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on Central Banking |
| By: | Taylor, Alan M. |
| Abstract: | In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself. |
| Keywords: | credit booms; external imbalances; financial crises |
| JEL: | E3 E4 E5 F3 F4 N1 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9255&r=cba |
| By: | Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon |
| Abstract: | This paper analyzes the sovereign risk contagion using credit default swaps (CDS) and bond premiums for the major eurozone countries. By emphasizing several econometric approaches (nonlinear regression, quantile regression and Bayesian quantile regression with heteroskedasticity) we show that propagation of shocks in Europe's CDS has been remarkably constant for the period 2008-2011 even though a significant part of the sample periphery countries have been extremely affected by their sovereign debt and fiscal situations. Thus, the integration among the different eurozone countries is stable, and the risk spillover among these countries is not affected by the size of the shock, implying that so far contagion has remained subdue. Results for the CDS sample are confirmed by examining bond spreads. However, the analysis of bond data shows that there is a change in the intensity of the propagation of shocks in the 2003-2006 pre-crisis period and the 2008-2011 post-Lehman one, but the coefficients actually go down, not up! All the increases in correlation we have witnessed over the last years come from larger shocks and the heteroskedasticity in the data, not from similar shocks propagated with higher intensity across Europe. This is the first paper, to our knowledge, where a Bayesian quantile regression approach is used to measure contagion. This methodology is particularly well-suited to deal with nonlinear and unstable transmission mechanisms. |
| Keywords: | Sovereign Risk, Contagion |
| JEL: | E58 F34 F36 G12 G15 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0009&r=cba |
| By: | Beirne, John; Fratzscher, Marcel |
| Abstract: | The paper analyses the drivers of sovereign risk for 31 advanced and emerging economies during the European sovereign debt crisis. It shows that a deterioration in countries’ fundamentals and fundamentals contagion – a sharp rise in the sensitivity of financial markets to fundamentals – are the main explanations for the rise in sovereign yield spreads and CDS spreads during the crisis, not only for euro area countries but globally. By contrast, regional spillovers and contagion have been less important, including for euro area countries. The paper also finds evidence for herding contagion – sharp, simultaneous increases in sovereign yields across countries – but this contagion has been concentrated in time and among a few markets. Finally, empirical models with economic fundamentals generally do a poor job in explaining sovereign risk in the pre-crisis period for European economies, suggesting that the market pricing of sovereign risk may not have been fully reflecting fundamentals prior to the crisis. |
| Keywords: | bond spreads; CDS spreads; contagion; ratings; sovereign debt crisis; sovereign risk |
| JEL: | C23 E44 F30 G15 H63 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9249&r=cba |
| By: | Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min |
| Abstract: | Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks, which leads to excessive risk-taking. This paper examines the relation between deposit insurance and bank risk and systemic fragility in the years leading to and during the recent financial crisis. It finds that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. The findings suggest that the"moral hazard effect"of deposit insurance dominates in good times while the"stabilization effect"of deposit insurance dominates in turbulent times. Nevertheless, the overall effect of deposit insurance over the full sample remains negative since the destabilizing effect during normal times is greater in magnitude compared with the stabilizing effect during global turbulence. In addition, the analysis finds that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability. |
| Keywords: | Banks&Banking Reform,Debt Markets,Deposit Insurance,Emerging Markets,Bankruptcy and Resolution of Financial Distress |
| Date: | 2012–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6289&r=cba |
| By: | Csaba Csávás (Magyar Nemzeti Bank (central bank of Hungary)); Szilárd Erhart (Magyar Nemzeti Bank (central bank of Hungary)); Dániel Felcser (Magyar Nemzeti Bank (central bank of Hungary)); Anna Naszodi (Magyar Nemzeti Bank (central bank of Hungary)) |
| Abstract: | In this paper we investigate the effect of central bank transparency on survey forecasts. Similar to Ehrmann et al. (2010), we find that greater transparency can reduce the degree of disagreement across individual forecasters and it can also improve the forecasting performance of survey respondents. However, our empirical approach is more rigorous than that of Ehrmann et al. (2010) as we test both for causality and misspecification. The analysis is carried out on a panel dataset that is much richer than those used by previous studies. This unique dataset allows us to identify the effects of various aspects of transparency separately and to assign weights to them reflecting their relative importance in reducing uncertainty. Finally, we construct a new composite measure of central bank transparency using the estimated weights. |
