Flotho
  5. Asset market participation, monetary policy rules and the great inflation By Roland Straub; Florin O. Bilbiie
  6. Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies By Luis-Felipe Zanna; Marco Airaudo
  7. Liquidity, risk and the global transmission of the 2007-08 financial crisis and the 2010-2011 sovereign debt crisis By Alexander Chudik; Marcel Fratzscher
  8. Optimal Liquidity and Economic Stability By Linghui Han; Il Houng Lee
  9. Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America By Mercedes Garcia-Escribano; Camilo Ernesto Tovar Mora; Mercedes Vera Martin
  10. Taylor rules, fear of floating and the role of the exchange rate in monetary policy: a case of observational equivalence By Juan Paez-Farrell
  11. The Role of Banks in Monetary Policy Transmission in South Africa By Syden Mishi; Asrat Tsegaye
  12. Capital controls and foreign exchange policy By Marcel Fratzscher
  13. Heterodox Central Bankers: Eccles, Prebisch and Financial Reform in 1930s By Esteban Pérez Caldentey and Matias Vernengo
  14. Euro money market spreads during the 2007-? Financial crisis By Nuno Cassola; Claudio Morana
  15. Thousands of models, one story: current account imbalances in the global economy By Michele Ca’Zorzi; Alexander Chudik; Alistair Dieppe
  16. Financial market frictions in a model of the euro area By Giovanni Lombardo; Peter McAdam
  17. Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates By Emmanuel Farhi; Ivan Werning
  18. The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal By Roberto A. De Santis
  19. How Effective Is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence By Prachi Mishra; Peter Montiel
  20. Foreign Banks and the Vienna Initiative: Turning Sinners into Saints? By Alexander Pivovarsky; Elena Loukoianova; Ralph De Haas; Yevgeniya Korniyenko
  21. Liquidity and credit risk premia in government bond yields By Jacob Ejsing; Magdalena Grothe; Oliver Grothe
  22. CISS - a composite indicator of systemic stress in the financial system By Dániel Holló; Manfred Kremer; Marco Lo Duca
  23. Financial intermediaries, credit Shocks and business cycles By Mimir, Yasin
  24. International Capital Mobility: Which Structural Policies Reduce Financial Fragility? By Rudiger Ahrend; Antoine Goujard; Cyrille Schwellnus
  25. Credit Crises and the Shortcomings of Traditional Policy Responses By William R. White
  26. Financial integration, specialization and systemic risk By Falko Fecht; Hans Peter Grüner; Philipp Hartmann
  27. Sequential decisions in the Diamond-Dybvig banking model By Markus Kinateder; Hubert Janos Kiss
  28. International Monetary Reform: A Critical Appraisal of Some Proposals By Park, Yung Chul; Wyplosz, Charles
  29. Bank Failure Risk: Different Now? By Sherrill Shaffer
  30. Liquidity risk, cash-flow constraints and systemic feedbacks By Kapadia, Sujit; Drehmann, Mathias; Elliott, John; Sterne, Gabriel
  31. International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies By Rudiger Ahrend; Antoine Goujard
  32. Currency Intervention: A Case Study of an Emerging Market By Renee Fry-McKibbin; Sumila Wanaguru
  33. International Capital Mobility and Financial Fragility - Part 7. Enhancing Financial Stability: Country-Specific Evidence on Financial Account and Structural Policy Positions By Rudiger Ahrend; Carla Valdivia
  34. International Capital Mobility and Financial Fragility - Part 6. Are all Forms of Financial Integration Equally Risky in Times of Financial Turmoil?: Asset Price Contagion During the Global Financial Crisis By Rudiger Ahrend; Antoine Goujard
  35. Do better capitalized banks lend less? Long-run panel evidence from Germany By Buch, Claudia M.; Prieto, Esteban
  36. Are European Banks in Economic Harmonay? An HLM Aproach By James P. Gander
  37. Did The Globalization of Finance Undermine Financial Stability? By Hugo Bänziger
  38. The Coming Resolution of the European Crisis: An Update By C. Fred Bergsten; Jacob Funk Kirkegaard
  39. How Liquid Are UK Banks? By Meilin Yan; Maximilian J. B. Hall; Paul Turner
  40. International Capital Mobility and Financial Fragility - Part 5. Do Investors Disproportionately Shed Assets of Distant Countries Under Increased Uncertainty?: Evidence from the Global Financial Crisis By OECD
  41. What kind of European banking union? By Jean Pisani-Ferry; André Sapir; Nicolas Véron; Guntram B. Wolff
  42. Financial Intermediation Costs in Low-Income Countries: The Role of Regulatory, Institutional, and Macroeconomic Factors By Tigran Poghosyan
  43. Do Dynamic Provisions Enhance Bank Solvency and Reduce Credit Procyclicality? A Study of the Chilean Banking System By Jorge A. Chan-Lau
  44. Bank Ownership and Credit over the Business Cycle: Is Lending by State Banks Less Procyclical? By Can Bertay, A.; Demirgüc-Kunt, A.; Huizinga, H.P.
  45. Bank Capitalization as a Signal By Daniel C. Hardy
  46. Reciprocal Deposits and Incremental Bank Risk By Sherrill Shaffer
  47. Modeling financial contagion: approach-based on asymmetric cointegration By Lazeni Fofana; Françoise SEYTE
  48. Bank ownership and credit over the business cycle : is lending by state banks less procyclical? By Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
  49. Local Governments’ Fiscal Balance, Privatization, and Banking Sector Reform in Transition Countries By Ernesto Crivelli

  1. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21.
    Keywords: Risk-taking channel, monetary policy, credit crisis, bank characteristics.
    Date: 2012–03
  2. By: Carrera, Cesar (Banco Central de Reserva del Perú); Vega, Hugo (Banco Central de Reserva del Perú; London School of Economics)
    Abstract: The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in needs of liquidity. Regulating the interbank market may actually benefit the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identification of the final effects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the effects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We find that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired effect on private expectations) or a zero bound (i.e. liquidity trap scenarios).
    Keywords: reserve requirements, collateral, banks, interbank market, DSGE
    JEL: E31 O42
    Date: 2012–06
  3. By: Raphael A. Espinoza; Ananthakrishnan Prasad
    Abstract: The GCC countries maintain a policy of open capital accounts and a pegged (or nearly-pegged) exchange rate, thereby reducing their freedom to run an independent monetary policy. This paper shows, however, that the pass-through of policy rates to retail rates is on the low side, reflecting the shallowness of money markets and the manner in which GCC central banks operate. In addition to policy rates, the GCC monetary authorities use reserve requirements, loan-to-deposit ratios, and other macroprudential tools to affect liquidity and credit. Nonetheless, a panel vector auto regression model suggests that U.S. monetary policy has a strong and statistically significant impact on broad money, non-oil activity, and inflation in the GCC region. Unanticipated shocks to broad money also affect prices but do not stimulate growth. Continued efforts to develop the domestic financial markets will increase interest rate pass-through and strengthen monetary policy transmission.
