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on Central Banking |
| By: | Lucyna Gornicka (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | We investigate actual capital chosen by banks in presence of capital minimum requirements and ex-post penalties for violating them. The model yields excess capital that is always positive and increases during times of distress in the economy, which is in line with empirical evidence. Next, we show that in presence of ex-post violation penalties the introduction of the conservation buffer under Basel III will not contribute to lowering the pro-cyclicality of capital regulations. The countercyclical buffer proposed under Basel III is then even more desirable as it significantly attenuates fluctuations of actual capital also when the penalties are accounted for. |
| Keywords: | capital requirements; Basel regulatory framework; excess capital; countercyclical buffer; market discipline |
| JEL: | G21 G28 E32 E44 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130013&r=cba |
| By: | Mikael Apel; Carl Andreas Claussen; Petra Gerlach-Kristen; Petra Lennartsdotter; Øistein Røisland (Norges Bank (Central Bank of Norway)) |
| Abstract: | How do monetary policy committee (MPC) members form their views about the appropriate interest rate? To what extent do they change their minds during the deliberations in the interest rate meeting? How important is the Chairman? The theoretical literature makes assumptions about these issues. We have asked actual MPC members in Sweden and Norway. This paper reports the results from this unique survey and discusses how well existing theories on monetary policy by committee capture the reality. |
| Keywords: | Monetary Policy Committee, Sveriges Riksbank, Norges Bank, Decision Making, Questionnaire Study. |
| JEL: | D71 E52 E58 |
| Date: | 2013–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2013_03&r=cba |
| By: | Afrasiab Mirza |
| Abstract: | This paper investigates regulations for banks that covered by deposit insurance in a dynamic setting where bankruptcy entails social costs. Regulatory policy operates through rules governing the bank's capital structure and asset allocation that may be adjusted each period. Throughout, the regulator must take into account that the bank is better informed about the inherent risks of its assets (adverse selection) and may forgo unobservable and costly actions to improve asset quality (moral hazard). Under the optimal regulatory policy under banks face risk-adjusted capital requirements but also hard-caps on size and leverage. In addition, the optimal policy counteracts pro-cyclical bank behaviour through the use of capital buffers. |
| Keywords: | Capital Regulation, Deposit Insurance, Risk-shifting |
| JEL: | G2 G3 G21 G28 G32 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:12-13&r=cba |
| By: | Michael Parkin (University of Western Ontario) |
| Abstract: | not available |
| Keywords: | none available |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20131&r=cba |
| By: | Canuto, Otaviano; Cavallari, Matheus |
| Abstract: | Confidence in combining inflation-targeting-cum-flexible-exchange-rate regimes with isolated microprudential regulation as a means to guarantee both macroeconomic and financial stability has been shattered by the scale and synchronization of asset price booms and busts that preceded the current global financial crisis. This paper has a two-fold purpose. On the one hand, it explores the implications and challenges of acknowledging the need for coordination between monetary policies and macroprudential regulation. On the other, it points out specific challenges currently faced by central bankers in emerging economies, as they cope with policy and regulatory coordination in a context of debt overhang and unconventional monetary policies in advanced economies. |
| Keywords: | Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Theory&Research,Banks&Banking Reform |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6310&r=cba |
| By: | John B. Taylor |
| Abstract: | Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination. |
| JEL: | E5 E58 F3 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18716&r=cba |
| By: | Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam.); Juan-Ángel Jiménez-Martín (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid); Teodosio Pérez Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008-09 global financial crisis. These issues are illustrated using Standard and Poor’s 500 Composite Index. |
| Keywords: | Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, risk forecasts, aggressive or conservative risk management strategies, Basel Accord, global financial crisis. |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1226&r=cba |
| By: | António Afonso; Michael G. Arghyrou; Alexandros Kontonikas |
| Abstract: | We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, unlike the period preceding the global financial crisis, European government bond yield spreads are well-explained by macro- and fiscal fundamentals over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including the risk of the crisis’ transmission among EMU member states, international risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited. |
| Keywords: | sovereign yields, government debt, panel analysis, credit ratings |
| JEL: | C23 E62 H50 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2012_14&r=cba |
| By: | Jose Berrospide |
| Abstract: | I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks' on-balance sheet risks, in addition to off-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks' asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, I find that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-03&r=cba |
| By: | Javier Bianchi; Juan Carlos Hatchondo; Leonardo Martinez |
| Abstract: | Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model. |
| JEL: | F41 F42 F44 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18628&r=cba |
| By: | Hachicha, Ahmed; Wen, Ming-Chang |
| Abstract: | This study investigates the relationship between inflation, inflation uncertainty and output in Tunisia using real and nominal data. GARCH-in-mean model with lagged variance equation is employed for the analysis. The result shows that inflation uncertainty has a positive and significant effect on the level of inflation only in the real term. Moreover, inflation uncertainty Granger-causes inflation and economic growth respectively. These results have important implications for the monetary policy in Tunisia. -- |
| Keywords: | GARCH-M model,inflation,inflation uncertainty,output |
| JEL: | C22 E31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20131&r=cba |