| Keywords: | central bank transparency, survey forecast, weighted transparency index, dynamic panel model, overlapping observations |
| JEL: | C53 D83 E50 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2012/6&r=cba |
| By: | Gerhard Hambusch (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Sherrill Shaffer (Department of Economics and Finance, University of Wyoming) |
| Abstract: | Standard early warning models to predict bank failures cannot be estimated during periods of few or zero failures, precluding any updating of such models during times of good performance. Here we address this problem using an alternative approach, forecasting the simple leverage ratio (equity/assets) as a continuous variable that does not suffer from the small sample problem. Out-of-sample performance shows some promise as a supplement to the standard approach, despite measurable deterioration in prediction accuracy during the crisis years. |
| Keywords: | bank leverage; forecasts; early warning |
| JEL: | G21 |
| Date: | 2012–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:wpaper:176&r=cba |
| By: | Ekin Ayse Ozsuca (Department of Economics, METU); Elif Akbostanci (Department of Economics, METU) |
| Abstract: | The mechanism by which monetary policy affects financial institutions’ risk perception and/or tolerance has been called the ‘risk-taking channel’ of monetary policy. It has been recently argued that periods of low interest rates due to expansionary monetary policy, might induce an increase in bank risk-appetite and risk-taking behavior. This paper investigates the bank specific characteristics of risk-taking behavior of the Turkish banking sector as well as the existence of risk taking channel of monetary policy in Turkey. Using bank level quarterly data over the period 2002-2012 a dynamic panel model is estimated. Our sample accounts for 53 banks that have been active in Turkey during the period. To deal with the potential endogeneity between risk and bank specific characteristics, which are explanatory variables in our model, the GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998) is used. Four alternative risk measures are used in the analysis; three accounting-based risk indicators and a market-based indicator- Expected Default Frequency. We find evidence that low levels of interest rates have a positive impact on banks’ risk-taking behavior for all the risk measures. Specifically, low short term interest rates reduce the risk of outstanding loans; however short term interest rates below a theoretical benchmark increase risk-taking of banks. This result holds for macroeconomic controls as well. Furthermore, in terms of bank specific characteristics, our analysis suggests that large, liquid and well-capitalized banks are less prone to risk-taking. |
| Keywords: | Monetary policy, Transmission mechanisms, Risk-taking channel, Turkey, Panel Data |
| JEL: | E44 E52 G21 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1208&r=cba |
| By: | Ricardo Correa; Horacio Sapriza; Andrei Zlate |
| Abstract: | This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1059&r=cba |
| By: | David ARISTEI; Manuela Gallo |
| Abstract: | In this paper we use a Markov-switching vector autoregressive model to analyse the interest rate pass-through between interbank and retail bank interest rates in the Euro area. Empirical results, based on monthly data for the period 2003-2011, show that during periods of financial distress bank lending rates to both households and non-financial corporations show a reduction of their degree of pass-through from the interbank rate. Interest rates on loans to non-financial firms are found to be more affected by changes in the interbank rate than loans to households, both in times of high volatility and in normal market conditions. |
| Keywords: | Interest rate pass-through, financial crisis, interbank interest rate; loans interest rate; Regime-switching vector autoregressive models; Euro area. |
| JEL: | C32 E43 E58 G01 G21 |
| Date: | 2012–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:pia:wpaper:107/2012&r=cba |
| By: | Sara Cecchetti (Bank of Italy); Giovanna Nappo (Sapienza, University of Rome) |
| Abstract: | We develop a dynamic multivariate default model for a portfolio of credit-risky assets in which default times are modelled as random variables with possibly different marginal distributions, and Lévy subordinators are used to model the dependence among default times. In particular, we define a cumulative dynamic hazard process as a Lévy subordinator, which allows for jumps and induces positive probabilities of joint defaults. We allow the main asset classes in the portfolio to have different cumulative default probabilities and corresponding different cumulative hazard processes. Under this heterogeneous assumption we compute the portfolio loss distribution in closed form. Using an approximation of the loss distribution, we calibrate the model to the tranches of the iTraxx Europe. Once the multivariate default distribution has been estimated, we analyse the distress dependence in the portfolio by computing indicators of systemic risk, such as the Stability Index, the Distress Dependence Matrix and the Probability of Cascade Effects. |