    Keywords: Bahrain , Cooperation Council for the Arab States of the Gulf , Economic models , Interest rates , Kuwait , Monetary policy , Monetary transmission mechanism , Oman , Qatar , Saudi Arabia , United Arab Emirates , United States ,
    Date: 2012–05–18
  4. By: Stefanie Flotho (Institute for Economic Research Chair of Economic Theory, University of Freiburg)
    Abstract: This paper explicitly models strategic interaction between two independent national fiscal authorities and a single central bank in a simple New Keynesian model of a monetary union. Monetary policy is constrained by the zero lower bound on nominal interest rates. Coordination of fiscal policies does not always lead to the best welfare effects. It depends on the nature of the shocks whether governments prefer to coordinate or not coordinate. The size of the government multipliers depend on the combination of the intraunion competitiveness parameters. They get larger in case of implementation lags of fiscal policy.
    Keywords: Monetary Union, Fiscal Policy, Zero Lower Bound on nominal interest rates, zero interest rate policy, Non-coordination
    JEL: E31 E52 E58 E61 E62 E63 F33
    Date: 2012–06
  5. By: Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Florin O. Bilbiie (Centre d’Economie de la Sorbonne, 106/112 Boulevard de l’Hôpital, 75647 Paris Cedex 13, France; Paris School of Economics and CEPR.)
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. In an otherwise conventional sticky-price model, standard aggregate de- mand logic is inverted at low enough asset market participation: interest rate increases become expansionary; passive monetary policy ensures equilibrium determinacy and maximizes welfare. This suggests that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom implies. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Ination and the Great Moderation. JEL Classification: E310; E320; E440; E520.
    Keywords: Great Ination; Great Moderation; Limited asset markets participa- tion; Passive monetary policy rules.
    Date: 2012–05
  6. By: Luis-Felipe Zanna; Marco Airaudo
    Abstract: We present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade.
    Keywords: Business cycles , Economic models , Flexible pricing policy , Interest rates , International trade , Monetary policy , Real effective exchange rates ,
    Date: 2012–05–11
  7. By: Alexander Chudik (Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, Texas 75201, USA and CIMF.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.)
    Abstract: The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental di¤erences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. JEL Classification: E44, F3, C5.
    Keywords: Global financial crisis, sovereign debt crisis, liquidity, risk, capital flows, transmission, high dimensional VARs, advanced economies, emerging market economies.
    Date: 2012–02
  8. By: Linghui Han; Il Houng Lee
    Abstract: Monetary aggregates are now much less used as policy instruments as identifying the right measure has become difficult and interest rate transmission has worked well in an increasingly complex financial system. In this process, little attention was paid to the potential spillover of excess liquidity. This paper suggests a notional level of "optimal" liquidity beyond which asset prices will start to rise faster than the GDP deflator, thereby creating a gap between the face value and the real purchasing value of financial assets and widen the wedge in income between those with capital stock and those living on salaries. Such divergence will eventually lead to an abrupt and disorderly adjustment of the asset value, with repercussions on the real sector.
    Keywords: Asset prices , Economic stabilization , Liquidity , Monetary aggregates , Monetary policy , Private sector ,
    Date: 2012–05–24
  9. By: Mercedes Garcia-Escribano; Camilo Ernesto Tovar Mora; Mercedes Vera Martin
    Abstract: Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and how they interact with monetary policy. In this paper, we examine the role of reserve requirements and other macroprudential instruments and report new cross-country evidence on how they influence real private bank credit growth. Our results show that these instruments have a moderate and transitory effect and play a complementary role to monetary policy.
    Keywords: Banking systems , Central bank policy , Credit expansion , Latin America , Macroprudential policy , Reserve requirements ,
    Date: 2012–06–04
  10. By: Juan Paez-Farrell (School of Business and Economics, Loughborough University, UK)
    Abstract: This paper considers the role of the exchange rate in monetary policy rules. It argues that much recent research aimed at determining the extent of concern for exchange rate stabilisation on the part of central banks is potentially flawed. If policy makers are subject to fear of floating – whereby they aim to stabilise exchange rates but without revealing this to the public – current estimated models cannot may provide insufficient information to determine policy objectives. In effect, several structural models may yield observationally equivalent interest rate rules. The paper uses two small open economy models to highlight this issue.
    Keywords: Small open economies, monetary policy, exchange rates, Taylor rule, fear of floating.
    JEL: E52 E58 F41
    Date: 2012–06
  11. By: Syden Mishi; Asrat Tsegaye
    Abstract: The role of banks in transmission of monetary policy in an economy has been a subject of theoretical and empirical investigations. This study attempts to empirically investigate the role played by private commercial banks in South Africa in transmitting the impulses of monetary policy shocks to the rest of the economy. Focus is placed on the bank lending channel of monetary transmission due to the importance of banks in the financial system. Specifically, we examine whether the central bank's monetary policy stance affects banks' lending behaviour. We specify and test the bank lending channel of monetary policy transmission in South Africa by using a panel structural approach that distinguishes banks according to size. The results indicate the prevalence of the bank lending channel in which banks play a pivotal role in the monetary policy transmission in South Africa. Also bank size had proved to appropriately discriminate banks in South Africa according to their external finance cost.
    Date: 2012
  12. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.)
    Abstract: The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. JEL Classification: F30, F31.
    Keywords: Capital controls, capital flows, exchange rates, financial stability, economic policy, G20.
    Date: 2012–02
  13. By: Esteban Pérez Caldentey and Matias Vernengo
    Keywords: Monetary Policy; Economic History; Heterodox Economics JEL Classification: B31, B50, E58, N10 The Great Depression led to a need to rethink the principles of central banking, as much as it had led to the rethinking of economics in general, with the Keynesian Revolution at the forefront of the theoretical changes. This paper suggests that the role of the monetary authority as a fiscal agent of government and the abandonment of the view of the economy as self-regulated were the central changes in central banking in the center. In addition, in the periphery central banks changed to try to insulate the worst effects of balance of payments crises and the use of capital controls became more common. Marriner S. Eccles, in the United States, and Raúl Prebisch, in Argentina, are paradigmatic examples of those new tendencies of central banking in the 1930s.