| By: | Herrera, Santiago; Youssef, Hoda |
| Abstract: | From 2008 to 2011, Egypt was hit by significant shocks, both global and country-specific. This paper assesses the impact of the resulting macroeconomic instability on the banking sector, and examines its role as a shock absorber. The Central Bank of Egypt accommodated the shocks by supplying liquidity to the market. The paper verifies a change in the fiscal regime from one in which the primary fiscal balance was used an instrument to stabilize the public debt ratio to one in which the policy instrument stopped playing that role and affected investors'assessment of the risk of holding public debt. This pattern suggests that fiscal conditions influenced exchange rate and price expectations originating a fiscal dominance situation in which the Central Bank could not control inflation. Hence, the Central Bank lacked functional independence in spite of its de jure independence, which underscores the importance of strengthening institutions that facilitate policy coordination and allow policy to be more predictable. The government also funds itself through non-market mechanisms, in a typical financial repression scheme. The paper estimates the revenue from financial repression at about 2.5 percent of gross domestic product in 2011, which together with the revenues from seignoriage add up to close to 50 percent of the budgeted tax revenues, indicating the need for an in-depth review of the governance of the public banks and the funding of public sector activities. Finally, the paper estimates the impact of shocks to macroeconomic variables on loan portfolio quality and bank capital. |
| Keywords: | Debt Markets,Banks&Banking Reform,Access to Finance,Economic Theory&Research,Currencies and Exchange Rates |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6314&r=cba |
| By: | P. Manasse; L. Zavalloni |
| Abstract: | This paper addresses the following questions. Is there evidence of contagion in the Eurozone? To what extent do sovereign risk and the vulnerability to contagion depend on fundamentals as opposed to a country's "credibility"? We look at the empirical evidence on EU sovereigns CDS spreads and estimate an econometric model where the crucial role is played by time varying parameters. We model CDS spread changes at country level as reflecting three different factors: a Global sovereign risk factor, a European sovereign risk factor and a Financial intermediaries risk factor. Our main findings are as follows. First, while the US subprime crisis affects all European sovereign risks, the Greek crisis is largely a matter concerning the Euro Zone. Second, differences in vulnerability to contagion in the Eurozone are remarkable: after the Greek crisis the core Eurozone members become less vulnerable to EUZ contagion, possibly due to a safe-heaven effect, while peripheric countries become more vulnerable. Third, market fundamentals go a long way in explaining these differences: they jointly explain between 54 and 80% of the cross-country variation in idiosyncratic risks and in the vulnerability to contagion, largely supporting the "wake-up calls" hypothesis suggesting that market participats bocome more wary of market fundamentals during finacial crises. |
| JEL: | E44 F34 G01 G12 G15 H63 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp863&r=cba |
| By: | Wäckerle, Manuel |
| Abstract: | The complexity of credit money is seen as the central issue in the banking-macro nexus, which the author considers as a structural as well as a process component of the evolving economy. This nexus is significant for the stability/fragility of the economic system because it links the monetary domain with the real domain of economic production and consumption. The evolution of credit rules shapes economic networks between households, firms, banks, governments and central banks in space and time. The author discusses the properties and characteristics of this process in three sections. First, he discusses the origins of the theory of money and its role in contemporary monetary economics. Second, he briefly discusses current theoretical foundations of top-down and bottom-up approaches to the banking-macro nexus, such as DSGE or ABM. Third, he suggests an evolutionary framework, building on the generic-rule based approach, to arrive at standards for bottom-up foundations in agent-based models of the banking-macro nexus. -- |
| Keywords: | 20th century origins of the theory of money,Schumpeterian credit-driven innovation,Post-Keynesian endogenous money,top-down versus bottom-up,evolutionary institutional approach to bank lending,generic credit rules as bottom-up foundations |
| JEL: | E41 G21 B52 B25 C63 E51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20135&r=cba |
| By: | Seth B. Carpenter; Jane E. Ihrig; Elizabeth C. Klee; Daniel W. Quinn; Alexander H. Boote |
| Abstract: | Over the past few years, the Federal Reserve's use of unconventional monetary policy tools has led it to hold a large portfolio of securities. The asset purchases are intended to put downward pressure on longer-term interest rates, but also affect the Federal Reserve's balance sheet and income. We present a framework for projecting Federal Reserve assets and liabilities and income through time. The projections are based on public economic forecasts and announced Federal Open Market Committee policy principles. The projections imply that for the next several years, the Federal Reserve's balance sheet remains large by historical standards, and earnings remain high. Using the FOMC's stated exit strategy principles and the Blue Chip financial forecasts of the federal funds rate, the projections have the Federal Reserve's portfolio beginning to contract in 2015, returning to a more normal size in 2018 or 2019, and returning to a more normal composition a year thereafter. The projections imply that Federal Reserve remittances to the Treasury may decline for a time, and in some cases fall to zero. Once the portfolio is normalized, earnings are projected to return to their long-run trend. On net over the entire period of unconventional monetary policy actions, cumulative earnings are higher than what they might have been without the Federal Reserve asset purchase programs. To illustrate the interest rate sensitivity of the portfolio, we consider scenarios where interest rates are 100 basis points higher or lower than in the baseline. With higher interest rates, earnings tend to fall a bit more and remittances to the Treasury stop for a longer period than in our baseline projections, while with lower interest rates earnings are a bit larger and remittances continue throughout the projection period. . |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-01&r=cba |