nep-cba New Economics Papers
on Central Banking
Issue of 2012‒09‒16
thirteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Excessive bank risk taking and monetary policy By Itai Agur; Maria Demertzis
  2. Does monetary policy affect bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  3. A global perspective on inflation and propagation channels By Luca Gattini; Huw Pill; Ludger Schuknecht
  4. Deriving the Taylor Principle when the Central Bank Supplies Money By Ceri Davies; Max Gillman; Michal Kejak
  5. Bank Risk during the Financial Crisis: Do business models matter? By Yener Altunbas; Simone Manganelli; David Marques-Ibanez
  6. An MVAR framework to capture extreme events in macro-prudential stress tests By Paolo Guarda; Abdelaziz Rouabah; John Theal
  7. The Influence of Banking Centralisation on Depositors: Regional Heterogeneities in the Transmission of Monetary Policy By John Ashton; Andros Gregoriou
  8. Financial markets and international risk sharing in emerging market economics By Martin Schmitz
  9. The Asymmetric Effects of Financial Frictions By Guillermo Ordoñez
  10. Executive Board Composition and Bank Risk Taking By Allen N. Berger; Thomas Kick; Klaus Schaeck
  11. Bank capital ratios and the structure of nonfinancial industries By Seung Jung Lee; Viktors Stebunovs
  12. Latin American banking efficiency and use of production factors. Are domestic and foreign banks so different? By Francisco Javier Sáez-Fernández; Andrés J. Picazo-Tadeo
  13. Is financial fragility a matter of illiquidity? An appraisal for Italian households By Marianna Brunetti; Elena Giarda; Costanza Torricelli

  1. By: Itai Agur (IMF (Singapore Regional Training Institute), 10 Shenton Way, MAS Building #14-03, Singapore 079117); Maria Demertzis (De Nederlandsche Bank, PO Box 98, 1000 AB Amsterdam, The Netherlands)
    Abstract: Why should monetary policy "lean against the wind"? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission. JEL Classification: E43, E52, E61, G01, G21, G28
    Keywords: Macroprudential, leverage, supervision, monetary transmission
    Date: 2012–08
  2. By: Yener Altunbas (Bangor Business School); Leonardo Gambacorta (Bank for International Settlements); David Marques-Ibanez (European Central Bank)
    Abstract: We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity and bank competition. The results also hold when changes in realized bank risk due to the crisis are accounted for. The results suggest that monetary policy is not neutral from a financial stability perspective.
    Keywords: bank risk, monetary policy, credit crisis.
    JEL: E44 E52 G21
    Date: 2012–01
  3. By: Luca Gattini (European Investment Bank, 98-100, Boulevard Konrad Adenauer, Luxembourg L-2950); Huw Pill (Goldman Sachs, Research Department); Ludger Schuknecht (German Ministry of Finance, Wilhelmstraße 97, 10117 Berlin, Germany and European Central Bank)
    Abstract: This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments. JEL Classification: E31, E51, E62, C32, F42
    Keywords: VAR, global inflation, global house prices, global money
    Date: 2012–08
  4. By: Ceri Davies; Max Gillman; Michal Kejak
    Abstract: The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium `Taylor rule'. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a `Taylor principle' sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from model misspecification. An inflation coefficient greater than one holds theoretically along the balanced growth path equilibrium, making it a sharply robust principle based on the economy's underlying structural parameters.
    Date: 2012–07–23
  5. By: Yener Altunbas (Bangor Business School); Simone Manganelli (European Central Bank); David Marques-Ibanez (European Central Bank)
    Abstract: We exploit the 2007-2009 financial crisis to analyze how risk relates to bank business models. Institutions with higher risk exposure had less capital, larger size, greater reliance on short-term market funding, and aggressive credit growth. Business models related to significantly reduced bank risk were characterized by a strong deposit base and greater income diversification. The effect of business models is non-linear: it has a different impact on riskier banks. Finally, it is difficult to establish in real time whether greater stock market capitalization involves real value creation or the accumulation of latent risk.