    Date: 2012
  14. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Claudio Morana (Università di Milano-Bicocca, Dipartimento di Economia Politica, Piazza dell’Ateneo Nuovo, 1 - 20126, Milano, Italy; at International Centre for Economic Research (ICER), Torino, Italy; Centre for Research on Pensions and Welfare Policies (CeRP), Moncalieri, Italy and Fondazione ENI Enrico Mattei (FEEM), Milano, Italy;)
    Abstract: In the paper we investigate the empirical features of euro area money market turbulence during the recent …nancial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Au- toregressive model, we …nd evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and the Lehman Brothers (16 September 2008) shocks, and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors. The unfold- ing of the crisis yielded a signi…cant increase in the persistence and volatility of OIS spreads. We also …nd evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB interest rate cuts and full allotment policy. JEL Classification: C32, E43, E58, G15.
    Keywords: money market interest rates, credit/liquidity risk, frac- tionally integrated heteroskedastic factor vector autoregressive model.
    Date: 2012–05
  15. By: Michele Ca’Zorzi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alexander Chudik (Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201, USA); Alistair Dieppe (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The global financial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any …rm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. Prior to the …nancial crisis, current account positions of major economies such as the US, UK, Japan and China were not aligned with fundamentals. JEL Classification: C11, C33, F32, F34, F41, O52.
    Keywords: current account, global imbalances, panel data, model uncertainty, model combination.
    Date: 2012–06
  16. By: Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Peter McAdam (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We build a model of the euro area incorporating financial market frictions at the level of firms and households. Entrepreneurs borrow from financial intermediaries in order to purchase business capital, in the spirit of the "financial accelerator" literature. We also introduce two types of households that differ in their degree of time preference. All households have preferences for housing services. The impatient households are faced with a collateral constraint that is a function of the value of their housing stock. Our aim is to provide a unified framework for policy analysis that emphasizes financial market frictions alongside the more traditional model channels. The model is estimated by Bayesian methods using euro area aggregate data and model properties are illustrated with simulation and conditional variance and historical shock decomposition. JEL Classification: C11, C32, E32, E37.
    Keywords: Financial Frictions, euro area, DSGE modeling, Bayesian estimation, simulation, decompositions.
    Date: 2012–02
  17. By: Emmanuel Farhi; Ivan Werning
    Abstract: We lay down a standard macroeconomic model of a small open economy with a fixed exchange rate and study optimal capital controls (defined as maximizing the utility of a representative household). We provide sharp analytical and numerical characterizations for a variety of shocks. We find that capital controls are employed to respond to some shocks but not others. They are particularly effective to address risk-premium shocks that affect the interest rate differential foreign investors require in a particular country. We also discuss how the solution depends on the degree of nominal rigidity and the openness of the economy. We show that capital controls may be optimal even if the exchange rate is not fixed in response to risk premium shocks or if wages, in addition to prices, are sticky. Finally, we compare the single country’s optimum to a coordinated world solution. Our results show a limited need for coordination. However, the uncoordinated solution features the same capital controls as the coordinated solution.
    JEL: E5 F3 F32 F33 F41 F42
    Date: 2012–06
  18. By: Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.)
    Abstract: Since the intensification of the crisis in September 2008, all euro area long-term government bond yields relative to the German Bund have been characterised by highly persistent processes with upward trends for countries with weaker fiscal fundamentals. Looking at the daily period 1 September 2008 - 4 August 2011, we find that three factors can explain the recorded developments in sovereign spreads: (i) an aggregate regional risk factor, (ii) the country-specific credit risk and (iii) the spillover effect from Greece. Specifically, higher risk aversion has increased the demand for the Bund and this is behind the pricing of all euro area spreads, including those for Austria, Finland and the Netherlands. Country-specific credit ratings have played a key role in the developments of the spreads for Greece, Ireland, Portugal and Spain. Finally, the rating downgrade in Greece has contributed to developments in spreads of countries with weaker fiscal fundamentals: Ireland, Portugal, Italy, Spain, Belgium and France. JEL Classification: G15, F36.
    Keywords: Sovereign spreads, credit ratings, spillovers.
    Date: 2012–02
  19. By: Prachi Mishra; Peter Montiel
    Abstract: This paper surveys the evidence on the effectiveness of monetary transmission in low-income countries. It is hard to come away from this review with much confidence in the strength of monetary transmission in such countries. We distinguish between the "facts on the ground" and "methodological deficiencies" interpretations of the absence of evidence for strong monetary transmission. We suspect that "facts on the ground" are an important part of the story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.
    Date: 2012–06–05
  20. By: Alexander Pivovarsky; Elena Loukoianova; Ralph De Haas; Yevgeniya Korniyenko
    Abstract: We use data on 1,294 banks in Central and Eastern Europe to analyze how bank ownership and creditor coordination in the form of the Vienna Initiative affected credit growth during the 2008–09 crisis. As part of the Vienna Initiative western European banks signed country-specific commitment letters in which they pledged to maintain exposures and to support their subsidiaries in Central and Eastern Europe. We show that both domestic and foreign banks sharply curtailed credit during the crisis, but that foreign banks that participated in the Vienna Initiative were relatively stable lenders. We find no evidence of negative spillovers from countries where banks signed commitment letters to countries where they did not.
    Keywords: Bank supervision , Banks , Credit expansion , Eastern Europe , Global Financial Crisis 2008-2009 ,
    Date: 2012–05–09
  21. By: Jacob Ejsing (Danmarks Nationalbank, Government Debt Management, Havnegade 5, DK-1093 Copenhagen, Denmark.); Magdalena Grothe (European Central Bank, Directorate General Economics, Capital Markets and Financial Structure Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oliver Grothe (University of Cologne, Department of Economic and Social Statistics, Albertus-Magnus-Platz, D-50923 Cologne, Germany.)
    Abstract: This paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of governmentguaranteed agency bonds and exploit the fact that any difference in their yields vis-`a-vis government bonds can be attributed to differences in liquidity premia. Adding the information on risk-free rates, we obtain model-free and model-based gauges of sovereign credit premia, which are an important alternative to the information based on CDS markets. The results allow us to quantify the price impact of so-called “safe haven flows”, which strongly affected bond markets in late 2008/early 2009 and again during some phases of the sovereign debt crisis. Thus, we show to what extent these effects disguised the increase of sovereign credit premia in the government yields of core euro area countries. JEL Classification: E44; G12; G01.
    Keywords: liquidity premium; sovereign credit risk; yield curve modeling; bond markets; state space models.
    Date: 2012–06
  22. By: Dániel Holló (Magyar Nemzeti Bank, 1054 Szabadság tér 8/9, 1850 Budapest, Hungary.); Manfred Kremer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. JEL Classification: G01, G10, G20, E44.
    Keywords: Financial system, financial stability, systemic risk, financial stress index, macro-financial linkages.