| Keywords: | Lévy subordinators, joint default probability, copula |
| JEL: | B26 C02 C53 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_892_12&r=cba |
| By: | Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross |
| Abstract: | This paper reassesses what works in banking regulation based on the new World Bank survey (Survey IV) of bank regulation and supervision around world. The paper briefly presents new and official survey information on bank regulations in more than 125 countries, makes comparisons with earlier surveys since 1999, and assesses the relationship between changes in bank regulations and banking system performance. The data suggest that many countries made capital regulations more stringent and granted greater discretionary power to official supervisory agencies over the past 12 years, but most countries have not enhanced the ability and incentives of private investors to monitor banks rigorously -- and several have weakened such private monitoring incentives. Although it is difficult to draw causal inferences from these data, and while there are material cross-country differences in the evolution of regulatory reforms, existing evidence suggests that many countries are making counterproductive changes to their bank regulations by not enhancing the ability and incentives of private investors to scrutinize banks. |
| Keywords: | Banks&Banking Reform,Access to Finance,Debt Markets,Public Sector Corruption&Anticorruption Measures,Emerging Markets |
| Date: | 2012–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6288&r=cba |
| By: | Gick, Wolfgang; Pausch, Thilo |
| Abstract: | The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal. -- |
| Keywords: | Stress Tests,Supervisory Information,Bayesian Persuasion,Multiple Receivers,Disclosure |
| JEL: | D81 D83 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:322012&r=cba |
| By: | Chakraborty, Lekha (National Institute of Public Finance and Policy) |
| Abstract: | Controlling for the capital flows, using the high frequency macrodata of financially deregulated regime, the paper examined whether there is any evidence of fiscal deficit determining interest rate in the context of India. The period of analysis is FY 2006-07[04] to FY 2011[04]. Quite contrary to the debates in the policy circles, the results found that increase in fiscal deficit does not cause the rise in interest rates. Using the asymmetric vector autoregressive model, it is established that the rate of interest is affected by the reserve money changes, expected inflation and volatility in the capital flows, but not the fiscal deficit. This result has significant policy implications for interest rate determination in India. The long term and short term interest rates are analysed to determine the occurrence of financial crowding out, but fiscal deficit does not appear to be causing both shorts and longs. |
| Keywords: | Fiscal deficit ; Asymmetric vector autoregressive model ; Financial crowding out |
| JEL: | E62 C32 H6 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:12/110&r=cba |
| By: | Alfredo Martín-Oliver (Universitat de les Illes Balears); Sonia Ruano (Banco de España); Vicente Salas-Fumás (Universidad de Zaragoza) |
| Abstract: | The observed high levels of banks’ operating effi ciency, profi ts and market values in the years before the fi nancial crisis raise reasonable doubts about the information content of conventional performance measures for the accurate assessment of the efficiency of banking intermediation. In this paper we estimate the productivity of individual Spanish banks and the industry’s productivity growth over time using the methodology of Olley and Pakes (1996) and Levinsohn and Petrin (2003), which controls for simultaneity bias. We then examine the contributions of two sets of factors to productivity growth: banking practices that have been signalled as the proximate causes of the crisis, and technical progress in the industry. We obtain that more than two thirds of the estimated productivity growth in the years 2000-2007 is attributable to practices such as the expansion of the housing market, the high recourse to securitization and short-term fi nance, and the leveraging of banks’ balance sheets. The remaining 2.8% cumulative annual growth rate is our estimate for the technical progress in the industry, similar to the estimated rate in the period 1993-2000. |
| Keywords: | productivity of banks, financial stability production function, IT capital, simultaneity bias |
| JEL: | D24 G21 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1239&r=cba |
| By: | B. Onur Tas |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:tob:wpaper:1206&r=cba |