    Keywords: bank risk, business models, bank regulation, financial crisis, Basle III
    JEL: G21 G15 E58 G32
    Date: 2012–02
  6. By: Paolo Guarda (Banque centrale du Luxembourg, 2, boulevard Royal, 2983 Luxembourg, Luxembourg); Abdelaziz Rouabah (Banque centrale du Luxembourg, 2, boulevard Royal, 2983 Luxembourg, Luxembourg); John Theal (Banque centrale du Luxembourg, 2, boulevard Royal, 2983 Luxembourg, Luxembourg)
    Abstract: Severe financial turbulences are driven by high impact and low probability events that are the characteristic hallmarks of systemic financial stress. These unlikely adverse events arise from the extreme tail of a probability distribution and are therefore very poorly captured by traditional econometric models that rely on the assumption of normality. In order to address the problem of extreme tail events, we adopt a mixture vector autoregressive (MVAR) model framework that allows for a multi-modal distribution of the residuals. A comparison between the respective results of a VAR and MVAR approach suggests that the mixture of distributions allows for a better assessment of the effect that adverse shocks have on counterparty credit risk, the real economy and banks’ capital requirements. Consequently, we argue that the MVAR provides a more accurate assessment of risk since it captures the fat tail events often observed in time series of default probabilities. JEL Classification: C15, E44, G01, G21
    Keywords: stress testing, MVAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector
    Date: 2012–08
  7. By: John Ashton (Bangor Business School); Andros Gregoriou (Hull University)
    Abstract: This study examines whether regionally and nationally branching banks set deposits interest rates differently. This assessment of the UK retail deposit market between 1992 and 2008 indicates regional banks set deposit interest rates in a manner distinct to nationally branching banks. This deviation between changes in the market interest to retail interest rates is characterised by a non-linear mean reverting process. Deposit interest rates offered by regional banks also display lower levels, a slower response to wholesale interest rate increases and a swifter response to wholesale interest rate falls, relative to national banks. It is concluded this evidence is consistent with distinct monetary conditions existing in the UK regions.
    Keywords: Interest rate transmission, Market definition, Bank Branching.
    JEL: G21
    Date: 2012–02
  8. By: Martin Schmitz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany)
    Abstract: In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets. JEL Classification: F21, F30, G15
    Keywords: International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies
    Date: 2012–07
  9. By: Guillermo Ordoñez
    Abstract: Economic variables are known to move asymmetrically over the business cycle: quickly and sharply during crises, but slowly and gradually during recoveries. Not known is the fact that this asymmetry is stronger in countries with less-developed financial systems. This new fact is documented using cross-country data on loan interest rates, investment, and output. The fact is then explained using a learning model with endogenous flows of information about economic conditions. Asymmetry is shown to be stronger in less-developed countries because these countries have greater financial frictions, which are captured in the model by higher monitoring and bankruptcy costs. These greater frictions magnify the crisis reactions of lending rates and economic activity to shocks and then delay their recovery by restricting the generation of information after the crisis. Empirical evidence and a quantitative exploration of the model show that this explanation is consistent with the data.
    JEL: D53 D82 E32 E44 G33
    Date: 2012–09
  10. By: Allen N. Berger (University of South Carolina); Thomas Kick (Deutsche Bundesbank); Klaus Schaeck (Bangor Business School)
    Abstract: Little is known about how socioeconomic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions. First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a higher proportion of female executives. In contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines.
    Keywords: Banks, executives, risk taking, age, gender, education
    JEL: G21 G34 I21 J16
    Date: 2012–02
  11. By: Seung Jung Lee; Viktors Stebunovs
    Abstract: We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance sheet pressures manifested through changes in capital ratios on employment in the manufacturing sector. For industries dependent on external finance, we find that an increase in the capital ratio has no statistically significant effect on net firm creation, but has an economically significant impact on average firm size, as measured in the number of employees. Our findings indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable adverse impact of balance sheet pressures on employment in industries dependent on external sources of funding. Our results highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such as Basel III, may have on nonfinancial firm dynamics.
    Date: 2012
  12. By: Francisco Javier Sáez-Fernández (Universidad de Granada); Andrés J. Picazo-Tadeo (Universidad de Valencia)
    Abstract: This paper assesses efficiency in Latin-American and Caribbean banking, distinguishing between domestic and foreign banks. Scores of both proportional and input-specific technical efficiency are computed using Data Envelopment Analysis (DEA) techniques. Furthermore, the so-called program approach is employed to assess differences in the technology used by domestic and foreign banks. Foreign banks are found to manage all production factors more efficiently; furthermore, this greater efficiency is partly due to the superior technology they use.
    Date: 2012–09
  13. By: Marianna Brunetti; Elena Giarda; Costanza Torricelli
    Abstract: In this paper we investigate household financial fragility and assess the role played by the composition of the household portfolio besides standard determinants of this condition (e.g. income, indebtedness, age, gender, financial literacy). We take the case of Italy, given the very peculiar portfolio composition (high level of housing and low level of indebtedness and portfolio diversification) and provide two main contributions. First, we propose a novel definition of financial fragility. Second, based on this new measure, we use data from the 1998-2010 Bank of Italy Survey on Household Income and Wealth to investigate the determinants of this condition. Our results confirm most usual markers of financial fragility and additionally highlight the role of homeownership, which is not related to the presence of mortgages but it is rather connected to specific socio-demographic features such as age and marital status.
    Keywords: financial fragility, household portfolios, housing
    JEL: D14 G11 C25
    Date: 2012–06

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.