    Date: 2012–03
  23. By: Mimir, Yasin
    Abstract: This paper conducts a quantitative analysis of the role of financial shocks and credit frictions affecting the banking sector in driving U.S. business cycles. I first document three key business cycle stylized facts of aggregate financial variables in the U.S. banking sector: (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium business cycle model with a financial sector, featuring a moral hazard problem between banks and its depositors, which leads to endogenous capital constraints for banks in obtaining funds from households. The model incorporates empirically-disciplined shocks to bank net worth (i.e. "financial shocks") that alter the ability of banks to borrow and to extend credit to non-financial businesses. I show that the benchmark model is able to deliver most of the above stylized facts. Financial shocks and credit frictions in banking sector are important not only for explaining the dynamics of financial variables but also for the dynamics of standard macroeconomic variables. Financial shocks play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread.
    Keywords: Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations
    JEL: E32 E44 E10 E20
    Date: 2012–05
  24. By: Rudiger Ahrend; Antoine Goujard; Cyrille Schwellnus
    Abstract: The structure of a country’s external liabilities, as well as the extent and nature of its international financial integration are key determinants of its vulnerability to financial crises. This is confirmed by new empirical analysis covering OECD and emerging economies over the past four decades. For example, a bias in gross external liabilities towards debt has raised crisis risk. The same holds for "currency mismatch" which refers to a situation where a country's foreign-currency denominated liabilities are large compared to its foreign-currency denominated assets. In addition, international banking integration has been a major vector of contagion, and even more so when cross-border bank lending was primarily short-term. Vulnerability to contagion has been lower when global liquidity has been abundant, underlining the importance of major central banks ensuring ample international liquidity at times of financial turmoil. Structural policies can increase financial stability, typically through their effects on the composition of the external financial account or on the vulnerability to contagion-induced financial shocks. Lower barriers on foreign direct investment and lower product market regulations have increased financial stability by shifting external liabilities from debt towards FDI. In contrast, tax systems that favour debt finance over equity finance have undermined stability by increasing the share of debt, including external debt, in corporate financing. Targeted capital controls on inflows from credit operations have reduced the impact of financial contagion, not least by shifting the structure of external liabilities. Stricter information disclosure rules or capital requirements, and strong supervisory authorities have also reduced countries' financial crisis risk.<P>Flux de capitaux internationaux : quelles politiques structurelles réduisent la fragilité financière ?<BR>La structure des engagements externes des pays, ainsi que l’ampleur et les différentes formes de leur intégration financière internationale, sont d’importants facteurs de vulnérabilité aux crises financières. Ceci est confirmé par une nouvelle analyse empirique couvrant les pays membres de l’OCDE et les pays émergents pendant les quatre dernières décennies. Par exemple, un biais des engagements externes vers la dette a augmenté les risques de crises. De même, un excès d’engagements libellés en monnaie étrangère par rapport aux créances libellées en monnaie étrangère a accru les risques de crises. En outre, l’intégration bancaire internationale a été un important vecteur de contagion, d’autant plus que la part de la dette bancaire de court-terme était importante. La vulnérabilité des pays à la contagion a aussi été moindre lorsque la liquidité globale était abondante, ce qui souligne l’importance d’une réaction des banques centrales assurant un niveau de liquidité internationale élevée lors des périodes d’instabilité financière. Les politiques structurelles peuvent contribuer à accroître la stabilité financière, tant par leurs effets sur la structure des engagements externes que par leurs effets sur la vulnérabilité aux chocs financiers liés aux épisodes de contagion. De faibles barrières aux investissements directs étrangers ainsi qu’une réglementation des marchés de produits favorable à la compétition ont contribué à la stabilité financière en modifiant les engagements externes des pays vers les IDEs au contraire de la dette. En revanche, les systèmes de taxation qui favorisent le financement par la dette au détriment des investissements de capitaux ont contribué à réduire la stabilité financière en augmentant le financement des entreprises par la dette, y compris la dette externe. Des mesures ciblées de contrôle des flux de crédits ont contribué à réduire les effets de contagion financière, notamment en modifiant la composition des engagements internationaux. Des règles plus strictes quant à la divulgation des résultats financiers et quant aux fonds propres requis, ainsi qu'une plus forte supervision des autorités ont aussi réduit les risques de crises financières.
    Keywords: structural policy, structural adjustment, debt, financial stability, capital controls, bank regulation, contagion, financial account, banking crises, bank balance sheet, asset mismatch, financial integration, politique structurelle, crise bancaire, stabilité financière, réglementation bancaire, compte financier, excès de demande d’actifs sûrs, dette externe, contrôle des flux de capitaux, intégration financière
    JEL: E44 F34 F36 G01 G18 G32
    Date: 2012–06–11
  25. By: William R. White
    Abstract: Economic downturns which have their roots in preceding credit excesses and debt overhang have tended historically to be long lasting, whether the financial sector remained healthy or not. There are no good reasons to believe the current global crisis will be any different. Moreover, it is argued in this paper that the policy responses to the crisis to date, both macroeconomic and structural, will not succeed in restoring sustainable growth. Monetary and fiscal stimulus might raise aggregate demand in the short run, but they contribute to higher debt levels which are already working increasingly in the opposite direction. Structural policies intended to maintain pre crisis production patterns, both in the financial and industrial sectors, ignore the unsustainability of those structures in the first place. Alternative policies are needed to meet the G 20’s goal of “strong, sustainable and balanced growth”. They include more international cooperation between creditor and debtor countries (on both exchange rates and production structures), more recourse to explicit debt restructuring (for both households and sovereigns), and structural polices to raise potential growth and make debts more sustainable. Unfortunately, there remain formidable practical and political obstacles to pursuing such policies. Future debt crises of the current magnitude could be avoided by using monetary, macro prudential and fiscal policies more symmetrically over the business cycle. Relative to past behaviour, this would imply more vigorous resistance to credit financed upswings, and a greater willingness to accept the cleansing effect of minor downswings. Policies to ensure financial stability are important but secondary.<P>Les crises de crédit et les insuffisances des interventions publiques traditionnelles<BR>D'un point de vue historique, les récessions économiques qui trouvent leur origine dans des excès en matière de crédit et des phénomènes de surendettement tendent à s'inscrire dans la durée, que le secteur financier reste sain ou non. Il n'existe aucune bonne raison de penser que la crise mondiale actuelle diffère en quoi que ce soit de ce schéma. En outre, nous faisons valoir dans ce document que les mesures prises à ce jour par les pouvoirs publics face à la crise, tant sur le plan macroéconomique que structurel, ne permettront pas de revenir à une croissance durable. Les mesures de relance monétaire et budgétaire peuvent certes renforcer la demande globale à court terme, mais elles contribuent à alourdir une dette qui exerce déjà un effet inverse de plus en plus fort. Quant aux mesures structurelles destinées à préserver les structures de production d'avant la crise, tant dans le secteur financier que dans l'industrie, elles ne tiennent pas compte du fait que ces structures n'étaient pas viables à l'origine. D'autres mesures s'imposent pour atteindre l'objectif de « croissance forte, durable et équilibrée » défini par le Groupe des Vingt (G20). Elles peuvent notamment prendre la forme d'une coopération internationale accrue entre pays débiteurs et créanciers (tant en matière de taux de change que de structures de production), d'un recours plus poussé à des formes explicites de restructuration de la dette (tant pour les ménages que pour les emprunteurs souverains), ainsi que de mesures structurelles destinées à rehausser la croissance potentielle et à renforcer la viabilité des dettes. Malheureusement, la mise en oeuvre de telles mesures reste entravée par des obstacles pratiques et politiques considérables. Nous pourrions éviter de futures crises de la dette d'une ampleur similaire à celle que nous connaissons aujourd'hui en utilisant les politiques monétaire, macro prudentielle et budgétaire de manière plus symétrique sur la durée du cycle économique. Par rapport aux comportements antérieurs, cela impliquerait une résistance plus vigoureuse aux phases d'expansion financées par le crédit, et une plus grande disposition à accepter l'effet d'assainissement des phases de contraction légère de l'activité. Les mesures destinées à garantir la stabilité financière sont certes importantes, mais secondaires.
    Keywords: fiscal policy, monetary policy, structural reforms, credit, financial crises, international policy coordination, debt forgiveness, réforme structurelle, politique fiscale, politique monétaire, crédit, viabilité de la dette, politique de coopération internationale, récessions économiques
    JEL: B50 E58 E62 G01 H12
    Date: 2012–06–07
  26. By: Falko Fecht (EBS Business School, Gustav-Stresemann-Ring 3, 65189 Wiesbaden, Germany.); Hans Peter Grüner (Universität Mannheim, Schloss, 68131 Mannheim, Germany and CEPR, London, UK.); Philipp Hartmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits. JEL Classification: D61, E44, G21.
    Keywords: Financial integration, specialization, interbank market, financial contagion.
    Date: 2012–02
  27. By: Markus Kinateder (Dpto. Economía); Hubert Janos Kiss (Universidad Autónoma de Madrid)
    Abstract: We study the Diamond-Dybvig model of financial intermediation (JPE, 1983) under theassumption that depositors have information about previous decisions. Depositors decidesequentially whether to withdraw their funds or continue holding them in the bank. If depositorsobserve the history of all previous decisions, we show that there are no bank runs in equilibriumindependently of whether the realized type vector selected by nature is of perfect or imperfectinformation.JEL classification numbers:
    Keywords: Bank Run, Imperfect Information, Perfect Bayesian Equilibrium
    JEL: C72 D82 G21
    Date: 2012–06
  28. By: Park, Yung Chul (Asian Development Bank Institute); Wyplosz, Charles (Asian Development Bank Institute)
    Abstract: This paper reviews some of the current debates on the reform of the international monetary system. Despite its deficiencies, the United States (US) dollar will remain the dominant currency and Special Drawing Rights (SDR) cannot serve as either an international medium of exchange or a reserve currency. The International Monetary Fund (IMF) has changed its position to accept capital controls under certain circumstances. Refining control instruments better tuned to present day markets may bring about greater acceptance. The 2008–2009 global financial crisis has dimmed much of the earlier hope for the multilateralized Chiang Mai Initiative. The currency swap arrangements portend a new form of international cooperation. Finally, for the Group of Twenty (G20) to matter, the systemically important countries need to ensure the stability of their financial systems and economies.
    Keywords: us dollars; special drawing rights; sdr; capital controls; currency swaps; g20
    JEL: F32 F33 F42
    Date: 2012–06–28
  29. By: Sherrill Shaffer
    Abstract: Motivated by the debate over similarities between the current and previous financial crises, logit estimates reveal significantly changed linkages between observable financial ratios and probabilities of subsequent bank failure using U.S. data from the 1980s and 2008.
    JEL: G21
    Date: 2012–06
  30. By: Kapadia, Sujit (Bank of England); Drehmann, Mathias (Bank for International Settlements); Elliott, John (Bank of England); Sterne, Gabriel (Exotix)
    Abstract: The endogenous evolution of liquidity risk is a key driver of financial crises. This paper models liquidity feedbacks in a quantitative model of systemic risk. The model incorporates a number of channels important in the current financial crisis. As banks lose access to longer-term funding markets, their liabilities become increasingly short term, further undermining confidence. Stressed banks’ defensive actions include liquidity hoarding and asset fire sales. This behaviour can trigger funding problems at other banks and may ultimately cause them to fail. In presenting results, we analyse scenarios in which these channels of contagion operate, and conduct illustrative simulations to show how liquidity feedbacks may markedly amplify distress.
    Keywords: Systemic risk; funding liquidity risk; contagion; stress testing
    JEL: G01 G21 G32
    Date: 2012–06–21
  31. By: Rudiger Ahrend; Antoine Goujard
    Abstract: This paper examines how structural policies can influence a country's risk of suffering financial turmoil. Using a panel of 184 developed and emerging economies from 1970 to 2009, the empirical analysis examines which structural policies can affect financial stability by either shaping the financial account structure, by reducing the risk of international financial contagion, or by directly reducing the risk of financial crises. Differentiated capital controls are found to affect financial stability via the structure of the financial account. Moreover, a number of structural policies including regulatory burdens on foreign direct investment, strict product market regulation, or tax systems which favour debt over equity finance are found to bias external financing towards debt, thereby increasing financial crisis risk. By contrast, more stringent domestic capital adequacy requirements for banks, greater reliance of a domestic banking system on deposits, controls on credit market inflows, and openness to foreign bank entry are found to reduce the vulnerability to financial contagion. Finally, vulnerability to international bank balance-sheet shocks is found to be lower in situations of abundant global liquidity, underlining the importance of adequate central bank reactions in situations of financial turmoil.<P>Flux de capitaux internationaux et fragilité financière : Partie 3. Comment les politiques structurelles affectent-elles la probabilité de crise financière? Analyse empirique des crises financières passées des pays OCDE et émergents<BR>Cet article examine comment les politiques structurelles peuvent influencer le risque de crise financière. L’analyse empirique porte sur un échantillon de 184 pays développés et émergents de 1970 à 2009 et teste quelles politiques structurelles peuvent favoriser la stabilité financière, soit en influant sur la structure du compte financier, soit en réduisant les risques de contagion financière internationale, soit en réduisant directement le risque de crise financière. Des mesures ciblées de contrôle des flux de capitaux ont influé sur la stabilité financière en modifiant la structure des engagements internationaux. De plus, de nombreuses politiques structurelles, comme les restrictions trop importantes aux investissements directs étrangers, une réglementation des marchés de produits défavorable à la compétition, ou des systèmes de taxation favorisant le financement par la dette au détriment des investissements de capitaux, ont contribué à réduire la stabilité financière en augmentant la part de la dette dans les engagements externes des pays au détriment des IDEs ou des investissements de capitaux. En revanche, une meilleure réglementation des fonds propres bancaires, un ratio crédits sur dépôts bancaires plus faible et une plus grande ouverture à l’entrée des banques étrangères ont réduit les risques de crises financières lors des épisodes de contagion bancaire. Enfin, la vulnérabilité des pays à la contagion par le système bancaire international a été moindre lorsque la liquidité globale était abondante, ce qui souligne l’importance d’une réaction appropriée des banques centrales lors des périodes d’instabilité financière.
    Keywords: foreign direct investment, FDI restrictions, financial stability, capital controls, balance sheet, financial account, external debt, banking regulations, investissement direct étranger, stabilité financière, réglementation bancaire, compte financier, dette externe, contrôle des flux de capitaux, bilan des banques
    JEL: E44 F34 F36 G01 G18
    Date: 2012–06–12
  32. By: Renee Fry-McKibbin; Sumila Wanaguru
    Abstract: Using a unique dataset on daily foreign exchange intervention and a new methodological framework of a latent factor model of central bank intervention, this paper addresses the effects of intervention in an emerging market. Events in financial markets from 2002 to 2010 provide a natural experiment to evaluate the short and medium term objectives of the central bank to contain excessive exchange rate volatility and to accumulate foreign reserves respectively. In the low volatility period in the first part of the sample, the central bank is successful in influencing the currency when pressure is to appreciate, accumulating international reserves. The same model estimated for the global volatility period in the second part of the sample shows the central bank intervening to mitigate excessive exchange rate volatility in line with the short-term objective.
    JEL: F31 F36 F41
    Date: 2012–06
  33. By: Rudiger Ahrend; Carla Valdivia
    Abstract: This paper brings together the results from new empirical analysis on how – under international capital mobility – financial account structure and structural policies can contribute to financial stability. More specifically, the analysis has identified features of financial accounts and structural policy settings that are associated with financial fragility, and this paper presents information on these features and policy settings across a wide set of countries. A first set of charts present stability-relevant dimensions of the financial account for OECD economies and the BRIICS. A second set of charts shows how countries' financial account structure evolved in the decade prior to the global financial crisis, highlighting substantial increases in financial vulnerability in countries that were subsequently strongly affected by the crisis. Finally, a third set of charts presents countries' stances on selected structural policies that are conducive to financial stability.<P>Flux de capitaux internationaux et fragilité financière - Partie 7. Améliorer la stabilité financière : Analyse empirique du compte financier et des politiques structurelles par pays<BR>Cet article rassemble les résultats d’une nouvelle analyse empirique des effets de la composition du compte financier et des politiques structurelles sur la stabilité financière. L’analyse empirique a identifié des caractéristiques des comptes financiers et un ensemble de politiques structurelles qui ont contribué à des fragilités financières. Ces caractéristiques et politiques structurelles sont présentées pour un grand nombre de pays. Un premier ensemble de graphiques présente les caractéristiques des comptes financiers des pays qui sont pertinentes quant à la stabilité financière des pays de l’OCDE et du BRIICS. Un second ensemble de graphiques examine comment la structure des comptes financiers des pays a évolué lors de la décennie ayant précédé la crise financière globale de 2008-09. Cette analyse souligne que les facteurs de vulnérabilité financière avaient augmenté significativement dans les pays qui ont été les plus affectés par la crise. Enfin, les derniers graphiques présentent la situation des pays pour une sélection de politiques structurelles qui sont apparues contribuer à la stabilité financière.
    Keywords: FDI restrictions, structural policy, financial stability, capital controls, financial account, external debt, banking regulations, bank debt, stabilité financière, COMESA, réglementation bancaire, compte financier, dette externe, contrôle des flux de capitaux, dette bancaire, réglementation des Investissements Directs Étrangers
    JEL: E44 F34 F36 G01 G18
    Date: 2012–06–20
  34. By: Rudiger Ahrend; Antoine Goujard
    Abstract: Using the 2008-09 global financial crisis, this paper examines the role of different forms of international financial integration for asset price contagion in crisis times. Defining contagion as the transmission of financial market movements beyond the co-movements that would occur in “tranquil” times, the paper looks into the presence of contagion in the period of turmoil prior to the fall of Lehman Brothers, in the main crisis period following the Lehman collapse, and in the ensuing late stages of the crisis. The analysis uses bilateral financial and trade linkages and daily data on equity and bond prices for a sample of 46 countries between 2002 and 2011. Bilateral debt integration and common bank lenders are found to have transmitted financial turmoil through equity and bond markets at the height of the crisis. During this period, real trade linkages also increased equity price co-movements. By contrast, no robust evidence is found that equity or FDI integration increased asset price co-movements during the crisis.<P>Flux de capitaux internationaux et fragilité financière - Partie 6. Toutes les formes d'intégration financière sont-elles risquées en cas de chocs financiers? : La contagion des prix des actifs lors de la crise financière<BR>Utilisant la crise financière de 2008-09, le papier identifie le rôle de différentes formes d’intégration financière sur la contagion entre les prix d’actifs de différents pays lors des chocs financiers. La contagion est définie comme un changement du rôle des liens financiers ou commerciaux bilatéraux entre la période de crise et la période la précédant. L’analyse distingue la présence éventuelle de contagion durant la période de trouble précédant la faillite de Lehman Brothers, la principale période de crise ayant suivie la faillite de Lehman Brothers et la période ayant succédé à cet épisode. L’application empirique porte sur un échantillon de 46 pays entre 2002 et 2011. L’intégration bilatérale par la dette et la présence de banques créditrices communes apparaissent comme des vecteurs de transmission des chocs pendant la principale période de crise. Au contraire, ni les Investissements Directs Étrangers ni la détention bilatérale de capitaux n’apparaissent significativement liés à une augmentation des co-mouvements des prix d’actifs pendant la crise.
    Keywords: financial spillovers, external debt, asset price co-movements, trade spillovers, foreign direct investments, investissement direct étranger, dette externe, intégration financière, co-mouvements des prix d’actifs, intégration commerciale
    JEL: E44 F36 F44 G15
    Date: 2012–06–20
  35. By: Buch, Claudia M.; Prieto, Esteban
    Abstract: Insufficient capital buffers of banks have been identified as one main cause for the large systemic effects of the recent financial crisis. Although higher capital is no panacea, it yet features prominently in proposals for regulatory reform. But how do increased capital requirements affect business loans? While there is widespread belief that the real costs of increased bank capital in terms of reduced loans could be substantial, there are good reasons to believe that the negative real sector implications need not be severe. In this paper, we take a long-run perspective by analyzing the link between the capitalization of the banking sector and bank loans using panel cointegration models. We study the evolution of the German economy for the past 60 years. We find no evidence for a negative impact of bank capital on business loans. --
    Keywords: Bank capital,Business loans,Cointegration
    JEL: G2 E5 C33
    Date: 2012
  36. By: James P. Gander
    Keywords: Bank behavior; Profit; Capital account ratios, Harmonization JEL Classification: C23; C40; C51; G21; G28 A reduced-form equation relating the log of the capital account ratio to several micro and macro variables, particularly the profitability variable, for the commercial banks in nine European countries over eleven years, 1991-2001, was constructed. The equation consisted of a fixed-effects part and a random-effects part. The Hierarchical Linear Model (HLM) approach was used to test the harmonization hypothesis relating the capital account ratio to the profit rate across the countries and over the years. The statistical results indicated that while some differences in bank behavior as indicated by the intercept and slope deviations across countries and over years did exist, by and large, most of the differences or deviations from the fixed-effects means were not significantly different from zero. The harmonization hypothesis was accepted. European bank behavior gave evidence of being in harmony and uniform over countries and years. Some policy implications are discussed briefly.
    Date: 2012
  37. By: Hugo Bänziger
    Abstract: None
    Date: 2012–06
  38. By: C. Fred Bergsten (Peterson Institute for International Economics); Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: The euro crisis is fundamentally a political crisis. At its core the crisis is about national sovereignty and the process in which European governments can agree to transfer it to new, required euro area institutions governing banking sectors and fiscal policies. This transfer of national control over domestic banking sectors and fiscal policy, say Bergsten and Kirkegaard, will happen only during an extraordinary crisis. An imminent economic catastrophe is almost certainly needed to overcome daunting political obstacles, which during normal political times is nearly impossible to accomplish. For this reason, the euro area policy response can only be reactive. Proactive decisions to resolve the crisis in one fell swoop are politically impossible and unrealistic. The authors put forward the "on the brink" theory to characterize the current process of European economic integration. Ultimately, the threat of imminent collapse of the European financial system and indeed the common currency itself would prompt euro area policymakers to take every feasible step to avoid it, including transferring sovereignty to new institutions. The threat, while it exists, is not as imminent as most mainstream commentary makes it out to be. Europe is more solid and has more time to fix its problems than financial markets and analysts think. But leaders urgently need to take a number of very far-reaching political decisions, in particular on banking and fiscal union, during 2012. Every gradual step, however small, that policymakers take on the brink is a step toward completing the decades-long political project and should not be underestimated.
    Date: 2012–06
  39. By: Meilin Yan (School of Business and Economics, Loughborough University, UK); Maximilian J. B. Hall (School of Business and Economics, Loughborough University, UK); Paul Turner (School of Business and Economics, Loughborough University, UK)
    Abstract: This paper uses a relatively new quantitative model for estimating UK banks' liquidity risk. The model is called the Exposure-Based Cash-Flow-at-Risk (CFaR) model, which not only measures a bank's liquidity risk tolerance, but also helps to improve liquidity risk management through the provision of additional risk exposure information. Using data for the period 1997-2010, we provide evidence that there is variable funding pressure across the UK banking industry, which is forecasted to be slightly illiquid with a small amount of expected cash outflow (i.e. £0.06 billion) in 2011. In our sample of the six biggest UK banks, only the HSBC maintains positive CFaR with 95% confidence, which means that there is only a 5% chance that HSBC's cash flow will drop below £0.67 billion by the end of 2011. RBS is expected to face the largest liquidity risk with a 5% chance that the bank will face a cash outflow that year in excess of £40.29 billion. Our estimates also suggest Lloyds TSB's cash flow is the most volatile of the six biggest UK banks, because it has the biggest deviation between its downside cash flow (i.e. CFaR) and expected cash flow.
    Keywords: UK Balance Sheet Analysis, Liquidity Coverage, Net Cash Capital.
    JEL: G01 G21 G28 G32
    Date: 2012–06
  40. By: OECD
    Abstract: The global crisis of 2008-09 went in hand with sharp fluctuations in capital flows. To some extent, these fluctuations may have been attributable to uncertainty-averse investors indiscriminately selling assets about which they had poor information, including those in geographically distant locations. Using a gravity equation setup, this paper shows that the impact of distance increases with investors’ uncertainty aversion. Consistent with a sudden increase in uncertainty, the negative impact of distance on foreign holdings increased during the global financial crisis of 2008-09. Host-country structural policies enhancing the quality of information available to foreign investors, such as strict disclosure requirements and prudential bank regulation, tended to mitigate withdrawals.<P>Flux de capitaux internationaux et fragilité financière : Partie 5. Les investisseurs se séparent-ils surtout des actifs des pays géographiquement distants en période d'incertitude ? Évidence empirique pendant la crise financière globale<BR>2 ABSTRACT/RÉSUMÉ International capital mobility and financial fragility: Part 5. Do investors disproportionately shed assets of distant countries under increased uncertainty? Evidence from the global financial crisis The global crisis of 2008-09 went in hand with sharp fluctuations in capital flows. To some extent, these fluctuations may have been attributable to uncertainty-averse investors indiscriminately selling assets about which they had poor information, including those in geographically distant locations. Using a gravity equation setup, this paper shows that the impact of distance increases with investors’ uncertainty aversion. Consistent with a sudden increase in uncertainty, the negative impact of distance on foreign holdings increased during the global financial crisis of 2008-09. Host-country structural policies enhancing the quality of information available to foreign investors, such as strict disclosure requirements and prudential bank regulation, tended to mitigate withdrawals. JEL classification codes: F21; G11; G18 Keywords: Capital flows; gravity model; uncertainty; crisis; financial regulation ************************************ Flux de capitaux internationaux et fragilité financière : Partie 5. Les investisseurs se séparent-ils surtout des actifs des pays géographiquement distants en période d’incertitude ? Évidence empirique pendant la crise financière globale La crise globale de 2008-09 a été accompagnée par de brusques fluctuations des flux de capitaux. Ces fluctuations pourraient être liées à la vente indiscriminée par des investisseurs averses à l’incertitude des actifs sur lesquels ils possédaient peu d’information, dont les actifs situés dans les pays géographiquement éloignés. Ce papier démontre dans le cadre d’une équation de gravité que l’impact de la distance sur la détention d’actifs internationaux augmente avec l’aversion à l’incertitude des investisseurs. Cet impact négatif de la distance sur la détention d’actifs a augmenté pendant la crise financière globale de 2008-09, ce qui est cohérent avec une soudaine augmentation de l’incertitude. Les politiques structurelles dans le pays de destination qui permettent aux investisseurs d’avoir accès à une information de meilleure qualité, comme par exemple de strictes obligations de divulgations des résultats et la régulation prudentielle des banques, ont eu tendance à réduire les retraits de capitaux des investisseurs étrangers.
    JEL: F21 G11 G18
    Date: 2012–06–12
  41. By: Jean Pisani-Ferry; André Sapir; Nicolas Véron; Guntram B. Wolff
    Abstract: This paper discusses the creation of a European Banking Union. First, we discuss questions of design. We highlight seven fundamental choices that decision makers will need to make: Which EU countries should participate in the banking union? To which categories of banks should it apply? Which institution should be tasked with supervision? Which one should deal with resolution? How centralised should the deposit insurance system be? What kind of fiscal backing would be required? What governance framework and political institutions would be needed? In terms of geographical scope, we see the coverage of the banking union of the euro area as necessary and of additional countries as desirable, even though this would entail important additional economic difficulties. The system should ideally cover all banks within the countries included, in order to prevent major competitive and distributional distortions. Supervisory authority should be granted either to both the ECB and a new agency, or to a new agency alone. National supervisors, acting under the authority of the European supervisor, would be tasked with the supervision of smaller banks in accordance with the subsidiarity principle. A European resolution authority should be established, with the possibility of drawing on ESM resources. A fully centralized deposit insurance system would eventually be desirable, but a system of partial reinsurance may also be envisaged at least in a first phase. A banking union would require at least implicit European fiscal backing, with significant political authority and legitimacy. Thus, banking union cannot be considered entirely separately from fiscal union and political union. The most difficult challenge of creating a European banking union lies with the short-term steps towards its eventual implementation. Many banks in the euro area, and especially in the crisis countries, are currently under stress and the move towards banking union almost certainly has significant distributional implications. Yet it is precisely because banks are under such stress that early and concrete action is needed. An overarching principle for such action is to minimize the cost to the tax payers. The first step should be to create a European supervisor that will anchor the development of the future banking union. In parallel, a capability to quickly assess the true capital position of the systemâ??s most important banks should be created, for which we suggest establishing a temporary European Banking Sector Task Force working together with the European supervisor and other authorities. Ideally, problems identified by this process should be resolved by national authorities; in case fiscal capacities would prove insufficient, the European level would take over in the country concerned with some national financial participation, or in an even less likely adverse scenario, in all participating countries at once. This approach would require the passing of emergency legislation in the concerned countries that would give the Task Force the required access to information and, if necessary, further intervention rights. Thus, the principle of fiscal responsibility of respective member states for legacy costs would be preserved to the maximum extent possible, and at the same time, market participants and the public would be reassured that adequate tools are in place to address any eventuality.
    Date: 2012–06
  42. By: Tigran Poghosyan
    Abstract: We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization, and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.
    Date: 2012–05–30
  43. By: Jorge A. Chan-Lau
    Abstract: Dynamic provisions could help to enhance the solvency of individual banks and reduce procyclicality. Accomplishing these objectives depends on country-specific features of the banking system, business practices, and the calibration of the dynamic provisions scheme. In the case of Chile, a simulation analysis suggests Spanish dynamic provisions would improve banks' resilience to adverse shocks but would not reduce procyclicality. To address the latter, other countercyclical measures should be considered.
    Keywords: Banks , Business cycles , Capital , Financial risk ,
    Date: 2012–05–14
  44. By: Can Bertay, A.; Demirgüc-Kunt, A.; Huizinga, H.P. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper finds that lending by state banks is less procyclical than lending by private banks, especially in countries with good governance. Lending by state banks in high income countries is even countercyclical. On the liability side, state banks expand potentially unstable non-deposit liabilities relatively little during booms, especially in countries with good governance. Public banks also report loan non-performance more evenly over the business cycle. Overall our results suggest that state banks can play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability. However, the track record of state banks in credit allocation remains quite poor, questioning the wisdom of using state banks as a short term counter-cyclical tool.
    Keywords: state banks;lending;procyclicality.
    JEL: G21 H44
    Date: 2012
  45. By: Daniel C. Hardy
    Abstract: The level of a bank‘s capitalization can effectively transmit information about its riskiness and therefore support market discipline, but asymmetry information may induce exaggerated or distortionary behavior: banks may vie with one another to signal confidence in their prospects by keeping capitalization low, and banks‘ creditors often cannot distinguish among them - tendencies that can be seen across banks and across time. Prudential policy is warranted to help offset these tendencies.
    Keywords: Banks , Capital , Economic models ,
    Date: 2012–05–07
  46. By: Sherrill Shaffer
    Abstract: Even after controlling for other observable factors, reciprocal deposits are associated with higher bank risk as measured by the probability of failure and the Zscore. These results are consistent with the moral hazard hypothesis and reject the risk substitution hypothesis.
    JEL: G21
    Date: 2012–06
  47. By: Lazeni Fofana; Françoise SEYTE
    Abstract: We analyze the financial contagion using an approach based on cointégration with asymmetric adjustment TAR and M-TAR. To capture the contagion effect, we consider regime change in the adjustment of the error correction term. We have introduced Threshold Autoregressive model (TAR) and Momentum Threshold Autoregressive model (M TAR) in adjustment mechanism of the error correction model with assumption that the error term exhibits self-excite jump. Our empirical study required the selection of four markets indices such as the CAC40, the FTSE 100, the S&P500 and NIKKEI225. We used these markets to understand the mechanism of shock propagation during the 2007 crisis. The results demonstrate the transmission of shocks by pure contagion from the S&P500 to FTSE100 and the CAC40. In contrast, we found a shocks transmission in the bond of interdependence from the S&P500 to NIKKEI225.
    Date: 2012–06
  48. By: Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
    Abstract: This paper finds that lending by state banks is less procyclical than lending by private banks, especially in countries with good governance. Lending by state banks in high-income countries is even countercyclical. On the liability side, state banks expand potentially unstable non-deposit liabilities relatively little during booms, especially in countries with good governance. Public banks also report loan non-performance more evenly over the business cycle. Overall the results of the analysis suggest that state banks can play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability. However, the track record of state banks in credit allocation remains quite poor, questioning the wisdom of using state banks as a short-term countercyclical tool.
    Keywords: Banks&Banking Reform,Debt Markets,Bankruptcy and Resolution of Financial Distress,Access to Finance,Economic Theory&Research
    Date: 2012–06–01
  49. By: Ernesto Crivelli
    Abstract: Several transition economies have undertaken fiscal decentralization reforms over the past two decades along with liberalization, privatization, and stabilization reforms. Theory predicts that decentralization may aggravate fiscal imbalances, unless the right incentives are in place to promote fiscal discipline. This paper uses a panel of 20 transition countries over 19 years to address a central question of fact: Did privatization help to promote local governments’ fiscal discipline? The answer is clearly ‘no’ for privatization considered in isolation. However, privatization and subnational fiscal autonomy along with reforms to the banking system - restraining access to soft financing - may prove effective at improving fiscal balances among local governments.
    Date: 2012–06–06

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